10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for quarterly period ended September 30, 2017.

o	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from __________ to __________.

Commission file number: 000-54457

GENERAL CANNABIS CORP

(Exact name of registrant as specified in its charter)


Colorado		90-1072649
(State of incorporation)		(IRS Employer Identification No.)

6565 East Evans Avenue
Denver, CO 80224
(Address of principal executive offices) (Zip Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in rule 12b-2 of the Exchange Act.


Large accelerated filer o		Accelerated filer o
Non-accelerated filer o		Smaller reporting company þ
		Emerging Growth Company o

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of November 1, 2017, there were 22,481,605 issued and outstanding shares of the Company’s common stock.

GENERAL CANNABIS CORP

FORM 10-Q

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION		3

Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	22
Item 4.	Controls and Procedures	22

PART II. OTHER INFORMATION		25

Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3.	Defaults Upon Senior Securities	25
Item 4.	Mine Safety Disclosures	25
Item 5.	Other Information	25
Item 6.	Exhibits	25

	Signatures	26

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED BALANCE SHEETS


		September 30, 2017 (Unaudited)		December 31, 2016
ASSETS
Current Assets
Cash and cash equivalents	$	252,538	$	773,795
Accounts receivable, net		283,406		182,214
Note receivable – DB Arizona		–		77,202
Prepaid expenses and other current assets		173,908		76,493
Inventory		30,443		7,981
Total current assets		740,295		1,117,685

Notes receivable – DB Arizona		221,671		–
Property and equipment, net		1,706,035		1,714,803
Intangible assets, net		139,288		25,383
Total Assets	$	2,807,289	$	2,857,871

LIABILITIES & STOCKHOLDERS’ EQUITY (DEFICIT)

Current Liabilities
Accounts payable and accrued expenses	$	474,200	$	363,618
Interest payable		115,237		9,806
Deferred rental revenue and customer deposits		75,499		46,155
Accrued stock payable		330,000		–
Derivative warrant liability		5,239,000		23,120,000
Notes payable (net of discount)		1,280,932		–
Infinity Note – related party		1,370,126		–
Total current liabilities		8,884,994		23,539,579

Notes payable (net of discount)		–		815,250
Infinity Note – related party		–		1,370,126
Tenant deposits		8,854		8,854
Total Liabilities		8,893,848		25,733,809

Commitments and Contingencies		–		–

Stockholders’ Equity (Deficit)
Preferred stock, no par value; 5,000,000 share authorized; no shares issued and outstanding at September 30, 2017 and December 31, 2016		–		–
Common Stock, $0.001 par value; 100,000,000 shares authorized; 20,881,605 and 17,128,778 shares issued and outstanding on September 30, 2017 and December 31, 2016, respectively		20,883		17,129
Additional paid-in capital		38,894,416		26,333,988
Accumulated deficit		(45,001,858)		(49,227,055)
Total Stockholders’ Equity (Deficit)		(6,086,559)		(22,875,938)

Total Liabilities & Stockholders’ Equity (Deficit)	$	2,807,289	$	2,857,871

See Notes to condensed consolidated financial statements.

GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


		Three months ended September 30,				Nine months ended September 30,
		2017		2016		2017		2016
REVENUES
Service	$	932,140	$	704,489	$	2,197,683	$	1,988,584
Rent and interest		32,902		25,565		99,251		93,398
Product Sales		14,949		80,326		235,767		122,452
Total revenues		979,991		810,380		2,532,701		2,204,434

COSTS AND EXPENSES
Cost of service revenues		752,154		564,687		1,757,241		1,547,474
Cost of goods sold		32,459		68,992		240,577		112,649
Selling, general and administrative		657,532		409,403		1,976,244		1,146,022
Share-based expense		839,322		872,217		2,995,251		1,974,191
Professional fees		126,303		95,520		454,591		276,706
Depreciation and amortization		39,885		97,988		88,788		292,329
Total costs and expenses		2,447,655		2,108,807		7,512,692		5,349,371

OPERATING LOSS		(1,467,664)		(1,298,427)		(4,979,991)		(3,144,937)

OTHER (INCOME) EXPENSE
Amortization of debt discount		284,900		111,837		1,134,432		327,455
Interest expense		81,563		5,276,550		240,380		5,381,125
Loss on extinguishment of debt		–		1,728,280		–		2,086,280
(Gain) loss on derivative warrant liability		(2,421,000)		6,032,000		(10,580,000)		6,032,000
Total other (income) expense, net		(2,054,537)		13,148,667		(9,205,188)		13,826,860

NET INCOME (LOSS)	$	586,873	$	(14,447,094)	$	4,225,197	$	(16,971,797)

PER SHARE DATA
Net income (loss) per share:
Basic	$	0.03	$	(0.93)	$	0.21	$	(1.11)
Diluted		(0.06)		(0.93)		(0.21)		(1.11)
Weighted average number of common shares outstanding:
Basic		20,654,502		15,495,421		19,883,329		15,270,968
Diluted		29,186,775		15,495,421		29,624,188		15,270,968

See Notes to condensed consolidated financial statements.

GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


		Nine months ended September 30,
		2017		2016
OPERATING ACTIVITIES
Net income (loss)	$	4,225,197	$	(16,971,797)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Amortization of debt discount		1,134,432		327,455
Loss on extinguishment of debt		–		2,086,280
Initial fair value of derivative warrant liability included as interest expense		–		5,189,000
(Gain) loss on derivative warrant liability		(10,580,000)		6,032,000
Depreciation and amortization expense		88,788		292,329
Share-based payments		2,995,251		1,974,191
Changes in operating assets and liabilities:
Accounts receivable		(101,192)		(143,141)
Prepaid expenses and other assets		(109,384)		(12,321)
Inventory		(22,462)		(11,627)
Accounts payable and accrued liabilities		245,357		174,948
Net cash used in operating activities:		(2,124,013)		(1,062,683)

INVESTING ACTIVITIES
Purchase of property and equipment		(38,925)		(11,615)
Lending on Note receivable – related party		(26,500)		–
Purchase of GC Finance Arizona LLC		(106,000)		–
Net cash used in investing activities		(171,425)		(11,615)

FINANCING ACTIVITIES
Proceeds from exercise of warrants and stock options		1,599,181		–
Proceeds from the sale of common stock – accrued stock payable		175,000		–
Borrowings under notes payable		–		2,500,000
Increase in Infinity Note – related party		–		497,500
Payments on notes payable		–		(917,307)
Net cash provided by financing activities		1,774,181		2,080,193

NET (DECREASE) INCREASE IN CASH		(521,257)		1,005,895
CASH, BEGINNING OF PERIOD		773,795		58,711
CASH, END OF PERIOD	$	252,538	$	1,064,606

SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid for interest	$	131,763	$	213,813

NON-CASH TRANSACTIONS
Portion of warrant derivative liability recorded as additional paid-in capital upon exercise of warrants	$	7,301,000	$	–
12% Note principal used to exercise 12% Warrants		668,750		–
Acquisition of MHPS – accrued stock payable		155,000		–
Issuance of common stock and warrants from accrued stock payable		–		1,069,775
Derivative warrant liability recorded as debt discount		–		2,450,000
Warrants issued in connection with debt recorded as debt discount		–		31,100
10% Notes and 14% Mortgage Note Payable converted to 12% Notes		–		550,000

See Notes to condensed consolidated financial statements.

GENERAL CANNABIS CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. NATURE OF OPERATIONS, HISTORY AND PRESENTATION

Nature of Operations

General Cannabis Corp, a Colorado Corporation (the “Company,” “we,” “us,” “our,” or “GCC”) (formerly, Advanced Cannabis Solutions, Inc.), was incorporated on June 3, 2013, and provides services and products to the regulated cannabis industry. On April 28, 2015, our common stock was uplisted and on May 6, 2015, resumed quotation on the OTC Market’s OTCQB. Our operations are segregated into the following four segments:

Security and Cash Transportation Services (“Security Segment”)

Iron Protection Group, or IPG, provides advanced security, including on-site professionals and cash transport, to licensed cannabis cultivators and retail shops. In August 2017, we acquired the operating assets of Mile High Protection Group, LLC, a Colorado limited liability company, which will continue to do business as “Mile High Protection Services,” or Mile High. Mile High has a diversified client roster, providing security services to hospitality companies, such as hotels, and to licensed cannabis retailers and cultivators in Colorado. We have also opened an IPG office in California.

Marketing Consulting and Apparel (“Marketing Segment”)

Chiefton Design provides design, branding and marketing strategy consulting services to the cannabis industry. We assist clients in developing a comprehensive marketing strategy, as well as designing and sourcing client-specific apparel and products. We now have the capacity of a full service marketing agency as well as the resources to expand our clothing lines. Chiefton Design also supports our other segments with marketing designs and apparel.

Chiefton’s apparel business, Chiefton Supply, strives to create innovative, unique t-shirts, hats, hoodies and accessories. Our apparel is sold through our on-line shop, cannabis retailers, and specialty t-shirt and gift shops. The apparel sold by Chiefton is purchased and screen printed by third parties, for which there are numerous suppliers.

Operations Consulting and Products (“Operations Segment”)

Through Next Big Crop (“NBC”), we deliver comprehensive consulting services to the cannabis industry that include obtaining licenses, compliance, cultivation, retail operations, logistical support, facility design and construction, and expansion of existing operations. Our business plan for NBC correlates to the future growth of the regulated cannabis market in the United States.

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

Finance and Real Estate (“Finance Segment”)

Real Estate Leasing

We own a cultivation property in a suburb of Pueblo, Colorado, consisting of approximately three acres of land, which currently includes a 5,000 square foot steel building and a parking lot. The property is zoned for cultivating cannabis and is leased to a medical cannabis grower until December 31, 2022.

Our real estate leasing business plan includes the potential future acquisition and leasing of cultivation space and related facilities to licensed marijuana growers and dispensary owners for their operations. Management anticipates that these facilities would range in size from 5,000 to 50,000 square feet. These facilities would only be leased to tenants that possess the requisite state licenses to operate cultivation facilities. The leases with the tenants would include certain requirements that permit us to continually evaluate our tenants’ compliance with applicable laws and regulations.

Shared Office Space, Networking and Event Services

In October 2014, we purchased a former retail bank located at 6565 East Evans Avenue, Denver, Colorado 80224, which has been branded as “The Greenhouse”. The building is a 16,056 square foot facility, which we use as our corporate headquarters.

The Greenhouse has approximately 10,000 square feet of existing office space and 5,000 square feet on its ground floor that is dedicated to a consumer banking design. We continue to assess the opportunity to lease shared workspace for entrepreneurs, professionals and others serving the cannabis industry. Clients would be able to lease office, meeting, lecture, educational and networking space, and individual workstations. We expect to continue the renovation of The Greenhouse in 2017.

We plan to continue to acquire commercial real estate and lease office space to participants in the cannabis industry. These participants may include media, internet, packaging, lighting, cultivation supplies and financial services-related companies. In exchange for certain services that may be provided to these tenants, we expect to receive rental income in the form of cash. In certain cases, we may acquire equity interests or provide debt capital to these businesses.

Industry Finance

Our industry finance strategy includes evaluating opportunities to make direct term loans or to provide revolving lines of credit to businesses involved in the cultivation and sale of cannabis and related products. These loans would generally be secured to the maximum extent permitted by law. We believe there is a significant demand for this type of financing. We are assessing other finance services including customized finance, capital formation and banking, for participants in the cannabis industry.

DB Products Arizona, LLC

DB Products Arizona, LLC (“DB Arizona”) produces and distributes cannabis-infused elixirs and edible products in Arizona.

In June 2017, we purchased 100% of the ownership interests in GC Finance Arizona LLC (“GC Finance Arizona”) from Infinity Capital for $106,000 in cash. GC Finance Arizona holds a 50% ownership interest in DB Arizona, an $825,000 loan to DB Arizona, and no liabilities. We expect future positive cash flows, if any, will first go towards paying the holders of DB Arizona’s notes payable. Accordingly, we allocated the entire consideration of $106,000 to the note receivable from DB Arizona.

We have determined that DB Arizona is a variable interest entity. The other 50% owner owns the building in which DB Arizona operates, and holds the Arizona cannabis license required for DB Arizona to extract cannabis oil and sell cannabis oil-infused products. Accordingly, the other owner is the primary beneficiary, as they have the power to direct activities that most significantly impact the economic performance of DB Arizona. We will treat our 50% ownership in DB Arizona as an equity investment.

As of September 30, 2017, DB Arizona had total assets of $1,200,000, operating liabilities of $73,639, debt and accrued interest liabilities of $2,463,373, and for the nine months ended September 30, 2017, total revenues of $632,000 and a net loss of $611,000.

Basis of Presentation

The accompanying (a) condensed consolidated balance sheet at December 31, 2016, has been derived from audited financial statements and (b) condensed consolidated unaudited financial statements as of September 30, 2017 and 2016, have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements, and should be read in conjunction with the audited consolidated financial statements and related footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Annual Report”), filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2017. 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 condensed consolidated financial statements include all material adjustments (consisting of normal recurring accruals) necessary to make the condensed consolidated financial statements not misleading as required by Regulation S-X, Rule 10-01. Operating results for the three and nine months ended September 30, 2017, are not necessarily indicative of the results of operations expected for the year ending December 31, 2017.

The condensed consolidated financial statements include the results of GCC and its six wholly-owned subsidiary companies: (a) ACS Colorado Corp., a Colorado corporation formed in 2013; (b) Advanced Cannabis Solutions Corporation, a Colorado corporation formed in 2013; (c) 6565 E. Evans Avenue LLC, a Colorado limited liability company formed in 2014; (d) General Cannabis Capital Corporation, a Colorado corporation formed in 2015; (e) GC Security LLC (“GCS”), a Colorado limited liability company formed in 2015; and (f) GC Finance Arizona LLC (“GC Finance Arizona”), an Arizona limited liability company . Advanced Cannabis Solutions Corporation has one wholly-owned subsidiary company, ACS Corp., which was formed in Colorado on June 6, 2013. Intercompany accounts and transactions have been eliminated.

Reclassifications

Certain reclassifications have been made to the prior period segment reporting to conform to the current period presentation related to now including GC Supply in our Operations Segment. The reclassifications had no effect on net loss, total assets, or total stockholders’ equity (deficit).

Related Parties

Related parties are any entities or individuals that, through employment, ownership or other means, possess the ability to direct or cause the direction of the management and policies of the Company. We disclose related party transactions that are outside of normal compensatory agreements, such as salaries or board of director fees. We had related party transactions with the following individuals / companies:

Michael Feinsod – Chairman of our Board of Directors (“Board”).

Infinity Capital West, LLC (“Infinity Capital”) – An investment management company that was founded and is controlled by Michael Feinsod.

GC Finance Arizona – A company owned 100% by Infinity Capital prior to our purchase in June 2017.

DB Arizona– A company that borrowed $825,000 from GC Finance Arizona, which also holds a 50% ownership interest in DB Arizona. Prior to our purchase in June 2017, we did not possess the ability to influence DB Arizona and DB Arizona did not have the ability to influence us. We include DB Arizona as a related party due to our relationship with Michael Feinsod and Infinity capital, and their relationship with DB Arizona.

Going Concern

The condensed consolidated financial statements have been prepared on a going concern basis, which assumes we will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future. The ability to continue as a going concern is dependent upon our generating profitable operations in the future and / or obtaining the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due. Management believes that actions presently being taken to further implement our business plan and generate additional revenues provide opportunity for the Company to continue as a going concern. While we believe in the viability of our strategy to generate additional revenues and our ability to raise additional funds, there can be no assurances to that effect.

We had an accumulated deficit of $45,001,858 and $49,227,055, respectively, at September 30, 2017 and December 31, 2016, and further losses are anticipated in the development of our business. Accordingly, there is substantial doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

Recently Issued Accounting Standards

Financial Accounting Standards Board, or FASB, Accounting Standards Update, or FASB ASU 2017-11 “Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Heding (Topic 815)” – In July 2017, the FASB issued 2017-11. The guidance eliminates the requirement to consider “down round” features when determining whether certain equity-linked financial instruments or embedded features are indexed to an entity’s own stock. Our 12% Warrants are treated as derivative instruments, because they include a “down round” feature, whereby if we issue equity-based instruments at a price below the exercise price of the 12% Warrants, the exercise price of the 12% Warrants would be adjusted. The ASU is effective for annual periods beginning after December 15, 2018, and for interim periods within those years, with early adoption permitted. Early adoption of this guidance could have a significant impact on our financial statements, as it would effectively eliminate the derivative liability and the gain or loss from changes in the fair value of the derivative. We are currently assessing whether to early adopt this standard.

FASB ASU 2017-09 “Scope of Modification Accounting (Topic 718)” – In May 2017, the FASB issued 2017-09. The guidance clarifies the accounting for when the terms of a share-based award are modified. The ASU is effective for annual reporting periods beginning after December 15, 2017, and for interim periods within those years, with early adoption permitted. This new guidance would only impact our financial statements if, in the future, we modified the terms of any of our share-based awards.

FASB ASU 2017-04 “Simplifying the Test for Goodwill Impairment (Topic 350)” – In January 2017, the FASB issued 2017-04. The guidance removes “Step Two” of the goodwill impairment test, which required a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The ASU is effective for annual reporting periods beginning after December 15, 2019, and for interim periods within those years, with early adoption permitted. We do not expect this ASU to have a significant impact on our consolidated financial statements and related disclosures.

FASB ASU 2017-01 “Clarifying the Definition of a Business (Topic 805)” – In January 2017, the FASB issued 2017-01. The new guidance that changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in ASC 606. The ASU is effective for annual reporting periods beginning after December 15, 2017, and for interim periods within those years. Adoption of this ASU is not expected to have a significant impact on our consolidated results of operations, cash flows and financial position.

FASB ASU 2016-15 “Statement of Cash Flows (Topic 230)” – In August 2016, the FASB issued 2016-15. Stakeholders indicated that there is a diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This ASU is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. Adoption of this ASU will not have a significant impact on our statement of cash flows.

FASB ASU 2016-12 “Revenue from Contracts with Customers (Topic 606)” – In May 2016, the FASB issued 2016-12. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2016-12 provides clarification on assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications. This ASU is effective for annual reporting periods beginning after December 15, 2017, with the option to adopt as early as December 15, 2016. We are currently assessing the impact of adoption of this ASU on our consolidated results of operations, cash flows and financial position.

FASB ASU 2016-11 “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815)” – In May 2016, the FASB issued 2016-11, which clarifies guidance on assessing whether an entity is a principal or an agent in a revenue transaction. This conclusion impacts whether an entity reports revenue on a gross or net basis. This ASU is effective for annual reporting periods beginning after December 15, 2017, with the option to adopt as early as December 15, 2016. We are currently assessing the impact of adoption of this ASU on our consolidated results of operations, cash flows and financial position.

FASB ASU 2016-10 “Revenue from Contracts with Customers (Topic 606)” – In April 2016, the FASB issued ASU 2016-10, to clarify identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. This ASU is effective for annual reporting periods beginning after December 15, 2017, with the option to adopt as early as December 15, 2016. We are currently assessing the impact of adoption of this ASU on our consolidated results of operations, cash flows and financial position.

FASB ASU 2016-09 “Compensation – Stock Compensation (Topic 718)” – In March 2016, the FASB issued ASU 2016-09, which includes multiple provisions intended to simplify various aspects of accounting for share-based payments. The new guidance will require entities to recognize all income tax effects of awards in the income statement when the awards vest or are settled. It also will allow entities to make a policy election to account for forfeitures as they occur. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Adopting this ASU did not have a significant impact on our consolidated financial statements and related disclosures.

FASB ASU 2016-02 “Leases (Topic 842)” – In February 2016, the FASB issued ASU 2016-02, which will require lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. Lessor accounting is similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard. This ASU is effective for fiscal years beginning after December 18, 2018, including interim periods within those fiscal years. We are currently evaluating the potential impact this standard will have on our consolidated financial statements and related disclosures.

FASB ASU 2015-17”Income Taxes (Topic 740)” – In November 2015, the FASB issued ASU 2015-17, which simplifies the presentation of deferred tax assets and liabilities on the balance sheet. Previous GAAP required an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts on the balance sheet. The amendment requires that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. This ASU is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. We are currently evaluating the potential impact this standard will have on our consolidated financial statements and related disclosures.

FASB ASU 2015-16 “Business Combinations (Topic 805),” or ASU 2015-16 - In September 2015, the FASB issued ASU 2015-16, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This ASU is effective for interim and annual reporting period beginning after December 15, 2016, including interim periods within those fiscal years, with the option to early adopt for financial statements that have not been issued. We will apply this guidance to any business combinations that may occur.

FASB ASU 2015-11 “Inventory (Topic 330): Simplifying the Measurement of Inventory,” or ASU 2015-11 - In July 2015, the FASB issued ASU 2015-11, which requires an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments apply to inventory that is measured using first-in, first-out (FIFO) or average cost. This ASU is effective for interim and annual reporting periods beginning after December 15, 2016, with the option to early adopt as of the beginning of an annual or interim period. Adopting this ASU did not have a significant impact on our financial position, results of operations and cash flows.

NOTE 2. BUSINESS ACQUISITION

On August 18, 2017, we entered into an Asset Purchase Agreement (the “Mile High APA”) with Mile High Protection Services LLC, a Colorado limited liability company, and its sole member (together “Seller”) whereby we acquired the tradename, workforce, customer contracts, and other intangible assets of the business. Pursuant to the Mile High APA, we agreed to deliver to Seller 224,359 restricted shares of our common stock. The shares vest over a six month period. The Mile High APA contains certain provisions that require Seller to forfeit a portion of such shares in the event that Seller does not meet the obligations under the Mile High APA. In accordance with the terms of the Mile High APA, the number of shares to be delivered was reduced by 120,000, thus 104,359 shares of our common stock are due upon vesting. Seller also agreed to a three year non-compete agreement.

The 104,359 shares of restricted common stock were valued based on the closing price per share of our common stock on August 18, 2017, or $1.75 per share, reduced by a discount of 15% due to the vesting period and the restrictions on the Seller’s ability to immediately sell such shares. The $155,000 value of stock consideration was recorded as accrued stock payable on the September 30, 2017, condensed consolidated balance sheet, which will be reduced when the vesting requirements for the shares are met and we issue the common stock. We have not completed the allocation of the purchase price. In the September 30, 2017, condensed consolidated balance sheet we have preliminarily recorded an intangible asset for Mile High of $155,000. Management anticipates completing the purchase price allocation as soon as possible, but no later than one year from the acquisition date.

NOTE 3. NOTES RECEIVABLE – DB ARIZONA

Our notes receivable – DB Arizona include accrued interest of $14,171 and $2,202, respectively, as of September 30, 2017 and December 31, 2016. The loans bear interest at 14%, with principal and interest due on May 30, 2017. The face value of the notes includes $101,500 that we loaned directly to DB Arizona and $825,000 that we acquired when we purchased GC Finance Arizona in June 2017 for $106,000. At the time of the purchase, we estimated the fair value of the $825,000 note, which is subordinate to the $101,500 note, to be $106,000.

DB Arizona is financed with significant debt and has yet to generate positive cash flows from operations. We have classified the notes as long-term, because DB Arizona does not currently have sufficient resources to satisfy their obligation to us and the notes are in default. These conditions do not meet the level of probable loss required to reduce the carrying value. In the future, however, they may be unable to generate sufficient cash flows from operations or to restructure their capital. Accordingly, there is a reasonable possibility that we may be unable to recover all or a portion of our notes receivable from DB Arizona.

NOTE 4. LONG-LIVED ASSETS

Property and Equipment

Depreciation expense was $15,997 and $11,944, respectively, for the three months ended September 30, 2017 and 2016, and $47,693 and $36,070, respectively, for the nine months ended September 30, 2017 and 2016. We have not recognized any impairment as of September 30, 2017.

Intangible Assets

Intangible assets of $139,288 as of September 30, 2017, consisted of the preliminary purchase price allocation for Mile High of $155,000, net of accumulated amortization of $15,712, based on a preliminary estimated useful life of two years. The intangible asset for Chiefton brand and graphic designs, with a gross value of $69,400, was fully amortized as of September 30, 2017.

Amortization expense was $23,888 and $86,044, respectively, for the three months ended September 30, 2017 and 2016, and $41,095 and $256,259, respectively, for the nine months ended September 30, 2017 and 2016.

NOTE 5. DEBT

Infinity Note – Related Party

In February 2015, we issued a senior secured note to Infinity Capital, as amended in April 2015, bearing interest at 5% payable monthly in arrears commencing June 30, 2015, until the maturity date of August 31, 2015 (the “Infinity Note”). On December 31, 2016, the Infinity Note was amended to aggregate principal and interest, and extend the due date of principal and interest to September 21, 2018. No additional advances may be made after December 31, 2016. The Infinity Note is collateralized by a security interest in substantially all of our assets. Interest expense for the Infinity Note for the nine months ended September 30, 2017 and 2016, was $51,239 and $26,540, respectively, and $51,239 was accrued as of September 30, 2017. The Infinity Note is subordinate to the 12% Notes.

Notes Payable


		September 30, 2017		December 31, 2016
12% Notes	$	2,081,250	$	2,750,000
Unamortized debt discount		(800,318)		(1,934,750)
Long-term portion	$	1,280,932	$	815,250

12% Notes

In September 2016, we completed a $3,000,000 private placement pursuant to a promissory note and warrant purchase agreement (the “12% Agreement”) with certain accredited investors, bearing interest at 12%, with principal due September 21, 2018, and interest payable quarterly (each such note, a “12% Note,” and collectively, the “12% Notes”). In the event of default, the interest rate increases to 18%. The 12% Notes are collateralized by a security interest in substantially all of our assets. We may prepay the 12% Notes at any time, but in any event must pay at least one year of interest.

Subject to the terms and conditions of the 12% Agreement, each investor was granted fully-vested warrants equal to their note principal times three (the “12% Warrants”), or nine million warrants, with a life of three years. 4.5 million warrants have an exercise price of $0.35 per share and the other 4.5 million warrants have an exercise price of $0.70 per share. Should we issue any equity-based instruments at a price lower than the exercise price(s) of the 12% Warrants, other than under our Incentive Plan, the exercise price(s) of the 12% Warrants will be adjusted to the lower price. The 12% Warrants may be exercised at the option of the holder (a) by paying cash, (b) by applying the amount due under the 12% Notes as consideration, or (c) if there is no effective registration statement for the 12% Warrants within six months of being granted, the holder may exercise on a cashless basis. The registration statement related to the 12% Warrants was declared effective on December 23, 2016. If our common stock closes above $5.00 for ten consecutive days, we may call the warrants, giving the warrant holders 30 days to exercise. Since the 12% Warrants include a clause requiring repricing, the warrants are considered to be a derivative that is recorded as a liability at fair value.

We received $2,450,000 of cash for issuing the 12% Notes. $300,000 of 10% Notes and $250,000 of the 14% Greenhouse Mortgage were converted into 12% Notes. We concluded that these conversions met the criteria for a debt extinguishment and, accordingly, recorded a loss on extinguishment of $1,728,280 during the year ended December 31, 2016. The loss on extinguishment represents the fair value of the 12% Warrants issued to the previous 10% Note holders and the 14% Greenhouse Mortgage lender. The initial fair value of the 12% Warrants not associated with the conversions was recorded as a debt discount of $2,450,000 and interest expense of $5,189,000. The 12% Notes are otherwise treated as conventional debt.

The Infinity Note and the 12% Notes, totaling $3,451,376, are due and payable on September 21, 2018.

NOTE 6. ACCRUED STOCK PAYABLE

The following tables summarize the changes in accrued common stock payable during the nine months ended September 30, 2017:


		Amount		Number of Shares
December 31, 2016	$	–	$	–
Acquisition of Mile High		155,000		104,359
Sale of common stock and warrants		175,000		175,000
September 30, 2017	$	330,000	$	279,359

The Mile High shares are issuable on February 27, 2018, if the terms of the Mile High APA are met.

The 175,000 shares were issued in October 2017. See Note 11 – Subsequent Events.

NOTE 7. DERIVATIVE WARRANT LIABILITY

On September 21, 2016, in connection with the 12% Notes, we issued the 12% Warrants, which are treated as a derivative liability and adjusted to fair value at the end of each period. The underlying assumptions used in the binomial model to determine the fair value of the derivative warrant liability were:


	Three months ended
	September 30, 2017	June 30, 2017	March 31, 2017
Stock price on valuation date	$1.43	$1.37 – 2.20	$2.21 – 3.25
Risk-free interest rate	1.5%	1.3 – 1.4%	1.3 – 1.5%
Expected dividend yield	–	–	–
Expected term (in years)	2.0	2.2 – 2.5	2.5 – 2.7
Expected volatility	128%	131 – 134%	146 – 153%
Number of iterations	5	5	5

Changes in the derivative warrant liability were as follows:


December 31, 2016	$	23,120,000
Decrease in fair value		(10,580,000)
Reclassification to additional paid-in capital upon exercise of warrants		(7,301,000)
September 30, 2017	$	5,239,000

NOTE 8. COMMITMENTS AND CONTINGENCIES

Legal

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

NOTE 9. STOCKHOLDERS’ EQUITY

Share-based expense consisted of the following:


		Three months ended September 30,				Nine months ended September 30,
		2017		2016		2017		2016
Employee Awards	$	839,322	$	740,844	$	2,969,811	$	1,574,906
Consulting Awards		–		103,869		25,440		151,385
Feinsod Agreement		–		27,504		–		192,800
DB Option Agreement		–		–		–		55,100
	$	839,322	$	872,217	$	2,995,251	$	1,974,191

Employee Stock Options

On October 29, 2014, the Board authorized the adoption of, and on June 26, 2015, our stockholders ratified, our 2014 Equity Incentive Plan (the “Incentive Plan”). The Incentive Plan provides for the issuance of up to 10 million shares of our common stock, and is designed to provide an additional incentive to executives, employees, directors and key consultants, aligning our long term interests with participants. In April 2016, we filed a Registration Statement on Form S-8 (the “Registration Statement”), which automatically became effective in May 2016. The Registration Statement relates to 10,000,000 shares of our common stock, which are issuable pursuant to, or upon exercise of, options that have been granted or may be granted under our Incentive Plan.

Share-based compensation costs for award grants to employees and directors (“Employee Awards”) are recognized on a straight-line basis over the service period for the entire award, with the amount of compensation cost recognized at any date equaling at least the portion of the award that is vested. The following summarizes the Black-Scholes assumptions used for Employee Awards granted:


	Three months ended
	September 30, 2017	June 30, 2017	March 31, 2017
Exercise price	$1.34 – 2.07	$1.92	$2.41 – 3.00
Stock price on date of grant	$1.34 – 2.07	$1.92	$2.41 – 3.00
Volatility	140 – 142%	145%	148 – 153%
Risk-free interest rate	1.4 – 1.9%	1.8%	1.7 – 1.9%
Expected life (years)	3.0 – 5.0	5.0	4.0 – 5.0
Dividend yield	–	–	–

The following summarizes Employee Awards activity:


	Number of Shares		Weighted-average Exercise Price per Share	Weighted-average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding at December 31, 2016	8,818,400	$	1.04
Granted	1,116,400		1.78
Exercised	(367,240)		1.09
Forfeited	(554,050)		0.75
Outstanding at September 30, 2017	9,013,510		1.14	2.2	$	6,211,944

Exercisable at September 30, 2017	7,984,960	$	1.00	1.9	$	5,726,885

Based on our estimated forfeiture rates, we expect 1,007,181 Employee Awards will vest. As of September 30, 2017, there was approximately $1,255,708 of total unrecognized compensation expense related to unvested Employee Awards, which is expected to be recognized over a weighted-average period of eight months.

Warrants for Consulting Services

As needed, we may issue warrants to third parties in exchange for consulting services. Stock-based compensation costs for award grants to third parties for consulting services (“Consulting Awards”) are recognized on a straight-line basis over the service period for the entire award, with the amount of compensation cost recognized at any date equaling at least the portion of the award that is vested. Consulting Awards are revalued at each reporting date until fully vested, which may generate an expense or benefit.

No Consulting Award warrants were issued during the nine months ended September 30, 2017.

Stock for Consulting Services

During the nine months ended September 30, 2017, we issued 8,000 shares to a third party for marketing services.

Warrants with Debt

The following summarizes warrants issued with debt:


	Number of Shares		Weighted-average Exercise Price per Share	Weighted-average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding at December 31, 2016	9,025,843	$	0.63
Exercised	(3,377,587)	$	0.59
Forfeited	(28,126)		1.20
Outstanding and exercisable at September 30, 2017	5,620,130	$	0.69	2.1	$	4,573,359

NOTE 10. NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the reporting period. Diluted net loss per share is computed similarly to basic loss per share, except that it includes the potential dilution that could occur if dilutive securities are exercised as of the first day of the reporting period, along with the impact of those dilutive securities on net income (loss).


		Three months ended September 30,				Nine months ended September 30,
		2017		2016		2017		2016
Net income (loss)	$	586,873	$	(14,447,094)	$	4,225,197	$	(16,971,797)
Gain on derivative warrant liability		(2,421,000)		–		(10,580,000)		–
	$	(1,834,127)	$	(14,447,094)	$	(6,354,803)	$	(16,971,797)

Weighted average outstanding shares of common stock		20,654,502		15,495,421		19,883,329		15,270,968
Warrants – Debt		4,778,627		–		4,960,848		–
Stock options		3,662,422		–		4,667,825		–
Other warrants		91,224		–		112,186		–
Common stock and equivalents		29,186,775		15,495,421		29,624,188		15,270,968

Net income (loss) per share
Basic	$	0.03	$	(0.93)	$	0.21	$	(1.11)
Diluted		(0.06)		(0.93)		(0.21)		(1.11)

In 2016, outstanding stock options and common stock warrants are considered anti-dilutive because we were in a net loss position.

NOTE 11. SUBSEQUENT EVENTS

On October 9, 2017, we entered into a securities purchase agreement with several non-affiliated accredited investors in a private placement, pursuant to which for $1.00 we sold one share of our common stock and one warrant to purchase one share of our common stock, at an exercise price of $0.50 per share with a two year life (together, the “2017 Units”). We issued 1,000,000 2017 Units. In consideration for issuing the 2017 Units, we received $975,000 in cash and extinguished $25,000 of 12% Notes. We received $175,000 in cash consideration in September 2017, see Note 6 – Accrued Stock Payable.

Subsequent to September 30, 2017, and up to the date of this filing, 600,000 shares of our common stock were issued upon the exercise of 12% Warrants for consideration of $210,000 in cash and $210,000 for the extinguishment of 12% Notes.

NOTE 12. SEGMENT INFORMATION

Our operations are organized into four segments: Security and Cash Management Services; Marketing Consulting and Apparel; Operations Consulting and Products; and Finance and Real Estate. All revenue originates and all assets are located in the United States. We have revised our disclosure to correspond to the information provided to the chief operating decision maker.

Three months ended September 30


2017		Security		Marketing		Operations		Finance		Total
Revenues	$	533,065	$	49,394	$	364,629	$	32,903	$	979,991
Costs and expenses		(647,915)		(100,464)		(402,856)		(9,339)		(1,160,574)
	$	(114,850)	$	(51,070)	$	(38,227)	$	23,564		(180,583)
Corporate										767,456
								Net income	$	586,873


2016		Security		Marketing		Operations		Finance		Total
Revenues	$	560,713	$	106,402	$	117,700	$	25,565	$	810,380
Costs and expenses		(528,916)		(91,342)		(235,605)		(13,352)		(869,215)
Other expense		–		–		–		(6,414)		(6,414)
	$	31,797	$	15,060	$	(117,905)	$	5,799		(65,249)
Corporate										(14,381,845)
								Net loss	$	(14,447,094)

Nine months ended September 30


2017		Security		Marketing		Operations		Finance		Total
Revenues	$	1,322,509	$	163,216	$	947,725	$	99,251	$	2,532,701
Costs and expenses		(1,615,694)		(381,439)		(1,018,655)		(37,113)		(3,052,901)
	$	(293,185)	$	(218,223)	$	(70,930)	$	62,138		(520,200)
Corporate										4,745,397
								Net income	$	4,225,197


2016		Security		Marketing		Operations		Finance		Total
Revenues	$	1,599,907	$	221,563	$	289,566	$	93,398	$	2,204,434
Costs and expenses		(1,604,932)		(216,443)		(439,389)		(36,731)		(2,297,495)
Other expense		–		–		–		(10,876)		(10,876)
	$	(5,025)	$	5,120	$	(149,823)	$	45,791		(103,937)
Corporate										(16,867,860)
								Net loss	$	(16,971,797)


Total assets		September 30, 2017		December 31, 2016
Security	$	363,757	$	141,140
Marketing		51,789		50,919
Operations		92,882		55,750
Finance		644,384		515,205
Corporate		1,654,477		2,094,857
	$	2,807,289	$	2,857,871

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis (“MD&A”) is intended to provide an understanding of our financial condition, results of operations and cash flows by focusing on changes in certain key measures from year to year. This discussion should be read in conjunction with the Condensed Consolidated Unaudited Financial Statements contained in this Quarterly Report on Form 10-Q and the Consolidated Financial Statements and related notes and MD&A of Financial Condition and Results of operations appearing in our Annual Report on Form 10-K as of and for the years ended December 31, 2016 and 2015. The results of operations for an interim period may not give a true indication of results for future interim periods or for the year.

Cautionary Statement Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q, Financial Statements and Notes to Financial Statements contain forward-looking statements that discuss, among other things, future expectations and projections regarding future developments, operations and financial conditions. All forward-looking statements are based on management’s existing beliefs about present and future events outside of management’s control and on assumptions that may prove to be incorrect. If any underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or intended. We undertake no obligation to publicly update or revise any forward-looking statements to reflect actual results, changes in expectations or events or circumstances after the date this Quarterly Report on Form 10-Q is filed.

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

Our Products, Services and Customers

We operate in a rapidly evolving and highly regulated industry that, as has been estimated by some, will exceed $30 billion in revenue by the year 2020. We have been and will continue to be aggressive in executing acquisitions and pursuing other opportunities that we believe will benefit us in the long-term.

Through our reporting segments, we provide products and services to the regulated cannabis industry, which include the following:

Security and Cash Transportation Services (“Security Segment”)

We provide advanced security, including on-site professionals and cash transport, to licensed cannabis cultivators and retail shops, under the business name Iron Protection Group (“IPG”), and security services to non-cannabis customers in the hospitality business, such as hotels, under the business name Mile High Protection Services (“Mile High”). The drop in wholesale prices in Colorado has negatively impacted security services in Colorado, as grow facilities and retailers seek cheaper alternatives or curtail services. We acquired Mile High in order to expand our Colorado security business into the non-cannabis space, as we believe that market provides an opportunity for growth. We have opened an IPG office in California, which recently legalized recreational cannabis in addition to previously legal medical marijuana.

In states that have recently legalized cannabis, whether medical, recreational or both, license applications require a security plan and, if approved, implementation of that security plan. Accordingly, we are assessing the opportunity to expand our security consulting business to assist companies with their application process and the subsequent implementation of compliant security services.

Marketing Consulting and Apparel (“Marketing Segment”)

Chiefton Design provides design, branding and marketing strategy consulting services to the cannabis industry. We assist clients in developing a comprehensive marketing strategy, as well as designing and sourcing client-specific apparel and products. We now have the capacity of a full service marketing agency. Chiefton Design also supports our other segments with marketing designs and apparel.

Chiefton’s apparel business, Chiefton Supply, strives to create innovative, unique t-shirts, hats, hoodies and accessories. Our apparel is sold through our on-line shop, cannabis retailers, and specialty t-shirt and gift shops. In August 2017, we added a separate managing director to focus solely on Chiefton Supply. We are planning a winter line for the 2017 holiday season and a spring / summer line for 2018.

Operations Consulting and Products (“Operations Segment”)

Through Next Big Crop (“NBC”), we deliver comprehensive consulting services to the cannabis industry that include obtaining licenses, compliance, cultivation, retail operations, logistical support, facility design and construction, and expansion of existing operations. Our business plan for NBC correlates to future growth of the regulated cannabis market in the United States.

Finance and Real Estate (“Finance Segment”)

Real Estate Leasing

Shared Office Space, Networking and Event Services

Industry Finance

DB Arizona

DB Arizona produces and distributes cannabis-infused elixirs and edible products in Arizona. They previously were a licensee with a single national cannabis-infused product company, which also had significant control of operations. The relationship was terminated in September 2017. DB Arizona is currently negotiating with several new cannabis-infused product companies to become their producer and distributor of products for the medical cannabis market in Arizona. If successful, we believe working with additional brands would allow DB Arizona to better control costs and potentially lead to increased revenues and operating cash flows. We believe the physical plant can be best utilized by contract manufacturing and distributing for multiple brands rather than a single partner. During this transition phase we anticipate investing additional funds for working capital.

Results of Operations

The following tables set forth, for the periods indicated, condensed statements of operations data. The table and the discussion below should be read in conjunction with the accompanying condensed consolidated financial statements and the notes thereto appearing elsewhere in this report.

Consolidated Results


		Three months ended September 30,					Percent
		2017		2016		Change	Change
Revenues	$	979,991	$	810,380	$	169,611	21%
Costs and expenses		(2,447,655)		(2,108,807)		(338,848)	16%
Other income (expense)		2,054,537		(13,148,667)		15,203,204	(116)%
Net income (loss)	$	586,873	$	(14,447,094)	$	15,033,967	(104)%


		Nine months ended September 30,					Percent
		2017		2016		Change	Change
Revenues	$	2,532,701	$	2,204,434	$	328,267	15%
Costs and expenses		(7,512,692)		(5,349,371)		(2,163,321)	40%
Other income (expense)		9,205,188		(13,826,860)		23,032,048	(167)%
Net income (loss)	$	4,225,197	$	(16,971,797)	$	21,196,994	(125)%

Revenues

Revenues increased primarily due to an increase in revenue in our Operations Segment and Chiefton Design, offset by a decrease in revenue for our Security Segment and Chiefton Supply.

Costs and expenses


		Three months ended September 30,					Percent
		2017		2016		Change	Change
Cost of service revenues	$	752,154	$	564,687	$	187,467	33%
Cost of goods sold		32,459		68,992		(36,533)	(53)%
Selling, general and administrative		657,532		409,403		248,129	61%
Share-based expense		839,322		872,217		(32,895)	(4)%
Professional fees		126,303		95,520		30,783	32%
Depreciation and amortization		39,885		97,888		(58,103)	(59)%
	$	2,447,655	$	2,108,807	$	338,848	16%


		Nine months ended September 30,					Percent
		2017		2016		Change	Change
Cost of service revenues	$	1,757,241	$	1,547,474	$	209,767	14%
Cost of goods sold		240,577		112,649		127,928	114%
Selling, general and administrative		1,976,244		1,146,022		830,222	72%
Share-based expense		2,995,251		1,974,191		1,021,060	52%
Professional fees		454,591		276,706		177,885	64%
Depreciation and amortization		88,788		292,329		(203,541)	(70)%
	$	7,512,692	$	5,349,371	$	2,163,321	40%

Cost of service revenues typically fluctuates with the changes in revenue for our Operations and Security Segments, while these costs are relatively fixed for our Marketing Segment. Cost of goods sold varies with changes in product sales, including an increase in products sold by our Operations Segment, which have smaller margins than apparel sold by our Marketing Segment.

Selling, general and administrative expense increased in 2017 primarily due to increases for (a) marketing and promotion; (b) premiums for liability, and directors and officers insurance; and (c) additional personnel added to our corporate and segment teams.

Share-based expense included the following:


		Three months ended September 30,				Nine months ended September 30,
		2017		2016		2017		2016
Employee Awards	$	839,322	$	740,844	$	2,969,811	$	1,574,906
Consulting Awards		–		103,869		25,440		151,385
Feinsod Agreement		–		27,504		–		192,800
DB Option Agreement warrants		–		–		–		55,100
	$	839,322	$	872,217	$	2,995,251	$	1,974,191

Employee awards are issued under our 2014 Equity Incentive Plan, which was approved by shareholders on June 26, 2015, and expense varies primarily due to the number of stock options granted. Consulting Awards are granted to third parties in lieu of cash for services provided. On August 4, 2014, pursuant to an agreement with Michael Feinsod (“Feinsod”), our Board of Directors (the “Board”) appointed Feinsod Chairman of the Board and approved a compensatory agreement with Infinity Capital, LLC (“Infinity Capital”), an investment management company founded and controlled by him. Under the agreement, we issued 200,000 shares of our common stock in 2014 and committed to issuing an additional 150,000 shares in 2015 and 150,000 shares in 2016. The 200,000 shares were expensed immediately, while the additional shares were expensed ratably through their issue date. In March 2016, we extended the DB Option Agreement and issued 100,000 warrants for our common stock.

Professional fees consist primarily of accounting and legal expenses, and increased in 2017 due to our registration statements and general corporate matters.

Depreciation and amortization expense decreased because the intangibles from the IPG acquisition were fully impaired as of December 31, 2016, and are no longer being amortized.

Other (Income) Expense


		Three months ended September 30,				Nine months ended September 30,
		2017		2016		2017		2016
Amortization of debt discount	$	284,900	$	111,837	$	1,134,432	$	327,455
Interest expense		81,563		5,276,550		240,380		5,381,125
Loss on extinguishment of debt		–		1,728,280		–		2,086,280
(Gain) loss on derivative warrant liability		(2,421,000)		6,032,000		(10,580,000)		6,032,000
	$	(2,054,537)	$	13,148,667	$	(9,205,188)	$	13,826,860

Amortization of debt discount is higher in 2017 compared to 2016, because 2017 also includes amounts immediately expensed upon the exercise of 12% Warrants through the reduction of principal for the related 12% Notes. Interest expense is higher in 2016 compared to 2017 due to immediately expensing $5,189,000 of the fair value of the derivative warrant liability in September 2016. Loss on extinguishment of debt includes (a) $1,715,000 of the fair value of the derivative warrant liability associated with converting a portion of the 10% Notes and 14% Mortgage Note Payable into 12% Notes in September 2016, and (b) in June 2016 expensing warrants issued to extend the maturity date of the 10% Notes from April 2016 to January 2017. The (gain) loss on derivative warrant liability varies, primarily, due to changes in the fair value of our common stock. A (decrease) increase in the fair value of the derivative warrant liability, associated with the warrants issued with the 12% Notes in September 2016, results in a (gain) loss.

Security and Cash Transportation Services


		Three months ended September 30,					Percent
		2017		2016		Change	Change
Revenues	$	533,065	$	560,713	$	(27,648)	(5)%
Costs and expenses		(647,915)		(528,916)		(118,999)	22%
	$	(114,850)	$	31,797	$	(146,647)	(461)%


		Nine months ended September 30,					Percent
		2017		2016		Change	Change
Revenues	$	1,322,509	$	1,599,907	$	(277,398)	(17)%
Costs and expenses		(1,615,694)		(1,604,932)		(10,762)	1%
	$	(293,185)	$	(5,025)	$	(288,160)	5,735%

Revenues decreased in 2017 primarily from the loss of a significant customer due to the drop in wholesale cannabis prices in Colorado, partially offset in the third quarter of 2017 by organic growth and the acquisition of Mile High. Costs and expenses typically vary with changes in revenue, however, the increase in costs and expenses in the third quarter of 2017 compared to 2016, relates primarily to overtime and training time for guards as our customer base recovered from the decline experienced during the first six months of 2017. We are also incurring additional expenses in 2017 for our office in California and overhead from the Mile High acquisition.

Marketing Consulting and Apparel


		Three months ended September 30,					Percent
		2017		2016		Change	Change
Revenues	$	49,394	$	106,402	$	(57,008)	(54)%
Costs and expenses		(100,464)		(91,342)		(9,122)	10%
	$	(51,070)	$	15,060	$	(66,130)	(439)%


		Nine months ended September 30,					Percent
		2017		2016		Change	Change
Revenues	$	163,216	$	221,563	$	(58,347)	(26)%
Costs and expenses		(381,439)		(216,443)		(164,996)	76%
	$	(218,223)	$	5,120	$	(223,343)	(4,362)%

In 2017, we have been focusing on launching our design agency. This led to a drop in apparel sales and an increase in consulting revenue. Expenses for the design business during the first six months of 2017 were high, as we tried different approaches to establishing its operations, which negatively impacted costs and expenses. We believe we now have an efficient model for Chiefton Design, with manageable, moderate recurring expenses. In the third quarter of 2017, we added a new managing director to drive Chiefton Supply’s apparel business. We do not expect to see a corresponding increase in revenue until we launch our holiday and spring clothing lines.

Operations Consulting and Products


		Three months ended September 30,					Percent
		2017		2016		Change	Change
Revenues	$	364,629	$	117,700	$	246,929	210%
Costs and expenses		(402,856)		(235,605)		(167,251)	71%
	$	(38,227)	$	(117,905)	$	79,678	(68)%


		Nine months ended September 30,					Percent
		2017		2016		Change	Change
Revenues	$	947,725	$	289,566	$	658,159	227%
Costs and expenses		(1,018,655)		(439,389)		(579,266)	132%
	$	(70,930)	$	(149,823)	$	78,893	(53)%

Revenues in 2017 increased primarily from (a) assisting companies submitting applications to acquire licenses in states that recently legalized cannabis; (b) adding a significant two year contract in July 2017 to manage the cannabis grow facility for a customer; and (c) 2017 product sales of approximately $210,000; offset by (d) the completion in the second quarter of 2017 of two small contracts to manage customer grow facilities. Costs and expenses increased in 2017 primarily due to hiring new consultants to meet current and expected future demand for services, as well as the cost of the products sold.

Finance and Real Estate


		Three months ended September 30,					Percent
		2017		2016		Change	Change
Revenues	$	32,903	$	25,565	$	7,338	29%
Costs and expenses		(9,339)		(13,352)		4,013	(30)%
Interest expense		–		(6,414)		6,414	(100)%
	$	23,564	$	5,799	$	17,765	306%


		Nine months ended September 30,					Percent
		2017		2016		Change	Change
Revenues	$	99,251	$	93,398	$	5,853	6%
Costs and expenses		(37,113)		(36,731)		(382)	1%
Interest expense		–		(10,876)		10,876	(100)%
	$	62,138	$	45,791	$	16,347	36%

Revenue from leasing our Pueblo facility remained steady between 2017 and 2016. Revenue fluctuates in 2017 compared to 2016, due to lease revenue for The Greenhouse. Revenues in 2017 also include interest income from our note receivable with DB Arizona. Interest expense represents the interest for the mortgage on our Pueblo facility, which was paid off in September 2016.

Liquidity and Capital Resources

We had cash of $252,538 and $773,795, respectively, as of September 30, 2017 and December 31, 2016. Our cash flows from operating, investing and financing activities were as follows:


		Nine months ended September 30,
		2017		2016
Net cash used in operating activities	$	(2,124,013)	$	(1,062,683)
Net cash used in investing activities		(171,425)		(11,615)
Net cash provided by financing activities	$	1,774,181	$	2,080,193

Net cash used in operating activities increased in 2017 by $1,061,330 compared to 2016, primarily due to a larger operating loss. We have added personnel to our Security, Operations and Marketing Segments in advance of growth opportunities. We also continue to add personnel to our corporate infrastructure and expanded our corporate marketing efforts. Where possible, we continue to use non-cash equity-based instruments to obtain consulting services and compensate employees.

Net cash used in investing activities in 2017 relates primarily to our loan to DB Arizona and our purchase of GC Finance Arizona.

Net cash provided by financing activities in 2017 was from the exercise of warrants and stock options, and the sale of common stock. In 2016, we borrowed $437,500 from Infinity Capital and $2,500,000 from non-affiliates.

On October 9, 2017, we entered into a securities purchase agreement with several non-affiliated accredited investors in a private placement, pursuant to which for $1.00 we sold one share of our common stock and one warrant to purchase one share of our common stock, at an exercise price of $0.50 per share with a two year life (together, the “2017 Units”). We issued and sold 1,000,000 2017 Units. In consideration for issuing the 2017 Units, we received $975,000 in cash and extinguished $25,000 of 12% Notes.

Non-GAAP Financial Measures

For the non-GAAP Adjusted EBITDA (Earnings (loss) Before Interest, Taxes, Depreciation and Amortization) per share-basic and diluted measures presented above, we have provided (1) the most directly comparable GAAP measure; (2) a reconciliation of the differences between the non-GAAP measure and the most directly comparable GAAP measure; (3) an explanation of why our management believes this non-GAAP measure provides useful information to investors; and (4) additional purposes for which we use this non-GAAP measure.

We believe that the disclosure of Adjusted EBITDA per share-basic and diluted provides investors with a better comparison of our period-to-period operating results. We exclude the effects of certain items from net loss per share-basic and diluted when we evaluate key measures of our performance internally, and in assessing the impact of known trends and uncertainties on our business. We also believe that excluding the effects of these items provides a more balanced view of the underlying dynamics of our business. Adjusted EBITDA per share-diluted excludes the impacts of interest expense, tax expense, depreciation and amortization, gain (loss) on its derivative liability, and share-based compensation. Weighted average number of common shares outstanding - basic and diluted (adjusted) excludes the impact of shares issued in connection with share-based compensation.

Tabular reconciliations of this supplemental non-GAAP financial information to our most comparable GAAP information are contained in this Quarterly Report on Form 10-Q. We present such non-GAAP supplemental financial information, as we believe such information provides additional meaningful methods of evaluating certain aspects of our operating performance from period-to-period on a basis that may not be otherwise apparent on a non-GAAP basis. This supplemental financial information should be considered in addition to, not in lieu of, our Condensed Consolidated Financial Statements.


		Three months ended September 30,				Nine months ended September 30,
		2017		2016		2017		2016
Net income (loss)	$	586,873	$	(14,447,094)	$	4,225,197	$	(16,971,797)
Adjustments:
Share-based expense		839,322		872,217		2,995,251		1,974,191
Depreciation and amortization		39,885		97,988		88,788		292,329
Amortization of debt discount		284,900		111,837		1,134,432		327,455
Interest expense		81,563		5,276,550		240,380		5,381,125
Loss on extinguishment of debt		–		1,728,280		–		2,086,280
(Gain) loss on derivative liability		(2,421,000)		6,032,000		(10,580,000)		6,032,000
Total adjustments		(1,175,330)		14,118,872		(6,121,149)		16,093,380
Adjusted EBITDA	$	(588,457)	$	(328,222)	$	(1,895,952)	$	(878,417)

Per share:
Net income (loss) – Basic	$	0.03	$	(0.93)	$	0.21	$	(1.11)
Net income (loss) – Diluted		(0.06)		(0.93)		(0.21)		(1.11)
Adjusted EBITDA – Basic and Diluted		(0.03)		(0.02)		(0.11)		(0.06)

Weighted-average shares outstanding:
Net income (loss) – Basic		20,654,502		15,495,421		19,883,329		15,270,968
Net income (loss) – Diluted		29,186,775		15,495,421		29,624,188		15,270,968
Adjusted EBITDA – Basic and Diluted		17,128,778		15,584,981		17,175,653		15,323,166

Critical Accounting Policies

Our condensed consolidated financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect reported amounts of assets, liabilities, revenues and expenses. We continually evaluate the accounting policies and estimates used to prepare the condensed financial statements. The estimates are based on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed in our Annual Report on Form 10-K for the year ended December 31, 2016, and Note 1 to the Condensed Consolidated Financial Statements in this Form 10-Q.

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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Accounting Officer, as appropriate to allow timely decisions regarding required disclosure.

We carried out an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2017, the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Accounting Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses discussed below.

Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive officer and principal financial officer and effected by the Board, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures of are being made only in accordance with authorizations of our management and directors; and

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Because of our inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management identified the following material weaknesses:

We have not performed a risk assessment and mapped our processes to control objectives;

We have not implemented comprehensive entity-level internal controls;

We have not implemented adequate system and manual controls; and

We do not have sufficient segregation of duties.

Assessment of Internal Control over Financial Reporting

Our management assessed the effectiveness of our internal control over financial reporting as of September 30, 2017. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework (2013). Based on management’s assessment, management concluded that the above material weaknesses have not been remediated and, accordingly, our internal control over financial reporting was not effective as of September 30, 2017.

Remediation of Material Weaknesses

We have designed and plan to implement, or in some cases have already implemented, the specific remediation initiatives described below:

We intend to allocate resources to perform a risk assessment and map processes to control objectives and, where necessary, implement and document internal controls in accordance with COSO.

Our entity-level controls are, generally, informal and we intend to evaluate current processes, supplement where necessary, and document requirements.

While we have implemented procedures to identify, evaluate and record significant transactions, we need to formally document these procedures and evidence the performance of the related controls.

We plan to evaluate system and manual controls, identify specific weaknesses, and implement a comprehensive system of internal controls.

We are assessing our current staffing and evaluating our personnel requirements to improve our segregation of duties.

Management understands that in order to remediate the material weaknesses, additional segregation of duties, changes in personnel, and technologies are necessary. We do not expect to have fully remediated these material weaknesses until management has tested those internal controls and found them to have been remediated.

Our Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to such attestation pursuant to rules of the SEC that permits us to provide only management’s report in our Annual Report on Form 10-K.

Changes in Internal Control over Financial Reporting

In September 2017, we appointed our Vice President of Finance, a certified public accountant, as Chief Financial Officer, and hired a certified public accountant to serve as our corporate controller, a new position. We have implemented an informal process of preparation and review of balance sheet reconciliations, as well as informal procedures to identify, evaluate and record significant transactions; however, these changes do not meet the strict requirements to overcome the material weaknesses identified above.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

As of the date of this report, there have been no material changes to the Risk Factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On July 27, 2017, we issued 196,874 shares of our common stock upon the exercise of warrants issued with debt in 2013 for consideration of $236,250 in cash. Such shares were exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS


Exhibits		Description
2.1		Asset Purchase Agreement dated August 18, 2017, between General Cannabis Corp and Mile High Protection Services LLC (incorporated by reference to Exhibit 2.1 of the Form 8-K filed by General Cannabis Corp. on August 24, 2017).
10.1		Form of Securities Purchase Agreement (incorporated by reference to Exhibit 10.1 of the Form 8-K filed by General Cannabis Corp. on October 13, 2017).
10.2		Form of Warrant (incorporated by reference to Exhibit 10.2 of the Form 8-K filed by General Cannabis Corp. on October 13, 2017).
31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101		The following financial information from the Quarterly Report on Form 10-Q of General Cannabis Corp for the quarter ended September 30, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Cash Flows, and (iv) Notes to the Condensed Consolidated Financial Statements.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	GENERAL CANNABIS CORP

Date: November 7, 2017	By:	/s/Robert Frichtel
		Robert Frichtel, Principal Executive Officer

	By:	/s/ Brian Andrews
		Brian Andrews, Principal Financial and Accounting Officer