NOTE 2. EQUITY-METHOD INVESTMENT AND BUSINESS ACQUISITIONS

Desert Created Company LLC / DB Products Arizona, LLC

In January 2018, we entered into a limited liability company operating agreement with DNFC LLC (“DNFC”), pursuant to the formation of Desert Created Company LLC (“Desert Created”). Each party owns a 50% interest in Desert Created, which took over the assets and operations of DB Products Arizona, LLC (“DB Arizona”). Desert Created produces and distributes cannabis-infused edible products in Arizona. In connection with the formation of Desert Created, we contributed 75,000 shares of our common stock and warrants to purchase 75,000 shares of our common stock, at an exercise price of $2.00 per share, to members of DNFC (collectively, the “DNFC Sellers”). This pricing was agreed to in November 2017, however, the transaction did not close until January 2018. In the interim, our stock price increased substantially, which was the reason for the impairment noted below.

The 75,000 shares of our common stock were valued at $461,000, based on the closing price per share of our common stock on January 24, 2018, or $7.23 per share, reduced by a discount of 15% due to the restrictions on the DNFC Seller’s ability to immediately sell such shares. The warrants to purchase 75,000 shares of our common stock were valued at $518,000, using the Black-Scholes model, assuming a life of 5.0 years, a risk-free interest rate of 1.2% and a volatility of 150%. The fair value of Desert Created was estimated based on the relative fair value of the underlying assets and liabilities, consisting primarily of cash, accounts receivable, equipment and accounts payable.

The purchase price allocation was as follows:


Common Stock	$	461,000
Warrants		518,000
Initial investment in Desert Created	$	979,000

Fair value of Desert Created	$	347,097
Percentage ownership		50%
Fair value of 50% of Desert Created		173,500
Initial investment in Desert Created		979,000
Impairment	$	805,500

The income and losses related to Desert Created are recognized using the equity method of accounting. The value of the investment as of June 30, 2018 consists of the following:


Initial investment in Desert Created	$	979,000
Impairment		(805,500)
Additional investment		50,000
Net loss		(119,972)
June 30, 2018	$	103,528

We loaned $26,500 and $75,000, respectively, to DB Arizona during the years ended December 31, 2017 and 2016. 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 expected future positive cash flows, if any, would 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. During the quarter ended December 31, 2017, DB Arizona’s operations were taken over by Desert Created and, as a result, we impaired the full amount of our notes receivable from DB Arizona.

Mile High Protection Services

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 the “Mile High 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 Mile High Seller 224,359 restricted shares of our common stock. The shares vested over a six month period. The Mile High APA contained certain provisions that require Mile High Seller to forfeit a portion of such shares in the event that Mile High Seller did 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, to 104,359 shares of our common stock. Mile High 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 Mile High Seller’s ability to immediately sell such shares. The $155,000 value of stock consideration was recorded as accrued stock payable on the December 31, 2017, consolidated balance sheet, which was reduced when the vesting requirements for the shares was met and we issued the common stock in February 2018.

The purchase price allocation was as follows:

Intangible assets:


Customer relationships	$	100,000
Tradename		55,000
	$	155,000

We finalized the purchase price allocation in the quarter ended December 31, 2017.

The accompanying consolidated financial statements include the results of MHPS from the date of acquisition, August 18, 2017. The pro forma effects of the acquisition on the results of operations as if the transaction had been completed on January 1, 2017, are as follows:


		Three months ended June 30, 2017		Six months ended June 30, 2017
Total revenues	$	1,027,385	$	1,940,271
Net loss		(1,569,369)		(4,171,121)
Net loss per common share:
Basic and diluted	$	(0.08)	$	(0.22)