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 the quarterly period ended September 30, 2019.

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) (303) 759-1300 (Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Name of each exchange on which registered	Ticker symbol
N/A	N/A	N/A

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 every Interactive Data File required to be submitted 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 such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an 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	Smaller reporting company þ
Non-accelerated filer o	Emerging growth company o
Accelerated filer þ

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 4, 2019, there were 39,497,480 issued and outstanding shares of the Company’s common stock.

GENERAL CANNABIS CORP

FORM 10-Q

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25
Item 4.	Controls and Procedures	25

PART II. OTHER INFORMATION		26

Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.	Defaults Upon Senior Securities	26
Item 4.	Mine Safety Disclosures	26
Item 5.	Other Information	26
Item 6.	Exhibits	26

	Signatures	27

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED BALANCE SHEETS


		September 30, 2019 (Unaudited)		December 31, 2018
ASSETS
Current Assets
Cash and cash equivalents	$	631,891	$	7,957,169
Accounts receivable, net		373,470		415,581
Prepaid expenses and other current assets		683,461		440,890
Inventory		141,268		123,263
Notes receivable, net – current portion		400,000		50,000
Total current assets		2,230,090		8,986,903

Note receivable, net		365,820		–
Operating lease right-of-use asset		102,800		–
Property and equipment, net		1,662,594		1,463,075
Intangible assets, net		–		42,247
Investment		250,000		250,000
Total Assets	$	4,611,304	$	10,742,225

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities
Accounts payable and accrued expenses	$	794,176	$	525,692
Interest payable		116,521		–
Deferred revenue and customer deposits		756,549		391,290
Accrued stock payable		88,200		–
Notes payable, net of discount		2,250,594		5,273,906
Operating lease liability – current portion		83,525		–
Warrant derivative liability		1,593,720		–
Total current liabilities		5,683,285		6,190,888

Operating lease liability		19,275		–
Total liabilities		5,702,560		6,190,888

Commitments and Contingencies (Note 8)

Stockholders’ (Deficit) Equity
Preferred stock, no par value; 5,000,000 shares authorized; no shares issued and outstanding at September 30, 2019 and December 31, 2018		–		–
Common Stock, $0.001 par value; 100,000,000 shares authorized; 39,497,480 and 36,222,752 shares issued and outstanding as of September 30, 2019 and December 31, 2018		39,498		36,223
Additional paid-in capital		60,320,012		56,303,061
Accumulated deficit		(61,450,766)		(51,787,947)
Total Stockholders’ (Deficit) Equity		(1,091,256)		4,551,337

Total Liabilities and Stockholders’ Equity	$	4,611,304	$	10,742,225

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,
		2019		2018		2019		2018
REVENUES
Service	$	1,138,566	$	1,050,752	$	2,825,017	$	2,994,416
Rent and interest		28,597		16,858		71,193		16,858
Product Sales		311,601		29,437		1,328,708		142,796
Total revenues		1,478,764		1,097,047		4,224,918		3,154,070

COSTS AND EXPENSES
Cost of service revenues		676,494		805,664		1,962,705		2,393,952
Cost of goods sold		280,543		52,601		1,160,298		146,011
Selling, general and administrative		1,622,882		1,091,988		4,517,908		3,198,625
Share-based expense		768,079		1,289,408		3,013,042		4,252,900
Professional fees		299,818		275,516		1,357,777		1,167,978
Depreciation and amortization		47,536		38,732		146,819		109,265
Total costs and expenses		3,695,352		3,553,909		12,158,549		11,268,731

OPERATING LOSS		(2,216,588)		(2,456,862)		(7,933,631)		(8,114,661)

OTHER (INCOME) EXPENSE
Amortization of debt discount and equity issuance costs		83,094		1,557,760		1,976,869		3,014,938
Loss on extinguishment of debt		298,500		–		298,500		–
Interest expense, net		76,980		119,097		276,521		214,332
Gain on warrant derivative liability		(420,840)		–		(822,702)		–
Loss from Desert Created investment		–		62,164		–		182,136
Impairment of Desert Created investment		–		18,319		–		823,819
Total other expense, net		37,734		1,757,340		1,729,188		4,235,225

NET LOSS	$	(2,254,322)	$	(4,214,202)	$	(9,662,819)	$	(12,349,886)
Deemed dividend		–		–		(1,192,000)		–

NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(2,254,322)	$	(4,214,202)	$	(10,854,819)	$	(12,349,886)

PER SHARE DATA – Basic and diluted
Net loss attributable to common stockholders per share	$	(0.06)	$	(0.12)	$	(0.28)	$	(0.35)
Weighted average number of common shares outstanding		39,402,594		36,013,107		38,106,781		34,921,388

See Notes to condensed consolidated financial statements.

GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


		Nine months ended September 30,
		2019		2018
OPERATING ACTIVITIES
Net loss	$	(9,662,819)	$	(12,349,886)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of debt discount and equity issuance costs		1,976,869		3,014,938
Loss on extinguishment of debt		298,500		–
Depreciation and amortization expense		146,819		109,265
Amortization of loan origination fees		(10,820)		–
Bad debt expense		116,761		82,615
Impairment of Desert Created investment		–		823,819
Loss from Desert Created investment		–		182,136
Gain on warrant derivative liability		(822,702)		–
Share-based expense		3,013,042		4,252,900
Changes in operating assets and liabilities:
Accounts receivable		(74,650)		(57,931)
Prepaid expenses and other assets		(242,571)		395,323
Inventory		(18,005)		(67,574)
Accounts payable and other current liabilities		750,264		(467,451)
Net cash used in operating activities:		(4,529,312)		(4,081,846)

INVESTING ACTIVITIES
Purchase of property and equipment		(296,091)		(197,710)
Lending on notes receivable		(705,000)		(585,000)
Proceeds on note receivable		–		600,000
Investment in Desert Created		–		(50,000)
Net cash used in investing activities		(1,001,091)		(232,710)

FINANCING ACTIVITIES
Net proceeds from the sale of common stock and warrants		2,604,355		–
Proceeds from exercise of warrants		–		3,985,197
Proceeds from exercise of stock options		188,770		625,595
Proceeds from notes payable		1,155,000		7,500,000
Payments on notes payable		(5,743,000)		(1,621,250)
Payments on Infinity Note – related party		–		(1,370,126)
Net cash (used in) provided by financing activities		(1,794,875)		9,119,416

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(7,325,278)		4,804,860
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		7,957,169		5,036,787
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	631,891	$	9,841,647

SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid for interest	$	209,777	$	334,365

NON-CASH TRANSACTIONS
Deemed dividend from 8.5% Warrants repricing	$	1,192,000	$	–
Operating lease right-of-use asset / Operating lease liability		154,200		–
12% Warrants recorded as debt discount and loss on extinguishment of debt		392,000
8.5% Note principal used to exercise 8.5% Warrants		–		604,000
8.5% Warrants recorded as debt discount and additional paid-in capital		–		5,366,000
Issuance of common stock for accrued stock payable		–		321,860
Issuance of common stock and warrants for investment in Desert Created		–		979,000

See Notes to condensed consolidated financial statements.

GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES

IN STOCKHOLDERS’ (DEFICIT) EQUITY

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018


	Common Stock				Additional		Accumulated
	Shares		Amount		Paid-in Capital		Deficit		Total
June 30, 2019	39,302,752	$	39,303	$	59,061,513	$	(59,196,444)	$	(95,628)
Warrants issued with the 12% Notes	–		–		392,000		–		392,000
Common stock issued upon exercise of stock options	194,728		195		131,950		–		132,145
Stock options granted to employees and consultants	–		–		734,549		–		734,549
Net loss	–	$	–	$	–	$	(2,254,322)	$	(2,254,322)
September 30, 2019	39,497,480		39,498		60,320,012		(61,450,766)		(1,091,256)


	Common Stock				Additional		Accumulated
	Shares		Amount		Paid-in Capital		Deficit		Total
June 30, 2018	35,945,327	$	35,945	$	52,843,025	$	(42,949,873)	$	9,929,097
Issuance of common stock	25,000		25		92,475		–		92,500
Common stock issued upon exercise of warrants	60,000		60		140,940		–		141,000
Common stock issued upon exercise of stock options	27,500		28		52,832		–		52,860
Stock options and warrants granted to employees and consultants	–		–		1,289,408		–		1,289,408
Net loss	–	$	–	$	–	$	(4,214,202)	$	(4,214,202)
September 30, 2018	36,057,827		36,058		54,418,680		(47,164,075)		7,290,663

See Notes to condensed consolidated financial statements.

GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES

IN STOCKHOLDERS’ (DEFICIT) EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018


	Common Stock				Additional		Accumulated
	Shares		Amount		Paid-in Capital		Deficit		Total
December 31, 2018	36,222,752	$	36,223	$	56,303,061	$	(51,787,947)	$	4,551,337
Sale of common stock, net of issuance costs	3,000,000		3,000		503,615		–		506,615
Warrants issued with the 12% Notes	–		–		392,000		–		392,000
Common stock issued for property and equipment	5,000		5		7,995		–		8,000
Common stock issued upon exercise of stock options	269,728		270		188,500		–		188,770
Stock options granted to employees and consultants	–		–		2,924,841		–		2,924,841
Net loss	–		–		–		(9,662,819)		(9,662,819)
September 30, 2019	39,497,480	$	39,498	$	60,320,012	$	(61,450,766)	$	(1,091,256)


	Common Stock				Additional		Accumulated
	Shares		Amount		Paid-in Capital		Deficit		Total
December 31, 2017	27,692,910	$	27,693	$	38,292,493	$	(34,814,189)	$	3,505,997
Issuance of common stock	25,000		25		92,475		–		92,500
Common stock issued for MHPS acquisition	104,359		104		154,896		–		155,000
Common stock and warrants issued for Desert Created acquisition	75,000		75		978,925		–		979,000
Warrants issued with the 8.5% Notes	–		–		5,366,000		–		5,366,000
Common stock issued upon exercise of warrants	7,526,286		7,526		4,748,531		–		4,756,057
Common stock issued upon exercise of stock options	634,272		635		624,960		–		625,595
Stock options and warrants granted to employees and consultants	–		–		4,160,400		–		4,160,400
Net loss	–		–		–		(12,349,886)		(12,349,886)
September 30, 2018	36,057,827	$	36,058	$	54,418,680	$	(47,164,075)	$	7,290,663

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 June 6, 2018 we began trading on the OTCQX® Best Market after upgrading from the OTCQB® Venture Market. Our operations are segregated into the following four segments:

Security and Cash Transportation Services (“Security Segment”)

We provide advanced security, including on-site professionals and cash transport, to licensed cannabis cultivators, cannabis processing facilities and retail shops, under the business name Iron Protection Group (“IPG”) in California and Colorado, and security services to non-cannabis customers in Colorado, such as hotels, apartment buildings and retail, under the business name Mile High Protection Services (“MHPS”), which we acquired in August 2017.

Operations Consulting and Products (“Operations Segment”)

Through Next Big Crop (“NBC”), we deliver comprehensive consulting services to the cannabis industry that include obtaining licenses, compliance, cultivation, retail operations, logistical support, facility design and construction, and expansion of existing operations. During the 3 and 9 months ended September 30, 2019, 82% of NBC’s revenue was with three customers and 61% of NBC’s revenue was with two customers, respectively.

NBC oversees our wholesale equipment and supply business, operated under the name “GC Supply,” which provides turnkey sourcing and stocking services to cultivation, retail and infused products manufacturing facilities. Our products include building materials, equipment, consumables and compliance packaging. There are generally multiple suppliers for the products we sell; however, there are a limited number of manufacturers of certain high-tech cultivation equipment.

Consumer Goods and Marketing Consulting (“Consumer Goods Segment”)

Our apparel business, Chiefton, has two primary revenue streams. Chiefton Supply strives to create innovative, unique t-shirts, hats, hoodies and accessories. Our apparel is sold through our on-line shop, cannabis retailers, non-cannabis retailers, and specialty t-shirt and gift shops. Chiefton Design provides design, branding and marketing strategy consulting services to the cannabis industry, which frequently includes sourcing and selling customer-specific apparel and accessories.

Our CBD retail business, STOA Wellness, opened in July of 2019. STOA Wellness offers a curated collection of high quality CBD products for athletes and general wellness.

Capital Investments and Real Estate (“Investments Segment”)

As a publicly traded company, we believe that we have access to capital that may not be available to businesses operating in the cannabis industry. Accordingly, we may provide debt or equity capital through (a) loans or revolving lines of credit, (b) leasing real estate we own, or (c) investing in businesses using cash or shares of our common stock.

Basis of Presentation

These unaudited condensed consolidated financial statements have been prepared following the requirements of the Securities and Exchange Commission (“SEC”), for interim reporting. As permitted under those rules, certain footnotes and other financial information that are normally required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) can be condensed or omitted. The condensed consolidated balance sheet for the year ended December 31, 2018 was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. The information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto of the Company for the year ended December 31, 2018 which were included in the annual report on Form 10-K filed by the Company on March 8, 2019.

In the opinion of management, these condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and notes thereto of the Company and include all adjustments, consisting only of normal recurring adjustments, considered necessary for the fair presentation of the Company’s financial position and operating results. The results for the three and nine months ended September 30, 2019 are not necessarily indicative of the operating results for the year ending December 31, 2019, or any other interim or future periods.

Use of Estimates

The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Although these estimates are based on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. Furthermore, when testing assets for impairment in future periods, if management uses different assumptions or if different conditions occur, impairment charges may result.

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 at least the twelve months from the date these condensed consolidated financial statements are issued. Our cash of approximately $600,000 is not sufficient to absorb our operating losses and repay our debt of $2.4 million. The warrants associated with this debt, if exercised, would provide sufficient funds to retire the debt; however, there is no guarantee that these warrants will be exercised. Our 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 (a) we will be successful obtaining additional capital and (b) 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 that we will be successful in such efforts. 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.

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 consider the following individuals / companies to be related parties:

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.

DB Arizona – A company that borrowed $825,000 from GC Finance 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.

Summary of Significant Accounting Policies

Since the date of the Annual Report, there have been no material changes to the Company’s significant accounting policies, except as disclosed below.

Notes Receivable

We classify our notes receivable as held for investment, because we have the intent and ability to hold our notes receivable to maturity or settlement. Direct loan origination costs we incur are netted with loan origination fees we receive and the net amount, loan origination fees or costs, is included in notes receivable on the condensed consolidated balance sheets. The loan origination fees or costs are amortized over the term of the underlying note receivable and included in interest income in the condensed consolidated statements of operations. We record an allowance for credit losses, as needed, using the current expected credit losses impairment model (“CECL Model”). The CECL Model requires us to consider relevant information about past events, current conditions, and reasonable and supportable forecasts of factors that affect the expected collectability of notes receivable. There is no probability of loss threshold that must be met prior to recording an allowance for credit losses under the CECL Model. We may assess notes receivable for impairment either on an aggregated basis, if they have sufficiently similar characteristics, or on an individual basis. Increases or decreases to the allowance for credit losses, if any, are included in net loss in the condensed consolidated statements of operations.

Right-of-use Asset / Lease Liability

We adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02 “Leases (Topic 842)” on January 1, 2019. We first evaluated our leases to determine whether they are classified as a finance lease or as an operating lease. A lease is a finance lease if any of the following criteria are met: (a) ownership transfers, (b) the lease includes an option to purchase the underlying asset, (c) the lease term is for the major part of the remaining economic life of the underlying asset, (d) the present value of the lease payments equals or exceeds the fair value of the underlying asset, or (e) the underlying asset is of a specialized nature that is expected to have no alternative use to the lessor at the end of the lease term. All of our leases are classified as operating leases. We then determined whether the short-term exemption applies; that is, is the lease term 12 months or less and does not include a purchase option whose exercise is reasonably certain. If the short-term exemption applies then lease payments are recognized as expense and no asset or liability is recorded. If the short-term exemption does not apply, then we recorded an operating lease right-of-use asset and a corresponding operating lease liability equal to the present value of the lease payments. All of our leases entered into prior to 2019 met the short-term exemption, so modification to prior period financial position was is not required. The two year commercial real estate lease we entered into in February 2019 did not meet the short-term exemption and, accordingly, we recorded the present value of the lease payments as a right-of-use asset and a lease liability in the condensed consolidated balance sheet. We recognize rent expense on a straight-line basis over the life of the lease.

Fair Value of Financial Instruments

GAAP requires disclosing the fair value of financial instruments to the extent practicable for financial instruments which are recognized or unrecognized in the consolidated balance sheet. The fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement.

In assessing the fair value of financial instruments, the Company uses a variety of methods and assumptions, which are based on estimates of market conditions and risks existing at the time. For certain instruments, including accounts receivable and accounts payable, the Company estimated that the carrying amount approximated fair value because of the short maturities of these instruments. All debt is based on current rates at which the Company could borrow funds with similar remaining maturities and approximates fair value.

GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use on unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs consist of items that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is described below:


Level 1 –	Quoted prices in active markets for identical assets or liabilities. There are no fair valued assets or liabilities classified under Level 1 as of September 30, 2019 and December 31, 2018.

Level 2 –	Observable prices that are based on inputs not quoted on active markets but corroborated by market data. There are no fair valued assets or liabilities classified under Level 2 as of September 30, 2019 and December 31, 2018.

Level 3 –	Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs (see Note 9).

Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s accounting and finance department, which reports to the Chief Financial Officer, determines its valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s accounting and finance department and are approved by the Chief Financial Officer.

Level 3 Valuation Techniques:

Level 3 financial liabilities consist of the derivative liabilities for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate. The Company deems financial instruments which do not have fixed settlement provisions to be derivative instruments. In accordance with U.S. GAAP the fair value of these warrants is classified as a liability on the Company’s consolidated balance sheets because, according to the terms of the warrants, a fundamental transaction could give rise to an obligation of the Company to pay cash to its

warrant holders. Such instruments do not have fixed settlement provisions and have also been recorded as derivative liabilities. Corresponding changes in the fair value of the derivative liabilities are recognized in earnings on the Company’s consolidated statements of operations in each subsequent period.

The Company’s derivative liabilities are carried at fair value and were classified as Level 3 in the fair value hierarchy due to the use of significant unobservable inputs.

Modification of Notes Payable

When we change the terms of existing notes payable subsequent to the maturity date, we evaluate the amendments under ASC 470-50, Debt Modification and Extinguishment to determine whether the change should be treated as a debt extinguishment or as a debt modification. This evaluation includes analyzing whether there are significant and consequential changes to the economic substance of the note. If the change is deemed insignificant then the change is considered a debt modification, whereas if the change is substantial the change is reflected as a debt extinguishment. If determined to be a debt extinguishment, the difference between the fair value of the new instrument compared to the original instrument is reflected as a gain or loss on extinguishment of debt.

Equity Instruments

Warrants with derivative features – When we raise capital by issuing warrants that do not have complex terms, they are recorded as additional paid in capital in our condensed consolidated balance sheet. When we issue warrants that have complex terms, such as a clause in which the warrant agreements contain a cash settlement provision whereby the holders could settle the warrants for cash upon a fundamental transaction that is considered outside of the control of management, such as a change of control, the warrants are considered to be a derivative that are recorded as a liability at fair value. The warrant derivative liability is adjusted to its fair value at the end of each reporting period, with the change being recorded as expense or gain. Equity issuance costs associated with a capital raise transaction are allocated between expense and additional paid-in capital based on the relative fair value of the instruments being issued. The expense is included in amortization of debt discount and equity issuance costs on the condensed consolidated statements of operations, and the equity allocation as a reduction of additional paid-in capital in our condensed consolidated balance sheet.

NOTE 2. ACCOUNTS RECEIVABLE AND CUSTOMER DEPOSITS

Our accounts receivable consisted of the following:


		September 30,		December 31,
		2019		2018
Accounts receivable	$	551,470	$	476,581
Less: Allowance for doubtful accounts		(178,000)		(61,000)
Total	$	373,470	$	415,581

We record bad debt expense when we conclude the credit risk of a customer indicates the amount due under the contract is not collectible. We recorded bad debt expense (recovery) of $13,499 and $(28,000), respectively, during the three months ended September 30, 2019 and 2018 and $116,761 and $82,615, respectively, during the nine months ended September 30, 2019 and 2018.

As of September 30, 2019 and December 31, 2018, prepaid expenses and other current assets includes $0 and $18,164 of unbilled revenue, respectively, representing amounts for services completed but not billed.

Our deferred revenue and customer deposit liability had the following activity:


		Amount
December 31, 2018	$	391,290
Additional deposits received		1,925,859
Less: Deposits recognized as revenue		(1,560,600)
September 30, 2019	$	756,549

NOTE 3. NOTES RECEIVABLE

As of September 30, 2019, our notes receivable consisted of the following:


CCR Note	$	375,000
BB Note		100,000
BRB Note		300,000
Total principal		775,000
Unamortized loan origination fee		(9,180)
		765,820
Less: Current portion		(400,000)
Long-term portion	$	365,820

In March 2019, we agreed to loan $375,000 to Consolidated C.R., LLC (“CCR”) pursuant to the terms of a convertible promissory note (“CCR Note”), bearing interest at 12% per annum, collateralized by virtually all of the assets of CCR and a maturity date of November 2020. CCR is a vertically integrated medical cannabis company located in San Juan, Puerto Rico. As of September 30, 2019, we had loaned $375,000, of which $155,000 was loaned in the first quarter, to CCR under the CCR Note. The CCR Note included a loan origination fee of $15,000, which is being recognized as interest income over the term of the agreement.

On January 3, 2019, we loaned $100,000 to Beacher Brewing, LLC (“BB”) pursuant to the terms of a promissory note (“BB Note”), bearing interest at 11% per annum and a maturity date of January 3, 2020.

On December 13, 2018, we loaned $50,000 to BRB Realty, LLC (“BRB”) pursuant to the terms of a promissory note (“BRB Note”), bearing interest at 13% per annum and a maturity date of June 12, 2019. On January 19, 2019 the BRB Note was amended with an additional loan amount of $250,000 bearing an interest rate of 13% and a new maturity date of July 15, 2019. On July 15, 2019, BRB Realty extended the maturity date, in accordance with the terms of the BRB Note, an additional six months with an increased interest rate to 15%. The BRB Note included a loan origination fee of $5,000, which is being recognized as interest income over the term of the agreement.

NOTE 4. OPERATING LEASE RIGHT-OF-USE ASSET / OPERATING LEASE LIABILITY

On February 1, 2019, we entered into a commercial real estate lease for 3,200 square feet of retail space in Greenvale, NY, with an initial term of two years and, at our option, two additional terms of five years each. Rent is $7,000 per month, as well as our portion of real estate taxes and common area maintenance. We determined the present value of the future lease payments using a discount rate of 8.5%, our incremental borrowing rate based on outstanding debt, resulting in an initial right-of-use asset and lease liability of $154,200, which are being applied ratably over the term of the lease. As of September 30, 2019, the balance of the right-of-use asset and lease liability was $102,800. Future remaining minimum lease payments were as follows:


Year ending December 31,		Amount
2019	$	21,000
2020		84,000
2021		7,000
		112,000
Less: Present value adjustment		(9,200)
Operating lease liability	$	102,800

NOTE 5. ACCRUED STOCK PAYABLE

The following tables summarize the changes in accrued common stock payable:


		Amount	Number of Shares
December 31, 2018	$	–	–
Employee stock award – accrual		88,200	32,667
September 30, 2019	$	88,200	32,667

On January 31, 2019, we granted an employee $100,000 worth of our common stock, with half vesting over six months and half vesting over eighteen months. Based on a stock price of $2.70 on the date of grant, the employee would receive 37,038 shares of our common stock upon vesting. We are recognizing the value of the grant ratably over the vesting periods.

NOTE 6. NOTES PAYABLE

Our notes payable consisted of the following:


		September 30,		December 31
		2019		2018
2019 12% Notes	$	1,506,000	$	–
8.5% Notes		–		6,849,000
SBI Note		855,000		–
Unamortized debt discount		(110,406)		(1,575,094)
		2,250,594		5,273,906
Less: Current portion		(2,250,594)		(5,273,906)
Long-term portion	$	–	$	–

2019 12% Notes

In September 2019, we completed a private placement with certain accredited investors pursuant to (a) a senior unsecured promissory note, bearing interest at 12% payable quarterly, with principal due October 31, 2020, with an option for the holder to extend the due date to October 31, 2021 (“2019 12% Notes”) and (b) warrants with an exercise price of $1.30 per share and a life of 1.1 years; however, if we prepay at any time the life extends to October 31, 2022 (“2019 12% Warrants”) (combined the “2019 12% Agreements”). We may prepay the 2019 12% Notes at any time, but in any event must pay at least one year of interest.

We issued an aggregate of $1,506,000 under the 2019 12% Notes and warrants to purchase an aggregate of 1,506,000 shares of common stock. $400,000 was received in cash and $1,106,000 from modifying the outstanding principal under the 8.5% Notes; see 8.5% Notes below. The change in terms of the 8.5% Notes is treated as a debt extinguishment and the fair value of the warrants of $298,500 is included in our condensed consolidated statement of operations and as additional paid-in capital.

The relative fair value of the 2019 12% Warrants was recorded as a debt discount and additional paid-in capital of $93,500. For the three and nine months ended September 30, 2019, amortization of debt discount includes $2,297. The 2019 12% Notes are otherwise treated as conventional debt.

For purposes of determining the loss on extinguishment of debt and the debt discount, the underlying assumptions used in the Black-Scholes model to determine the fair value of the 2019 12% Warrants were:


Current stock price	$ 0.82 - 0.92
Exercise price	$ 1.30
Risk-free interest rate	1.63 - 1.68 %
Expected dividend yield	–
Expected term (in years)	1.10
Expected volatility	124 %

8.5% Notes

In April 2018, we completed a $7,500,000 private placement pursuant to a promissory note (“8.5% Notes”) and warrant purchase agreement (the “8.5% Agreement”) with certain accredited investors, bearing interest at 8.5%, with principal due May 1, 2019, and interest payable quarterly. During the second quarter this note was extended to be due June 1, 2019. On June 6, 2019, we made payments of approximately $5.7 million, leaving approximately $1.1 million outstanding. In the event of default, the interest rate increases to 18%. The 8.5% Notes are collateralized by a security interest in substantially all of our assets. We may prepay the 8.5% Notes at any time, but in any event must pay at least one year of interest. In September 2019, we modified the debt agreement into the 2019 12% Notes.

Subject to the terms and conditions of the 8.5% Agreement, each investor was granted fully-vested warrants equal to their note principal times 80%, or six million warrants, with an exercise price of $2.35 per share and a life of two years (the “8.5% Warrants”). Should we issue any equity-based instruments at a price lower than the exercise price(s) of the 8.5% Warrants, other than under our Incentive Plan (as defined below), the exercise price(s) of the 8.5% Warrants will be adjusted to the lower price. If the shares underlying the 8.5% Warrants were not registered for resale on a registration statement within six months, we would have issued an additional warrant to each purchaser at the same exercise price for one-half of the shares covered by the initial 8.5% Warrants. A registration statement related to the 8.5% Warrants was declared effective on June 5, 2018. We may call the 8.5% Warrants at $0.01 per share if our stock trades above $8.00 per share for 15 consecutive days. The 8.5% Warrants may be exercised at the option of the holder by paying cash or by applying the amount due under the 8.5% Notes as consideration.

We received $7,500,000 of cash for issuing the 8.5% Notes. The relative fair value of the 8.5% Warrants was recorded as a debt discount and additional paid-in capital of $5,366,000. For the three months ended September 30, 2019 and 2018, respectively, amortization of debt discount includes $0 and $1,013,261. For the Nine months ended September 30, 2019 and 2018, amortization of debt discount expense was $1,575,094 and $1,457,178, respectively, from the 8.5% Notes. The 8.5% Notes are otherwise treated as conventional debt.

For purposes of determining the debt discount, the underlying assumptions used in the binomial lattice model to determine the fair value of the 8.5% Warrants as of April 2018, were:


Current stock price	$ 4.18
Exercise price	$ 2.35
Risk-free interest rate	2.46 %
Expected dividend yield	–
Expected term (in years)	2.0
Expected volatility	134 %
Number of iterations	5

SBI Debt

In July 2019, we completed a $855,000 private placement pursuant to a promissory note (“SBI Note”) with a certain accredited investor, bearing interest at 10%, with principal due October 17, 2019, and interest due at maturity. On October 18, 2019, the maturity date was extended to November 15, 2019, in exchange for 50,000 options to purchase shares of our common stock, with an exercise price of $1.00 per share and an exercise period of two years from date of grant.

We received $755,000 of cash for issuing the SBI Note and the difference between the cash received and the principal amount was recorded as a debt discount of $100,000. For the three and nine months ended September 30, 2019 amortization of debt discount includes $80,797.

NOTE 7. WARRANT DERIVATIVE LIABILITY

The 2019 Warrants, issued with the 2019 Capital Raise, are accounted for as a derivative liability. The 2019 Warrant agreements contain a cash settlement provision whereby the holders could settle the warrants for cash based on the Black-Scholes value, upon certain fundamental transactions, as defined in the 2019 Warrant agreement, that are considered outside of the control of management, such as a change of control.

The following are the key assumptions that were used to determine the fair value of the 2019 Warrants:


		May 31, 2019		September 30, 2019
Number of shares underlying the warrants		3,000,000		3,000,000
Fair market value of stock	$	0.95	$	0.69
Exercise price	$	1.30	$	1.30
Volatility		133%		125%
Risk-free interest rate		1.93%		1.55%
Warrant life (years)		5.00		4.67

The following table sets forth a summary of the changes in the fair value of the warrant derivative liability, our Level 3 financial liabilities that are measured at fair value on a recurring basis:


		Three months ended September 30,				Nine months ended September 30,
		2019		2018		2019		2018
Beginning balance	$	2,014,560	$	–	$	–	$	–
Recognition of warrant derivative liability on May 31, 2019		–		–		2,416,422		–
Change in fair value of warrants derivative liability		(420,840)		–		(822,702)		–
Ending balance	$	1,593,720	$	–	$	1,593,720	$	–

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

2019 Capital Raise

On May 31, 2019 we received gross proceeds of $3 million by issuing three million shares of our common stock and three million warrants (“2019 Warrants”) to purchase shares of our common stock (together “2019 Units”) in a registered direct offering for $1.00 per 2019 Unit (combined the “2019 Capital Raise”). The 2019 Warrants have an exercise price of $1.30 per share and are exercisable for five years from the date of issuance. We received cash of $2,604,355 which is net of $395,645 of issuance costs, of which $318,681 is included as amortization of debt discount and equity issuance costs and $76,964 is included as a reduction of additional paid in capital. We used a portion of the net proceeds from the issuance of the 2019 Units to pay down the 8.5% Notes by $5,743,000, leaving $1,106,000 outstanding.

Share-based compensation

We use the fair value method to account for stock-based compensation. We recorded $768,079 and $1,289,408 in compensation expense, for the three months ended September 30, 2019 and 2018, respectively and $3,013,042 and $4,252,900, for the nine months ended September 30, 2019 and 2018, respectively. This includes expense related to options issued in prior years for which the requisite service period for those options includes the current period as well as options issued in the current period. The fair value of these instruments was calculated using the Black-Scholes option pricing method.

As of September 30, 2019, there was approximately $1,630,009 of total unrecognized compensation expense related to unvested Employee Awards, which is expected to be recognized over a weighted-average period of nine months.

Feinsod Employment Agreement

On August 6, 2019, we entered into an agreement (the “Feinsod Agreement”) with Michael Feinsod for his permanent service as our Chief Executive Officer. Pursuant to the agreement, Mr. Feinsod received 1,000,000 stock options that vest when our stock price has a trading price of equal to or above $4.51 per share for five consecutive days. The options have an exercise price of $0.83 per share and a ten-year life. These options were issued under the Incentive Plan. The options were valued using the Monte Carlo method.

The underlying assumptions used in the Monte Carlo simulations to determine the fair value of options were:


	August 6, 2019
Current stock price	$ 0.83
Exercise price	$ 0.83
Vesting goal	$ 4.51
Risk-free interest rate	1.73%
Expected term (in years)	10
Expected volatility	123%

Warrants

On May 31, 2019, we issued the 2019 Units at $1.00, which triggered the “down round” feature specified in the 8.5% Warrants. We calculated the difference between the 8.5% Warrants’ fair value on the date the down round feature was triggered using the original exercise price and the new exercise price. The difference in fair value of the effect of the down round feature is reflected in our condensed consolidated financial statements as a deemed dividend and as a reduction to income available to common stockholders in the basic earnings per share calculation.

The underlying assumptions used in the binomial lattice model to determine the fair value of the 8.5% Warrants were:


	Pre-trigger	Post-Trigger
Current stock price	$ 0.95	$ 0.95
Exercise price	$ 2.35	$ 1.00
Risk-free interest rate	2.21 %	2.21 %
Expected dividend yield	–	–
Expected term (in years)	0.89	0.89
Expected volatility	123%	123%
Number of iterations	5	5

NOTE 10. SUBSEQUENT EVENTS

As disclosed in Note 6, Notes Payable, we and SBI agreed to extend the maturity date of the SBI Note to November 15, 2019.

NOTE 11. SEGMENT INFORMATION

Our operations are organized into four segments: Security and Cash Transportation Services; Operations Consulting and Products; Consumer Goods and Marketing Consulting; and Capital Investments and Real Estate. All revenue originates, and all assets are located in the United States.

Three months ended September 30


2019		Security		Operations		Consumer Goods		Investments		Total
Services	$	524,525	$	614,041	$	–	$	–	$	1,138,566
Rent and interest		–		–		–		28,597		28,597
Product		–		220,293		91,308		–		311,601
Total Revenues		524,525		834,334		91,308		28,597		1,478,764
Costs and expenses		(647,935)		(784,844)		(332,307)		–		(1,765,086)
	$	(123,410)	$	49,490	$	(240,999)	$	28,597		(286,322)
Corporate										(1,968,000)
								Net loss	$	(2,254,322)


2018		Security		Operations		Consumer Goods		Investments		Total
Service	$	689,930	$	338,672	$	22,150	$	–	$	1,050,752
Rent and interest		–		–		–		16,858		16,858
Product		–		6,533		22,904		–		29,437
Total revenue		689,930		345,205		45,054		16,858		1,097,047
Costs and expenses		(724,558)		(358,556)		(190,636)		–		(1,273,750)
Investment in Desert Created		–		–		–		(80,483)		(80,483)
	$	(34,628)	$	(13,351)	$	(145,582)	$	(63,625)		(257,186)
Corporate										(3,957,016)
								Net loss	$	(4,214,202)

Nine months ended September 30


2019		Security		Operations		Consumer Goods		Investments		Total
Services	$	1,596,673	$	1,228,344	$	–	$	–	$	2,825,017
Rent and interest		–		–		–		71,193		71,193
Product		–		1,178,733		149,975		–		1,328,708
Total Revenues		1,596,673		2,407,077		149,975		71,193		4,224,918
Costs and expenses		(1,921,277)		(2,321,461)		(982,049)		(41,723)		(5,266,510)
	$	(324,604)	$	85,616	$	(832,074)	$	29,470		(1,041,592)
Corporate										(8,621,227)
								Net loss	$	(9,662,819)


2018		Security		Operations		Consumer Goods		Investments		Total
Service	$	1,856,188	$	1,017,990	$	120,238	$	–	$	2,994,416
Rent and interest		–		–		–		16,858		16,858
Product		–		35,516		107,280		–		142,796
Total revenue		1,856,188		1,053,506		227,518		16,858		3,154,070
Costs and expenses		(2,228,504)		(1,238,299)		(572,189)		–		(4,038,992)
Investment in Desert Created		–		–		–		(1,005,955)		(1,005,955)
	$	(372,316)	$	(184,793)	$	(344,671)	$	(989,097)		(1,890,877)
Corporate										(10,459,009)
								Net loss	$	(12,349,886)


		September 30,		December 31,
Total assets		2019		2018
Security	$	468,933	$	723,878
Operations		610,578		134,786
Consumer Goods		291,434		144,365
Investments		389,100		300,000
Corporate		2,851,259		9,439,196
	$	4,611,304	$	10,742,225

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 Condensed 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, 2018 and 2017. 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, including the financial statements and related notes, 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 of this Quarterly Report on Form 10-Q.

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

Our Products, Services and Customers

Through our reporting segments (Security, Operations, Consumer Goods, and Investments), we provide products, services and capital to the regulated cannabis industry and non-cannabis customers, which include the following:

Security and Cash Transportation Services (“Security Segment”)

Operations Consulting and Products (“Operations Segment”)

Through Next Big Crop (“NBC”), we deliver comprehensive consulting services to the cannabis industry that include obtaining licenses, compliance, cultivation, retail operations, logistical support, facility design and construction, and expansion of existing operations. During the three and nine months ended September 30, 2019, 82% of NBC’s revenue was with three customers and 61% of NBC’s revenue was with two customers.

Consumer Goods and Marketing Consulting (“Consumer Goods Segment”)

Our CBD retail business, STOA Wellness, opened in July of 2019. STOA Wellness offers a curated collection of high quality CBD products for athletes and general wellness.

Capital Investments and Real Estate (“Investments Segment”)

As a publicly traded company, we have access to capital that may not be available to businesses operating in the cannabis industry. Accordingly, we may provide debt or equity capital through (a) loans or revolving lines of credit, (b) leasing real estate we own, or (c) investing in businesses using cash or shares of our common stock.

Developments in 2019

Security – Our security business, IPG, continues to find success expanding into the California market, with a recent shift in focus to the greater Los Angeles area. We also left the northern California market, as the revenue opportunities did not warrant the cost to operate in that area. IPG continues to face significant challenges in Colorado, however, such as pricing pressure from unfavorable economic conditions and the availability and cost of guards. These challenges have resulted in a reduction of revenue and an increase in the cost of revenue.

Operations – Our operations consulting business, NBC, has found significant success in 2019: (a) equipment and product sales continue to rise; (b) increased revenue from licensing application consulting; (c) additional management contracts; and (d) an expansion of our grow facility design and construction business.

Consumer Goods – We made significant changes to our apparel and marketing business, Chiefton, during the quarter ended September 30, 2019. We reduced recurring annualized overhead by approximately $400,000. With a revised cost structure, we are pursuing new, lower cost methods to acquire customers, as well as identify sustainable, profitable revenue streams. STOA, our CBD retail store in Long Island, NY, offering a curated collection of high quality CBD products, opened to customers in July 2019. STOA revenues have shown steady, moderate growth since opening.

Corporate – We continue to invest in our infrastructure in order to better serve our current customers and position ourselves for expansion through organic growth and acquisition. Additionally, through expense management strategies, we reduced annualized overhead by approximately $600,000, and have identified $200,000 - $400,000 of additional potential cost savings. These reductions are partially offset by adding key positions to prepare us for significant growth as we execute our PubCo strategy.

PubCo – We are focused on taking advantage of the ability for public companies to own cultivation, processing and retail cannabis licenses. In Colorado, we have signed numerous letters of intent with potential targets and expect to begin closing acquisitions in early 2020.

Results of Operations

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

Consolidated Results


		Three months ended September 30,					Percent
		2019		2018		Change	Change
Revenues	$	1,478,764	$	1,097,047	$	381,717	35%
Costs and expenses		(3,695,352)		(3,553,909)		(141,443)	4%
Other expense		(37,734)		(1,757,340)		1,719,606	(98)%
Net loss	$	(2,254,322)	$	(4,214,202)	$	1,959,880	(47)%


		Nine months ended September 30,					Percent
		2019		2018		Change	Change
Revenues	$	4,224,918	$	3,154,070	$	1,070,848	34%
Costs and expenses		(12,158,549)		(11,268,731)		(889,818)	8%
Other expense		(1,729,188)		(4,235,225)		2,506,037	(59)%
Net loss	$	(9,662,819)	$	(12,349,886)	$	2,687,067	(22)%

Revenues

Revenue increased for our Operations and Investments segments, offset by a decrease in revenues in our Security and Consumer Goods Segment. See Segment discussions below for further details.

Costs and expenses


		Three months ended September 30,					Percent
		2019		2018		Change	Change
Cost of service revenues	$	676,494	$	805,664	$	(129,170)	(16)%
Cost of goods sold		280,543		52,601		227,942	433%
Selling, general and administrative		1,622,882		1,091,988		530,894	49%
Share-based compensation		768,079		1,289,408		(521,329)	(40)%
Professional fees		299,818		275,516		24,302	9%
Depreciation and amortization		47,536		38,732		8,804	23%
	$	3,695,352	$	3,553,909	$	141,443	4%


		Nine months ended September 30,					Percent
		2019		2018		Change	Change
Cost of service revenues	$	1,962,705	$	2,393,952	$	(431,247)	(18)%
Cost of goods sold		1,160,298		146,011		1,014,287	695%
Selling, general and administrative		4,517,908		3,198,625		1,319,283	41%
Share-based compensation		3,013,042		4,252,900		(1,239,858)	(29)%
Professional fees		1,357,777		1,167,978		189,799	16%
Depreciation and amortization		146,819		109,265		37,554	34%
	$	12,158,549	$	11,268,731	$	889,818	8%

Cost of service revenues typically fluctuates with the changes in revenue for our Operations and Security Segments, while these costs are relatively fixed for Chiefton Design within our Consumer Goods Segment. Cost of goods sold varies with changes in product sales, including a significant increase in products sold by our Operations Segment, which have smaller margins than products sold by our Consumer Goods Segment. See Segment discussions below for further details.

Selling, general and administrative expense increased in 2019 primarily due to increases for (a) salaries; (b) premiums for liability, and directors and officers insurance; (c) computer and internet costs; and (d) marketing costs.

Share-based compensation included the following:


		Three months ended September 30,					Percent
		2019		2018		Change	Change
Employee awards	$	552,119	$	931,706	$	(379,587)	(41)%
Consulting awards		18,758		–		18,758	100%
Feinsod Agreement		197,202		357,702		(160,500)	(45)%
	$	768,079	$	1,289,408	$	(521,329)	(40)%


		Nine months ended September 30,					Percent
		2019		2018		Change	Change
Employee awards	$	2,406,088	$	2,341,933	$	64,155	3%
Consulting awards		39,961		163,965		(124,004)	(76)%
Feinsod Agreement		566,993		1,747,002		(1,180,009)	(68)%
	$	3,013,042	$	4,252,900	$	(1,239,858)	(29)%

Employee awards are issued under our 2014 Equity Incentive Plan, which was approved by shareholders on June 26, 2015, and expense varies primarily due to the number of stock options granted and the share price on the date of grant. Consulting awards are granted to third parties in lieu of cash for services provided. The Feinsod Agreement expense represents share-based compensation pursuant to agreements with Michael Feinsod for serving as the Executive Chairman of our Board.

Professional fees consist primarily of accounting and legal expenses and have increased slightly from 2019 due primarily to the cost of raising capital.

Other Expense


		Three months ended September 30,					Percent
		2019		2018		Change	Change
Amortization of debt discount and equity issuance costs	$	83,094	$	1,557,760	$	(1,474,666)	(95)%
Loss on extinguishment of debt		298,500		–		298,500	100%
Interest expense		76,980		119,097		(42,117)	(35)%
Loss from Desert Created investment		–		62,164		(62,164)	(100)%
Impairment of Desert Created investment		–		18,319		(18,319)	(100)%
Gain on warrant derivative liability		(420,840)		–		(420,840)	(100)%
	$	37,734	$	1,757,340	$	(1,719,606)	(98)%


		Nine months ended September 30,					Percent
		2019		2018		Change	Change
Amortization of debt discount and equity issuance costs	$	1,976,869	$	3,014,938	$	(1,038,069)	(34)%
Loss on extinguishment of debt		298,500		–		298,500	100%
Interest expense		276,521		214,332		62,189	29%
Loss from Desert Created investment		–		182,136		(182,136)	(100)%
Impairment of Desert Created investment		–		823,819		(823,819)	(100)%
Gain on warrant derivative liability		(822,702)		–		(822,702)	(100)%
	$	1,729,188	$	4,235,225	$	(2,506,037)	(59)%

Amortization of debt discount and equity issuance costs generally varies with our debt balance and, in 2019, includes $318,681 of equity issuance costs from the 2019 Warrants. Loss on extinguishment of debt reflects the fair value of the warrants related to converting the remaining 8.5% Notes into 2019 12% Notes. Interest expense varied between 2019 and 2018 due to the payoff of the 12% Notes in January 2018, the payoff of the Infinity Note in February 2018, and the issuance of the 8.5% Notes in April 2018. We recognized equity issuance costs in conjunction with our registered direct offering in May 2019. The loss on investment in Desert Created is our 50% share of the net loss of Desert Created during the three quarters September 30, 2018. The impairment of Desert Created occurred primarily because the agreement was priced in November 2017, however, the transaction did not close until January 2018. In the interim, our stock price increased substantially, thus the consideration we paid, in equity instruments, was higher than the fair value of the investment received. In October 2018, we sold our 50% interest to DNFC for cash consideration of $23,045 and, accordingly, impaired the remaining balance. The gain on warrant derivative liability reflects the change in fair value of the 2019 Warrants.

Security and Cash Transportation Services


		Three months ended September 30,					Percent
		2019		2018		Change	Change
Revenues	$	524,525	$	689,930	$	(165,405)	(24)%
Costs and expenses		(647,935)		(754,558)		76,623	(11)%
	$	(123,410)	$	(34,628)	$	(88,782)	(256)%


		Nine months ended September 30,					Percent
		2019		2018		Change	Change
Revenues	$	1,596,673	$	1,856,188	$	(259,515)	(14)%
Costs and expenses		(1,921,277)		(2,228,504)		307,227	(14)%
	$	(324,604)	$	(372,316)	$	47,712	(13)%

Revenues decreased in 2019 primarily from the loss of several clients in 2019. Costs and expenses typically vary with changes in revenue. During the three months ended September 30, 2019 compared to 2018, the change in expense did not correspond with the change in revenue, due primarily to increased overtime hours and an increase in overhead personnel and salaries.

Operations Consulting and Products


		Three months ended September 30,					Percent
		2019		2018		Change	Change
Revenues	$	834,334	$	345,205	$	489,129	142%
Costs and expenses		(784,844)		(358,556)		(426,288)	119%
	$	49,490	$	(13,351)	$	62,841	471%


		Nine months ended September 30,					Percent
		2019		2018		Change	Change
Revenues	$	2,407,077	$	1,053,506	$	1,353,571	128%
Costs and expenses		(2,321,461)		(1,238,299)		(1,083,162)	87%
	$	85,616	$	(184,793)	$	270,409	146%

The increase in revenues is mostly related to an increase in product sales for the first three quarters of 2019. There were also several applications completed during the quarter ended September 30, 2019. Ongoing management revenue remained consistent with prior year. The higher margin mainly related to the three applications that were completed in the third quarter of 2019. Costs and expenses increased in 2019 due to increased product sales.

Consumer Goods and Marketing Consulting


		Three months ended September 30,					Percent
		2019		2018		Change	Change
Revenues	$	91,308	$	45,054	$	46,254	103%
Costs and expenses		(332,307)		(190,636)		(141,671)	74%
	$	(240,999)	$	(145,582)	$	(95,417)	66%


		Nine months ended September 30,					Percent
		2019		2018		Change	Change
Revenues	$	149,975	$	227,518	$	(77,543)	(34)%
Costs and expenses		(982,049)		(572,189)		(409,860)	72%
	$	(832,074)	$	(344,671)	$	(487,403)	(141)%

The increase in revenues during the three months ended September 30, 2019 is related to STOA revenue, and a slight increase in Chiefton wholesale revenue during the three months ended September 30, 2019. The decrease in revenues during the nine months ended September 30, 2019 is due to fewer custom design projects in 2019 and a decrease in product sales. Costs and expenses vary with changes in product sales, product mix, and inventory adjustments. Revenue derived from services has a higher margin than revenues derived from product sales. In 2019, a larger percentage of revenues came from product sales, increasing the costs related to these sales. Additionally, there was an increase in nonrecurring expense due to the opening of the STOA Wellness retail location in New York.

Investments


		Three months ended September 30,					Percent
		2019		2018		Change	Change
Revenues	$	28,597	$	16,858	$	11,739	70%
Costs and expenses		–		–		–	0%
Investment in Desert Created		–		(80,483)		80,483	(100)%
	$	28,597	$	(63,625)	$	92,222	(145)%


		Nine months ended September 30,					Percent
		2019		2018		Change	Change
Revenues	$	71,193	$	16,858	$	54,335	322%
Costs and expenses		(41,723)		–		(41,723)	0%
Investment in Desert Created		–		(1,005,955)		1,005,955	(100)%
	$	29,470	$	(989,097)	$	1,018,567	(103)%

The increase in revenues in 2019 is related to three new notes receivables that were executed during the nine months ended September 30, 2019. All revenue is from interest and loan origination fees related to these new notes. The investment in Desert Created includes an $805,500 impairment charge and our share of their net loss of $119,972.

Liquidity

Sources of liquidity

Our sources of liquidity include cash generated from operations, the cash exercise of common stock options and warrants, debt, and the issuance of common stock or other equity-based instruments. We anticipate our more significant uses of resources will include funding operations, developing infrastructure, as well as potential loans, investments, and business and real property acquisitions.

In May 2019, we raised approximately $3 million by issuing three million shares of our common stock and three million warrants (“2019 Warrants”) to purchase shares of our common stock (together “2019 Units”) in a registered direct offering for $1.00 per 2019 Unit. The 2019 Warrants have an exercise price of $1.30 per share and are exercisable for five years from the date of issuance. We received cash of $2,604,355, which is net of $395,645 of issuance costs.

In April 2018, we completed a $7,500,000 private placement pursuant to a promissory note (“8.5% Notes”) and warrant purchase agreement (the “8.5% Agreement”) with certain accredited investors, bearing interest at 8.5%, with principal due May 1, 2019, and interest payable quarterly. During the second quarter this note was extended to be due June 1, 2019. On June 6, 2019, we made payments of approximately $5.7 million, leaving approximately $1.1 million outstanding. The proceeds were made available for general working capital purposes and acquisitions.

Sources and uses of cash

We had cash of approximately $600,000 and $8.0 million, respectively, as of September 30, 2019 and December 31, 2018. Our cash flows from operating, investing and financing activities were as follows:


		Nine months ended September 30,
		2019		2018
Net cash used in operating activities	$	(4,529,312)	$	(4,081,846)
Net cash used in investing activities		(1,001,091)		(232,710)
Net cash (used in) provided by financing activities		(1,794,875)		9,119,416

Net cash used in operating activities increased in 2019 by $447,466 compared to 2018, primarily due to additional cash-based expenses, such as salaries for additional personal.

Net cash used in investing activities in 2019 relates primarily to issuing notes receivable, along with purchasing fixed assets. 2018 expenditures were for fixed assets.

Net cash used in financing activities related to the payoff of the notes payable, offset by a capital raise in May 2019. Net cash provided by financing activities in 2018 related to the exercise of warrants and options offset by paying off debt.

Capital Resources

We have no material commitments for capital expenditures as of September 30, 2019. Part of our growth strategy, however, is to acquire businesses and real estate, and provide debt or equity capital to third parties. We expect to fund such activity through cash on hand, the issuance of debt, common stock, warrants for our common stock or a combination thereof.

Non-GAAP Financial Measures

Adjusted EBITDA per share is a non-GAAP financial measure. We define Adjusted EBITDA per share as (a) net income (loss) attributable to common stockholders calculated in accordance with GAAP, adjusted for the impact of share-based expense, depreciation and amortization, impairment of investments, amortization of debt discounts and equity issuance costs, interest expense, income taxes and certain other non-cash items; divided by (b) the weighted average shares outstanding, adjusted for the shares related to the calculation of Adjusted EBITDA. Below we have provided a reconciliation of Adjusted EBITDA per share to the most directly comparable GAAP measure.

We believe that the disclosure of Adjusted EBITDA per share provides investors with a better comparison of our period-to-period operating results. We exclude the effects of certain items 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 comparable view of the underlying dynamics of our operations. 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 GAAP basis. This supplemental financial information should be considered in addition to, not in lieu of, our condensed consolidated financial statements.

The following table reconciles Adjusted EBITDA to the most directly comparable GAAP measure.


		Three months ended September 30,				Nine months ended September 30,
		2019		2018		2019		2018
Net loss attributable to common stockholders	$	(2,254,322)	$	(4,214,202)	$	(10,854,819)	$	(12,349,886)
Adjustments:
Share-based expense		768,079		1,289,408		3,013,042		4,252,900
Depreciation and amortization		47,536		38,732		146,819		109,265
Amortization of debt discount and equity issuance costs		83,094		1,557,760		1,976,869		3,014,938
Loss on extinguishment of debt		298,500		–		298,500		–
Interest expense		76,980		119,097		276,521		214,332
Gain on warrant derivative liability		(420,840)		–		(822,702)		–
Loss on investment in Desert Created		–		62,164		–		182,136
Impairment of Desert Created investment		–		18,319		–		823,819
Total adjustments		853,349		3,085,480		4,889,049		8,597,390
Adjusted EBITDA	$	(1,400,973)	$	(1,128,722)	$	(5,965,770)	$	(3,752,496)

Per share:
Net loss – Basic and Diluted	$	(0.06)	$	(0.12)	$	(0.28)	$	(0.35)
Adjusted EBITDA – Basic and Diluted		(0.04)		(0.03)		(0.17)		(0.11)

Weighted-average shares outstanding:
Net loss – Basic and Diluted		39,402,594		36,013,107		38,106,781		34,921,388
Adjusted EBITDA – Basic and Diluted		36,322,752		35,316,192		34,926,939		34,292,475

Off-balance Sheet Arrangements

We currently have no off-balance sheet arrangements.

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, 2018, and Note 1 to the Condensed Consolidated Financial Statements in this Form 10-Q.

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 Principal Executive Officer and Principal Financial and 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 Principal Executive Officer and Principal Financial and Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2019, the end of the period covered by this report. Based on that evaluation, our Principal Executive Officer and Principal Financial and Accounting Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2019.

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 GAAP, 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 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.

Assessment of Internal Control over Financial Reporting

Our management assessed the effectiveness of our internal control over financial reporting as of September 30, 2019. 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 its internal control over financial reporting was effective as of September 30, 2019, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP.

Changes in Internal Control over Financial Reporting

None.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we may be involved in various claims and legal actions in the ordinary course of business. We are not currently involved in any material legal proceedings outside the ordinary course of our business.

ITEM 1A. RISK FACTORS

Except as described below, 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, 2018.

The loss of one of our largest customers, or a significant reduction in the revenue we generate from these customers, could materially adversely affect our revenue, profitability and results of operations.

Revenue from our largest customers have historically accounted for a significant amount of our business. For instance, during the third quarter of 2019, 82% of NBC’s revenue was with three customers, which comprised approximately 46% of our total consolidated revenue for such quarter. During the third quarter of 2019, approximately 77% of our revenue was derived from the delivery of services, for which we have contracts, and approximately 21% was derived from the sale of products. Generally, our agreements with our customers for services allow them to terminate service with a limited notification period, while product sales agreements do not include any minimum or continuing obligations to purchase our products. We cannot assure you that our largest customers will not terminate services or cease purchasing our products in favor of other service and/or product providers, significantly reduce orders, or seek price reductions in the future. Any such event could have a material adverse effect on our revenue, profitability and results of operations.

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

The 2019 12% Warrants were issued, and any shares of common stock issued upon exercise of the 2019 12% Warrants, if applicable, will be issued in reliance on the exemptions from the registration requirements of the Securities Act by virtue of Sections 3(a)(9) or 4(a)(2) thereof, as applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS


Exhibits		Description
4.1		Form of Promissory Note issued by General Cannabis to certain investors (included in Exhibit 10.1).
4.2		Form of Warrant issued by General Cannabis to certain investors (included in Exhibit 10.1).
10.1		Form of Securities Exchange Agreement between General Cannabis Corp and certain investors, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed September 17, 2019.
10.2		Form of Securities Purchase Agreement between General Cannabis Corp and certain investors, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed September 26, 2019.
10.3		Letter Agreement, dated October 18, 2019, by and between General Cannabis Corp and SBI Investments LLC, 2014-1, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed October 24, 2019.
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.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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 8, 2019		/s/ Michael Feinsod
		Michael Feinsod, Chief Executive Officer
		Principal Executive Officer

		/s/ Brian Andrews
		Brian Andrews, Chief Financial Officer
		Principal Financial and Accounting Officer