NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF OPERATIONS, HISTORY AND PRESENTATION
Nature of Operations
General Cannabis Corporation (the Company, we, us, our, or GCC) (formerly, Advanced Cannabis Solutions, Inc.), was incorporated on June 3, 2013, and provides products and services to the regulated cannabis industry. On April 28, 2015, our common stock was uplisted and resumed quotation on the OTC Markets OTCQB on May 6, 2015. Our operations are segregated into the following four reportable segments:
Security and Cash Management Services
In March 2015, we acquired substantially all of the assets of Iron Protection Group, LLC, a Colorado limited liability company, which continues to do business as Iron Protection Group. Iron Protection Group (IPG) provides advanced security, including on-site professionals, video surveillance and cash transport, to licensed cannabis cultivators and retail shops. As of March 31, 2016, Iron Protection Group had approximately 52 guards who serve 15 clients throughout Colorado.
Marketing and Products
In September 2015, we acquired substantially all of the assets of Chiefton Supply Co., and established a dba of Chiefton Supply Co., incorporated in Colorado (Chiefton). Chiefton is an apparel and design company. We design, distribute and sell apparel featuring graphic designs. Our apparel is purchased and screen printed by third parties, for which there are numerous suppliers. Chiefton also provides high-level design and branding services to various clients, from grow stores and dispensaries to wholesale cannabis companies.
In April 2016, we relaunched GC Supply, dedicated to providing wholesale equipment and supplies to participants in the regulated cannabis industry. We will provide turnkey sourcing and stocking services to cultivation, retail and infused products manufacturing facilities. Offerings will include infrastructure, equipment, consumables, various delivery technologies (vaporizers and capsules) and compliance packaging. GC Supply operates out of a leased, 1,800 square-foot warehouse located in Colorado Springs, Colorado.
Consulting and Advisory
Through Next Big Crop we deliver comprehensive consulting services to the cannabis industry that include obtaining licenses, compliance, cultivation, retail operations, logistical support, facility design and building services, and expansion of existing operations. Our business plan is based on the future growth of the regulated cannabis market in the United States.
In April 2016, we launched our public market research services division, called General Cannabis Equity Research, or GCER. Our approach to investment research will place an emphasis on intrinsic value and management quality. We will evaluate cannabis investments in the same manner as a merger and acquisitions specialist might. Our analyses of the individual cannabis companies will be driven by economic realities of the industry and its constantly changing dynamics. We expect our first report will be available in July 2016.
Finance and Real Estate
Real Estate Leasing
Our real estate leasing business primarily includes the acquisition and leasing of cultivation space and related facilities to licensed marijuana growers and dispensary owners for their operations. Management anticipates that these facilities will range in size from 5,000 to 50,000 square feet. These facilities will only be leased to tenants that possess the requisite state licenses to operate cultivation facilities. The leases with the tenants will provide certain requirements that permit us to continually evaluate our tenants compliance with applicable laws and regulations.
As of the date of this report, we owned one cultivation property that is located in a suburb of Pueblo, Colorado (the Pueblo West Property). The property consists of approximately three acres of land, which currently includes a 5,000 square foot steel building, and parking lot. The property is zoned for cultivating cannabis and is leased to a medical cannabis grower until December 31, 2022. We are evaluating strategic options for this property.
6
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 Greenhouse). The building is a 16,056 square-foot facility, which will be converted to serve as the largest shared workspace for entrepreneurs, professionals and others serving the cannabis industry. Clients will be able to lease space to use as offices, meeting rooms, lecture, educational and networking facilities, and individual workstations.
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. The banking space includes a vault with safety deposit boxes, three drive through teller windows and five secure teller windows inside.
We plan to continue to acquire commercial real estate and lease office space to participants in the cannabis industry. These participants include media, internet, packaging, lighting, cultivation supplies, and financial services. In exchange for certain services that may be provided to these tenants, we expect to receive rental income in the form of cash. In certain cases, we may acquire equity interests or provide debt capital to these businesses.
Industry Finance and Equipment Leasing Services
We lease cultivation equipment and facilities to customers in the cannabis industry. We expect we will enter into sale lease-back transactions of grow lights, tenant improvements and other grow equipment. Since Colorado State law does not allow entities operating under a cannabis license to pledge the assets or the license of the cannabis operation for any type of general borrowing activity, we intend to provide loans to individuals and businesses in the cannabis industry on an unsecured basis. Equipment will only be leased to tenants that possess the requisite state licenses to operate such facilities. The leases with the tenants will provide certain requirements that permit us to continually evaluate its tenants compliance with applicable laws and regulations.
We are exploring lending opportunities in Oregon, Washington, Colorado, and Arizona. Our finance strategy will include making direct term loans and providing revolving lines of credit to businesses involved in the cultivation and sale of cannabis and related products. These loans will generally be secured to the maximum extent permitted by law. We believe there is a significant demand for this financing. We are pursuing other finance services including customized finance, capital formation, and banking, for participants in the cannabis industry.
On November 4, 2015, we entered into an agreement (the DB Option Agreement) with Infinity Capital, a related party, which was amended on March 29, 2016 (the Amended DB Option Agreement). Pursuant to the Amended DB Option Agreement, we have the right to purchase all of Infinity Capitals interest in DB Products Arizona, LLC (DB) at Infinity Capitals actual cost, plus $1.00, or $750,001. The interests for which the option has been granted are Infinity Capitals 50% equity interest in the membership interests of DB, and any outstanding unpaid principal and interest owed on promissory note(s) issued by DB in favor of Infinity Capital for up to $750,000. DB is involved in the production and distribution of Dixie Brands, Incs full line of medical cannabis Dixie Elixirs and Edible products in Arizona. DB expects to begin sales in 2016. We have no obligation to exercise the option, which expires September 24, 2016.
Basis of Presentation
The accompanying (a) condensed consolidated balance sheet at December 31, 2015, has been derived from audited statements and (b) the condensed consolidated unaudited financial statements as of March 31, 2016 and 2015, 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, 2015 (the 2015 Annual Report), filed with the Securities and Exchange Commission (the SEC) on March 25, 2016. It is managements opinion, however, that all material adjustments (consisting of normal recurring adjustments), have been made which are necessary for a fair financial statements presentation. The financial statements include all material adjustments (consisting of normal recurring accruals) necessary to make the financial statements not misleading as required by Regulation S-X, Rule 10-01. Operating results for the three ended March 31, 2016, are not necessarily indicative of the results of operations expected for the year ending December 31, 2016.
The condensed consolidated financial statements include the results of GCC and its five 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; and (e) GC Security LLC, a Colorado limited liability company formed in 2015. 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.
7
Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. The reclassifications had no effect on net loss, total assets, or total stockholders equity (deficit).
Going Concern
The 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 its obligations and repay its liabilities arising from normal business operations when they come due. Management believes that actions presently being taken to further implement its business plan and generate additional revenues provide 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 $17,615,610 and $16,427,378, respectively, at March 31, 2016 and December 31, 2015, 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 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 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. While aimed at reducing the cost and complexity of the accounting for share-based payments, the amendments are expected to significantly impact net income, earnings per share, and the statement of cash flows. Implementation and administration may present challenges for companies with significant share-based payment activities. This ASU is effective for fiscal years beginning after December 15, 2016, 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 2016-10 Revenue from Contracts with Customers (Topic 606)
In April 2016, the FASB issued ASU 2016-10, 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.
NOTE 2.
BUSINESS ACQUISITIONS
IPG Acquisition
On March 26, 2015, GCS, our wholly-owned subsidiary, entered into an Asset Purchase Agreement (the IPG APA) by and among us, GCS and Iron Protection Group, LLC, a Colorado limited liability company (the Seller), whereby GCS agreed to acquire substantially all of the assets of Seller (the IPG Acquisition). Pursuant to the terms of the IPG APA, we delivered to Seller 500,000 restricted shares of our common stock, which vested over a one-year period (100,000 shares on October 1, 2015; 200,000 shares on January 1, 2016; and 200,000 shares on April 1, 2016).
In addition, we delivered to Seller three-year warrants (the IPG Warrants) to purchase an aggregate of 500,000 shares of our common stock at an exercise price of: (i) $4.50 for warrants to purchase 250,000 shares, and (ii) $5.00 for warrants to purchase another 250,000 shares. The IPG APA contains certain provisions that require Seller to forfeit a portion of the stock consideration in the event that Seller violates its obligations under the IPG APA relating to non-competition and non-disclosure. The closing date of the IPG Acquisition was March 26, 2015 and we calculated the purchase price of the IPG Acquisition to be approximately $1,887,000. At the acquisition date and pursuant to the IPG APA, we did not assume any of the Sellers liabilities and there were no tangible assets of significance.
The aggregate consideration was as follows:
|
|
|
Common stock payable
|
$
|
1,054,000
|
Warrants issued with $4.50 exercise price
|
|
421,000
|
Warrants issued with $5.00 exercise price
|
|
412,000
|
|
$
|
1,887,000
|
8
The 500,000 shares of common stock were valued based on the closing price per share on March 26, 2015, or $2.48, reduced by a discount of 15% due to restrictions in the ability to trade our common stock. The $1,054,000 value of stock consideration was recorded as accrued stock payable on the consolidated balance sheet, which is reduced as we issue common stock according to the vesting schedule.
The purchase price allocation is as follows:
|
|
|
Intangible assets:
|
|
|
Customer relationship intangible
|
$
|
1,000,000
|
Marketing-related intangibles
|
|
200,000
|
Non-compete agreements
|
|
500,000
|
Goodwill
|
|
187,000
|
|
$
|
1,887,000
|
We finalized the purchase price allocation in the fourth quarter of the year ended December 31, 2015.
In connection with our acquisition of IPG, we agreed to issue to the sole shareholder of the Seller 100,000 fully vested warrants to purchase shares of our common stock if revenues of the Security segment exceeded $3,000,000 for the year ended December 31, 2015, with an exercise price of $2.48. This condition was not met during the year ended December 31, 2015, so no value was recorded for these warrants.
The accompanying condensed consolidated financial statements include the results of IPG from the date of acquisition, March 26, 2015. The pro forma effects of the acquisition on the results of operations as if the transaction had been completed on January 1, 2015, are as follows:
|
|
|
|
|
Three months ended
|
|
|
March 31, 2015
(Unaudited)
|
Total net revenues
|
$
|
1,061,858
|
Net loss
|
|
(1,079,871)
|
Net loss per common share:
|
|
|
Basic and diluted
|
$
|
(0.07)
|
Chiefton Acquisition
On September 25, 2015, we closed an asset purchase agreement for the purchase of substantially all the assets of Chiefton Supply Co., a Colorado corporation, and established a dba within GCC of Chiefton. This acquisition expands our service offerings in the cannabis industry and provides a new revenue stream.
We acquired the Chiefton assets for consideration of 80,000 restricted shares of our common stock. The shares shall remain in escrow for six months for the exclusive purpose of being available to indemnify us for any claims that may be made by any person or governmental entity related to or arising from Chieftons intellectual property during the six month period after closing. After such period, the shares will be released if no claims have been made, provided that if any claims have been made the shares will remain in escrow until the claim is resolved, at which time the shares will be released less the value of any and all settlement amounts, penalties, damages or other liabilities arising from the claim.
The aggregate consideration was as follows:
|
|
|
Cash
|
$
|
12,249
|
Common stock
|
|
69,400
|
Aggregate consideration
|
$
|
81,649
|
The value of the common stock consideration was estimated based on our closing common stock price on September 25, 2015, or $1.02 per share, reduced by a discount of 15% due to restrictions in the ability to trade our shares. The $69,400 value of stock consideration is included in accrued stock payable on the consolidated balance sheet as of December 31, 2015.
The purchase price allocation is as follows:
|
|
|
Inventory
|
$
|
12,249
|
Intangible assets intellectual property
|
|
69,400
|
|
$
|
81,649
|
9
We finalized the purchase price allocation in the fourth quarter of the year ended December 31, 2015.
NOTE 3. LONG-LIVED ASSETS
Property and Equipment
Depreciation expense was $12,159 and $9,007, respectively for the three months ended March 31, 2016 and 2015. We have not recognized any impairment as of March 31, 2016.
Intangible Assets
Intangible assets consisted of the following as of March 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
|
Estimated Life
(in years)
|
Customer relationship intangible
|
$
|
1,000,000
|
$
|
101,643
|
$
|
898,357
|
|
10
|
Marketing-related intangibles
|
|
200,000
|
|
40,658
|
|
159,342
|
|
5
|
Non-compete agreements
|
|
500,000
|
|
169,406
|
|
330,594
|
|
3
|
Chiefton brand and graphic designs
|
|
69,400
|
|
17,873
|
|
51,527
|
|
2
|
Intangible assets, net
|
$
|
1,769,400
|
$
|
329,580
|
$
|
1,439,820
|
|
|
Amortization expense was $85,107 and $0, respectively, for the three months ended March 31, 2016 and 2015. We have not recognized any impairment as of March 31, 2016.
Goodwill
In connection with our purchase of IPG, we recorded goodwill of $187,000. We have not recognized any impairment as of March 31, 2016.
NOTE 4. DEBT
Line of Credit Related Party
In February 2015, we issued a senior secured note to Infinity Capital, LLC (Infinity Capital), as amended in April 2015, bearing 5% interest payable monthly in arrears commencing June 30, 2015, until the maturity date of August 31, 2015 (the Infinity Note). Infinity Capital, an investment management company, was founded and is controlled by our chairman of the board, Michael Feinsod, a related party. On July 1, 2015, the outstanding principal and interest of $309,000 was settled by our issuing a 10% private placement note. Subsequent to the settlement on July 1, 2015, we continued to borrow under the Infinity Note. Interest expense for the Infinity Note for the three months ended March 31, 2016, was approximately $11,700, and approximately $23,400 was accrued as of March 31, 2016.
Notes Payable
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
10.0% private placement notes
|
$
|
659,000
|
$
|
659,000
|
14.0% mortgage note payable (The Greenhouse)
|
|
600,000
|
|
600,000
|
8.5% convertible note payable (Pueblo West Property)
|
|
156,637
|
|
158,307
|
|
|
1,415,637
|
|
1,417,307
|
Unamortized debt discount
|
|
(143,598)
|
|
(279,435)
|
|
|
1,272,039
|
|
1,137,872
|
Less: Current portion
|
|
(1,122,460)
|
|
(986,475)
|
Long-term portion
|
$
|
149,579
|
$
|
151,397
|
10% Private Placement Notes
In 2015, we completed a private placement pursuant to a Promissory Note and Warrant Purchase Agreement (the 10% Agreement) with certain accredited investors, bearing interest at 10% payable quarterly, with a maturity date of May 1, 2016. Under the 10% Agreement, we can issue up to $2,000,000 of notes to investors, bearing interest at 10%, with a minimum denomination of $25,000
10
(each such note, a 10% Note, and collectively, the 10% Notes). Subject to the terms and conditions of the 10% Agreement, each investor is granted fully-vested warrants equal to their note principal divided by two (the 10% Warrants) (with standard dilution clauses). The 10% Warrants are exercisable for a period of eighteen months after grant date and have an exercise price of $1.08 per share. The debt is treated as conventional debt. The 10% Notes are collateralized by a security interest in substantially all of our assets.
$309,000 of the 10% Notes are due to a related party, Infinity Capital, at March 31, 2016 and December 31, 2015. During the three months ended March 31, 2015, approximately $3,600 of interest expense and $10,900 of accrued interest under the 10% Notes relates to Infinity Capital.
14% Mortgage Note Payable (The Greenhouse)
In October 2014, we executed a mortgage on The Greenhouse in the amount of $600,000, bearing 14.0% interest payable monthly, with a maturity date of October 21, 2016 (the Greenhouse Mortgage). The debt is treated as conventional debt.
In addition, we granted warrants to Evans Street Lendco LLC (Evans Lendco), the note holder of the Greenhouse Mortgage, which expire on October 21, 2016. The warrants vested immediately and allowed for Evans Lendco to purchase 600,000 shares of our common stock at a price of $4.40 per share, (with standard dilution clauses). Due to the drop in our stock price, on July 29, 2015, we agreed with Evans Lendco to replace the warrants previously issued to Evans Lendco with warrants to purchase 225,000 shares of our stock at $1.20 per share with a term of two years. The estimated fair value of the replacement warrants is less than the fair value of the original warrants on their date of grant. Accordingly, we will continue to amortize the remaining fair value of the original warrants over the remaining life of the underlying debt.
8 ½% Convertible Note Payable (Pueblo West Property)
In December 2013, we executed a mortgage on our Pueblo West Property in the amount of $170,000, bearing 8 ½% interest with monthly principal and interest payments totaling $1,674, with the balance due on December 31, 2018 (the Pueblo Mortgage). This note is convertible at any time at $5.00 per share.
Derivative treatment is not required, as the conversion feature meets the scope exception. The conversion feature is not beneficial, because the conversion price was higher than the stock price on the commitment date. Accordingly, we treated the Pueblo Mortgage as conventional debt.
12% Convertible Notes
Conversion of 12% Convertible Notes
During the year ended December 31, 2015, lenders converted $321,123 of 12% Convertible Notes for 64,225 shares of our common stock. The December 2013 Issuance and the January 2014 Issuance (collectively, the 12% Convertible Notes) included a provision that if the trading stock price exceeded $10 for twenty consecutive trading days and the daily volume for those twenty consecutive trading days exceeds 25,000 shares, then the 12% Convertible Notes convert into shares of our common stock on or after December 1, 2015. As of April 24, 2014, these parameters were met. On December 1, 2015, the remaining $1,330,000 of convertible notes was automatically converted to 266,000 shares of our common stock.
December 2013 Issuance
In December 2013, we entered into convertible promissory notes with various third parties totaling $530,000 (the December 2013 Issuance). The principal amounts of these notes ranged between $10,000 and $150,000. The notes required quarterly interest payments at 12%, and were convertible into shares of our common stock at a conversion rate of $5.00 per share (with standard dilution clauses).
Derivative treatment was not required, as the conversion feature met the scope exception. The conversion feature was not beneficial, because the conversion price was higher than the stock price on the commitment date. Accordingly, we treated the December 2013 Issuance as conventional debt.
January 2014 Issuance
In January 2014, we entered into convertible promissory notes with various third parties totaling $1,605,000 (the January 2014 Issuance). The principal amounts of these notes ranged between $10,000 and $200,000. The notes required quarterly interest payments at 12%, and were convertible into shares of our common stock at a conversion rate of $5.00 per share (with standard dilution clauses).
11
Derivative treatment was not required, as the conversion feature met the scope exception. Since the initial conversion price was less than the market value of the common stock at the time of issuance, it was determined that a beneficial conversion feature existed. The intrinsic value of the beneficial conversion feature and the combined value of the debt discount resulted in a value greater than the value of the debt and, as such, the total discount was limited to the value of the debt balance of $1,605,000.
Annual maturities of long-term debt (excluding unamortized discount) for the next four years, consist of:
|
|
|
Year ending December 31,
|
|
|
2016
|
$
|
1,264,240
|
2017
|
|
7,507
|
2018
|
|
143,890
|
|
$
|
1,415,637
|
NOTE 5. ACCRUED STOCK PAYABLE
The following tables summarize the changes in accrued common stock payable during the three months ended March 31, 2016:
|
|
|
|
|
|
|
Amount
|
|
Number of Shares
|
December 31, 2015
|
$
|
1,532,420
|
|
730,000
|
Feinsod Agreement -- accrual
|
|
82,648
|
|
--
|
Consulting services -- accrual
|
|
6,988
|
|
--
|
Consulting services -- issued
|
|
(25,000)
|
|
(50,000)
|
Employment agreements -- accrual
|
|
567
|
|
--
|
March 31, 2016
|
$
|
1,597,623
|
|
680,000
|
Feinsod Agreement
On August 4, 2014, we entered into an agreement with Michael Feinsod in consideration for serving as Executive Chairman of the Board and as a member of the Board and pursuant to the terms of the Executive Board and Director Agreement (the Feinsod Agreement). The Board approved the issuance to Infinity Capital of (a) 200,000 shares of our common stock on August 4, 2014; (b) 1,000,000 shares of our common stock upon the uplisting of our common stock to the OTC Markets OTCQB; (c) 150,000 shares of our common stock on August 4, 2015; and (d) 150,000 shares of our common stock on August 4, 2016. Mr. Feinsod must remain a member of the Board in order for the common stock to be issued. In addition, the Feinsod Agreement requires the issuance of a number of shares of our common stock to Infinity Capital equal to 10% of any new issuances not to exceed 600,000 shares of our common stock in the aggregate during the time that Mr. Feinsod remains a member of the Board (the New Issuance Allowance). Under the terms of the Feinsod Agreement, the New Issuance Allowance will not be triggered upon issuances relating to convertible securities existing as of the date of the Feinsod Agreement. For illustrative purposes, if we issue 7,000,000 new shares of common stock, then the New Issuance Allowance issued to Infinity Capital would be capped at 600,000 shares of our common stock. No shares have been issued under the New Issuance Allowance.
The 1,000,000 shares of our common stock were valued at $2.97 per share, based on the closing price of our common stock of $3.49 on April 27, 2015, and then reduced by 15% due to restrictions on the ability to trade our shares. The other shares under the Feinsod Agreement were valued at $4.42 per share, based on the closing price of our common stock of $5.20 on August 4, 2014, and then reduced by 15% due to restriction on the ability to trade our common stock. We are recognizing expense for the unissued shares ratably over the vesting period.
Employment Agreements
On May 13, 2015, we hired two individuals from Next Big Crop (NBC), an unaffiliated entity serving the cannabis industry, to service our new and existing clients. We did not purchase any existing client base from NBC and upon execution of employment agreements, granted these persons a total of 100,000 shares of our common stock with a vesting date of January 1, 2016. On the date of grant, the 100,000 shares had an initial fair value of $311,000, based on a closing price per share of our common stock of $3.11 on May 13, 2015. Due to restrictions in the ability to trade our shares, a discount of fifteen percent (15%) was applied to the fair value of the shares. After taking into consideration the illiquidity of the shares, the fair value was determined to be $264,350. One individual forfeited his shares, so expense was only recognized for 50,000 shares.
12
Consulting Agreement
On July 15, 2015, we entered into an agreement with an individual to provide consulting services to customers in exchange for 50,000 shares of our common stock to be delivered on March 15, 2016. The fair value of the common stock is determined at the end of each reporting period and the pro rata amount earned is recognized as accrued stock payable over the term of the agreement. These shares were issued in March 2016.
NOTE 6. COMMITMENTS AND CONTINGENCIES
Legal
To the best of the Companys knowledge and belief, no legal proceedings of merit are currently pending or threatened against the Company.
NOTE 8. STOCKHOLDERS EQUITY
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.
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. We recognized expense for continued vesting of previously issued Employee Awards of $452,621 during the three months ended March 31, 2016. No Employee Awards were granted during the three months ended March 31, 2016 and 2015.
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, 2015
|
|
2,509,000
|
$
|
1.49
|
|
|
|
|
Forfeited
|
|
(134,000)
|
$
|
0.73
|
|
|
|
|
Outstanding at March 31, 2016
|
|
2,375,000
|
$
|
1.53
|
|
2.9
|
$
|
5,270
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2016
|
|
347,500
|
$
|
2.57
|
|
3.3
|
|
--
|
As of March 31, 2016, there was approximately $877,000 of total unrecognized compensation expense related to unvested Employee Awards, which is expected to be recognized over a weighted-average period of six 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. Service Awards are revalued at each reporting date until fully vested, which may generate an expense or benefit. We recognized expense for continued vesting of previously issued Consulting Awards of $10,100 for the three months ended March 31, 2016. No Consulting Awards were granted during the three months ended March 31, 2016 and 2015.
13
The following summarizes Consulting Awards:
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted-average Exercise Price per Share
|
|
Weighted-average Remaining Contractual Term
(in years)
|
|
Aggregate Intrinsic Value
|
Outstanding at December 31, 2015
|
|
252,500
|
$
|
3.62
|
|
|
|
|
Outstanding at March 31, 2016
|
|
252,500
|
$
|
3.62
|
|
1.2
|
$
|
75
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2016
|
|
180,000
|
$
|
3.99
|
|
1.0
|
$
|
75
|
As of March 31, 2016, there was approximately $4,825 of total unrecognized expense related to unvested Consulting Awards, which is expected to be recognized over a weighted-average period of two months.
IPG Acquisition Warrants
In connection with the IPG APA, we issued to IPG 500,000 fully-vested warrants to purchase a) 250,000 shares of our common stock at $4.50 per share, (the IPG $4.50 Warrants), and b) 250,000 shares of our common stock at $5.00 per share (the IPG $5.00 Warrants) (collectively, the IPG Warrants). The IPG Warrants are subject to customary adjustments in the event of our reclassification, consolidation, merger, subdivision of shares of our common stock, combination of shares of our common stock or payment of dividends in the form of the our common stock. The IPG Warrants expire three years after their initial issuance date.
As of March 31, 2016, all of the IPG Warrants are outstanding and exercisable.
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, 2015
|
|
597,200
|
$
|
1.41
|
|
|
|
|
Outstanding at March 31, 2016
|
|
597,200
|
$
|
1.41
|
|
0.8
|
$
|
--
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2016
|
|
597,200
|
$
|
1.41
|
|
0.8
|
$
|
--
|
DB Option Agreement warrants
In order to extend the DB Option Agreement with Infinity Capital, we granted Infinity Capital warrants to purchase 100,000 shares of our common stock at an exercise price of $0.67 per share with a five year life. The fair value of $55,100 is included in equity-based expense. The following summarizes the Black-Scholes assumptions used to estimate the fair value of the DB Option Agreement warrants:
|
|
|
Volatility
|
|
150 %
|
Risk-free interest rate
|
|
1.2 %
|
Expected life (years)
|
|
5.0
|
Dividend yield
|
|
--
|
Series A Warrants
Between July 11, 2013 and August 8, 2013, we issued 707,000 shares of our common stock and 707,000 fully-vested Series A Warrants for cash consideration of $1.00 per share. Each Series A Warrant entitles the holder to purchase one share of our common stock at a price of $10.00 per share. The Series A Warrants expire on the earlier of August 1, 2016, or twenty days following written notification from that our common stock had a closing bid price at or above $12.00 for any ten consecutive trading days. This condition was met as of April 30, 2014; however, we have not forced conversion of the warrants at this time.
14
Between August 14, 2013 and September 19, 2013, we issued 266,000 shares and 266,000 fully-vested Series A Warrants of our common stock for cash consideration of $1.00 per share. The Series A Warrants expire on the earlier of August 1, 2016, or twenty days following written notification from that our common stock had a closing bid price at or above $12.00 for any ten consecutive trading days. This condition was met as of April 30, 2014; however, we have not forced conversion of the warrants at this time.
As of March 31, 2016, all 973,000 warrants are outstanding and exercisable.
NOTE 9. NET LOSS PER SHARE
Basic net 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.
The following table presents a reconciliation of the denominators used in the computation of net loss per share basic and diluted:
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
2016
|
|
2015
|
Net loss
|
$
|
(1,188,232)
|
$
|
(828,493)
|
Weighted average outstanding shares of common stock
|
|
14,930,256
|
|
13,095,465
|
Dilutive effect of stock options and warrants
|
|
--
|
|
--
|
Common stock and equivalents
|
|
14,930,256
|
|
13,095,465
|
|
|
|
|
|
Net loss per share Basic and diluted
|
$
|
(0.08)
|
$
|
(0.06)
|
Outstanding stock options and common stock warrants are considered anti-dilutive because we are in a net loss position.
NOTE 10. SUBSEQUENT EVENTS
Settlement of Accrued Stock Payable
In April 2016, we issued shares of our common stock related to accrued stock payable, as follows:
|
|
|
|
|
Number of Shares
|
IPG Acquisition
|
|
400,000
|
Chiefton Acquisition
|
|
80,000
|
Consulting services
|
|
50,000
|
March 31, 2016
|
|
530,000
|
Employee Awards
In April 2016, we issued options to employees to purchase 216,650 shares of our common stock at an exercise price of $0.61 per share, with a one year vesting period.
Registration Statement on Form S-8
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.
NOTE 11. SEGMENT INFORMATION
Our operations are organized into four segments: Security and Cash Management Services; Marketing and Products; Consulting and Advisory; 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.
15
Three months ended March 31
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
Security and Cash Management
|
|
Marketing and Products
|
|
Consulting and Advisory
|
|
Finance and Real Estate
|
|
Total
|
Revenues, net
|
$
|
507,531
|
$
|
50,098
|
$
|
98,114
|
$
|
36,369
|
$
|
692,112
|
Costs and expenses
|
|
(541,396)
|
|
(81,575)
|
|
(83,769)
|
|
(11,786)
|
|
(718,526)
|
Other expense
|
|
--
|
|
--
|
|
--
|
|
(3,352)
|
|
(3,352)
|
|
$
|
(33,865)
|
$
|
(31,477)
|
$
|
14,345
|
$
|
21,231
|
|
(29,766)
|
Corporate expenses
|
|
|
|
|
|
|
|
|
|
(1,158,466)
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(1,188,232)
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
Security and Cash Management
|
|
Marketing and Products
|
|
Consulting and Advisory
|
|
Finance and Real Estate
|
|
Total
|
Revenues, net
|
$
|
17,382
|
$
|
12,798
|
$
|
--
|
$
|
26,677
|
$
|
56,857
|
Costs and expenses
|
|
(27,470)
|
|
(24,653)
|
|
--
|
|
(9,007)
|
|
(61,130)
|
Other expense
|
|
--
|
|
--
|
|
--
|
|
(2,322)
|
|
(2,322)
|
|
$
|
(10,088)
|
$
|
(11,855)
|
$
|
--
|
$
|
15,348
|
|
(6,595)
|
Corporate expenses
|
|
|
|
|
|
|
|
|
|
(821,898)
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(828,493)
|
|
|
|
|
|
Total assets
|
|
March 31, 2016
|
|
December 31,
2015
|
Security and Cash Management
|
$
|
110,214
|
|
132,314
|
Marketing and Products
|
|
30,045
|
|
127,345
|
Consulting and Advisory
|
|
22,220
|
|
22,268
|
Finance and Real Estate
|
|
453,312
|
|
431,639
|
Corporate
|
|
2,916,706
|
|
2,969,145
|
|
$
|
3,532,497
|
|
3,682,711
|
All assets are located in the United States.
16