$CANN Form 10-K

Net Revenues

Net revenues were $171,665 for the year ended December 31, 2014 comprised for tenant rental revenue, wholesale sales and consulting fee revenue. The Company’s commenced operations during 2013 and did not have any revenues. Tenant rental revenue, which relates to real estate leasing of our property in Pueblo, Colorado to a licensed medical cannabis cultivator, was $115,059 for the year ended December 31, 2014. Net wholesale sales were $16,606 for the year ended December 31, 2014 from wholesale sales of $85,147 and cost of goods sold of $68,541. The Company’s wholesale business commenced operations in May 2014 and its performance is a result of the Company’s ability to penetrate a difficult segment of the cannabis industry. Consulting fee revenue, net, was $40,000 for the year ended December 31, 2014. The consulting contract was mutually cancelled during the third quarter of 2014.

Operating Expense

Operating expenses, which consist of general and administrative expenses, payroll and related expenses, share-based compensation, professional fees, office expense and depreciation and amortization expense, were $2,707,404 and $561,254 for the year ended December 31, 2014 and 2013 Fiscal Period, respectively. An overall increase in operating expenses for the year ended December 31, 2014 versus the 2013 Fiscal Period is due to the Company incurring a full year of expense in 2014, as compared with approximately six months in 2013, as well as expenses relating to stock-based compensation issued to employees and professional fees incurred relating to pursued litigation against a former executive and shareholder of the Company. Significant expenses incurred in 2014 are discussed herein.

General and administrative expense, which is primarily comprised of corporate expenses, insurance premiums, travel and promotion, and website maintenance, was $225,535 and $53,265, for the year ended December 31, 2014 and 2013 Fiscal Period, respectively. The increase in general and administrative expenses is primarily due to increased insurance premiums and travel and conference expenses, as the Company continues to build its presence in the industry. Payroll and related expense, which is primarily comprised of management and staff salaries and the Company’s share of health benefit premiums was $494,402 and $108,588 for the year ended December 31, 2014 and 2013 Fiscal Period, respectively. This increase is primarily due to slightly higher headcount and a full year of expense being incurred in 2014. Share-based compensation expense was $1,298,375 and $0 for the year ended December 31, 2014 and the 2013 Fiscal Period. Share-based compensation expense in 2014 was primarily due to issued and accrued stock payable to Infinity Capital pursuant to the Feinsod Agreement.

Professional fees, which are primarily comprised of legal, accounting and audit fees, and filing fees, were $555,442 and $391,132 for the year ended December 31, 2014 and 2013 Fiscal Period, respectively. Professional fees incurred during 2013 were primarily related to the Company’s reverse merger. Professional fees during 2014 primarily relate to the Company’s pursuit of legal action against a former stockholder of the Company. Office expense, which is primarily comprised of rent expense and office supplies, was $67,388 and $8,269 for the year ended December 31, 2014 and the 2013 Fiscal Period. The increase in office expense was primarily due to a full year of expense in 2014 and the Company’s change in its headquarters location. Depreciation and amortization expense was $66,262 and $0 the year ended December 31, 2014 and for the 2013 Fiscal Period, respectively. The increase in depreciation and amortization expense is due to a full year of expense and assets purchased at the end of 2014.

Other Expense

Other expense consists of amortization of debt discount and deferred financing costs, interest expense, and loss on fair value adjustment of the warrant derivative liability. Other expense was $4,394,400 and $151,665 for the year ended December 31, 2014 and 2013 Fiscal Period, respectively. Amortization expense of debt discount and deferred financing costs was $755,725 and $794 for the year ended December 31, 2014 and 2013 Fiscal Period, respectively. The amortization of debt discount relates primarily to the discount recognized on the January 2014 Issuance of convertible debt. Interest expense was $244,771 and $871 for the year ended December 31, 2014 and the 2013 Fiscal Period, respectively. Interest expense in 2014 is comprised of interest expense on convertible debt and the mortgage on The Greenhouse, purchased in October 2014. The derivative loss relates to the change in the value of the derivative liability recorded during the first quarter 2014. The loss on derivative liability of $3,393,904 for the year ended December 31, 2014 includes accrual for Full Circle’s cashless exercise of warrants. During the 2013 Fiscal Period, the Company incurred a loss of $150,000 on an option to purchase property.

Net Loss and Per Share Data

Net loss was $6,930,139 and $710,962 for the year ended December 31, 2014 and 2013 Fiscal Period, respectively. Based on the weighted average number of common shares outstanding for the year ended December 31, 2014 and 2013 Fiscal Period of 13,462,396 and 14,026,127, respectively, net loss per share was $0.51 and $0.05 for the year ended December 31, 2014 and 2013 Fiscal Period, respectively. The Company’s net loss of $6,930,139 for the year ended December 31, 2014 included approximately $5,546,000 related to non-cash items, primarily resulting from amortization of debt discount and deferred financing costs of $787,669, loss in fair value of derivative liability of $3,393,904 and stock-based compensation expense of $1,298,375.

The Company has incurred a loss since Inception resulting in an accumulated deficit of approximately $7,641,000 as of December 31, 2014 and further losses are anticipated in the development of its business. Accordingly, there is substantial doubt about the Company’s ability to continue as a going concern. The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and, or, obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. There is no guarantee that the Company will be successful in achieving these objectives.

Liquidity and Capital Resources

The Company discusses its liquidity and capital resources below for the year ended December 31, 2014 and for the 2013 Fiscal Period:

                                                                    2014            2013
Net cash used in operating activities                           $ (1,425,031 )   $  (489,071 )
Amortization of debt discount (non-cash)                             755,725             794
Issuance of stock for services (non-cash)                            884,000          40,000
Changes in fair value of derivative liability, net (non-cash)      3,393,904               -

Net cash used in investing activities                               (611,252 )      (432,753 )
Net cash used in the purchase of property and equipment             (573,052 )      (282,753 )
Purchase of option to acquire real property                                -        (150,000 )

Net cash used in financing activities                              1,774,383       1,349,260
Proceeds from sale of common stock and warrants                      400,000         985,400
Proceeds from sale of convertible notes                            1,394,739         530,000

Operating Activities

During the year ended December 31, 2014, cash flows used in operating activities were $1,425,031. During the year ended December 31, 2014, we incurred net loss of $6,930,139, of which approximately $5,546,000 related to non-cash items, primarily resulting from amortization of debt discount and deferred financing costs of $787,669, loss in fair value of derivative liability of $3,393,904 and stock-based compensation expense of $1,298,375. Approximately $41,000 was used in a net of increases in receivables, inventory, and prepayments offset by an increase in accounts payable and accruals and tenant deposits.

During the 2013 Fiscal Period, cash flows used in operating activities were $489,071. During the 2013 Fiscal Period, we incurred net loss of $710,962, of which approximately $190,000 related to non-cash items. We used a net $40,968 for increases in prepaid expenses and increases in accounts payable and accruals, for the 2013 Fiscal Period.

Investing Activities

During the year ended December 31, 2014, cash flows used in investing activities were $611,252. Approximately $573,000 was used to purchase plant, property and equipment, including cash payments of approximately $500,000 for The Greenhouse, which serves as the Company’s corporate headquarters and will be repurposed as a shared workspace and networking facility for companies who serve the cannabis industry.

During the 2013 Fiscal Period, cash flows used in investing activities were $432,753, of which $150,000 resulted from a loss on an option to acquire property. Cash flows used in investing activities of approximately $283,000 relate to the purchase and improvement of our property in Pueblo County, Colorado, which is leased to a licensed approved cannabis cultivator.

Financing Activities

During the year ended December 31, 2014, cash provided by financing activities was $1,774,383. The Company generated proceeds, net of cash expenses, of $1,394,739 from the sale of convertible notes, and $400,000 from the sale of warrants. Cash flows used in financing activities relate to the Company’s principal repayment on convertible notes payable and deferred financing costs.

During the 2013 Fiscal Period, we raised net funding of $1,349,260 through the sale of common stock, warrants, and convertible notes. Of this amount, $100,000 was used to purchase 8,000,000 shares of our common stock from a former officer, proceeds of $985,400 was generated from issuance of common stock and $530,000 was generated from sale of convertible notes.

Financing Activities Subsequent to December 31, 2014

The Company discusses its liquidity and capital resources below for the period subsequent to December 31, 2014:

Common stock issued to Full Circle upon cashless exercise of warrants (non-cash) 3,314,520 Convertible notes and interest payable settled in common stock (non-cash) 291,063 Proceeds from Note with Infinity Capital 210,000

Pursuant to the terms of the Company’s Warrant Agreement with Full Circle, on January 23, 2015, Full Circle executed its option to cashless exercise 1,215,000 warrants. The Company issued Full Circle 660,263 shares in exchange for the cancellation of 1,215,000 warrants, with 185,000 warrants outstanding as of April 14, 2015 (See section “Credit Facilities” under “Item 1. Business”).

Pursuant to the terms of the Company’s Note with Infinity Capital, the Company’s Note balance to Infinity Capital was approximately $210,000 on April 14, 2015 (See section “Credit Facilities” under “Item 1. Business”).

From January 1, 2015 to April 14, 2015, three of the January 2014 Issuance note holders and one of the December 2013 Issuance note holders converted loan notes with principal balances totaling $290,000 and accrued interest of $1,063 into 58,213 shares of the Company’s common stock at a conversion price of $5.00 per share.

Contractual Obligations



The Company had the following contractual obligations, including interest, as of
December 31, 2014:



                                                                          Amounts Due in
Description                    Total           2015           2016           2017           2018            2019           Thereafter
12% Convertible notes (3)   $ 1,650,000     $        -     $        -     $        -     $ 1,650,000     $         -     $            -
Mortgage on Pueblo
Property                    $   217,048     $   20,089     $   20,089     $   20,089     $   156,781     $         -     $            -
Mortgage on The
Greenhouse, Denver, CO
(1)                         $   780,306     $   53,351     $  726,955     $        -     $         -     $         -     $            -
Office rental               $    30,546     $   12,852     $   13,238     $    4,456     $         -     $         -     $            -
  TOTAL                     $ 2,677,900     $   86,292     $  760,282     $   24,545     $ 1,806,781     $         -     $            -

The Company had the following contractual obligations, including interest, as of April 14, 2015:

                                                                           Amounts Due in
Description                    Total           2015            2016           2017           2018            2019           Thereafter
12% Convertible notes (3)   $ 1,360,000     $         -     $        -     $        -     $ 1,360,000     $         -     $            -
Mortgage on Pueblo
Property                    $   210,352     $    13,393     $   20,089     $   20,089     $   156,781     $         -     $            -
Mortgage on The
Greenhouse, Denver, CO
(1)                         $   780,306     $    53,351     $  726,955     $        -     $         -     $         -     $            -
Senior Secured Note to
Infinity Capital (2)        $   210,000     $   210,000     $        -     $        -     $         -     $         -     $            -
Office rental               $    30,546     $    12,852     $   13,238     $    4,456     $         -     $         -     $            -
  TOTAL                     $ 2,581,204     $ 2,279,596     $  760,282     $   24,545     $ 1,516,781     $         -     $            -

(1) Pursuant to the terms of the Company’s Greenhouse Mortgage with Evans Lendco (See section “The Greenhouse” under “Item 2. Properties”).

(2) Pursuant to the terms of the Company’s Note with Infinity Capital (See section “Credit Facilities” under “Item 1. Business”).

(3) As of December 1, 2015, we anticipate that all of the requirements for conversion of the Convertible Notes will have been met and the Company intends to elect its option to convert the remaining Convertible Notes on such date.

Critical Accounting Policies

Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.

While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would materially affect our consolidated results of operations, financial position or liquidity for the periods presented in this report. The Company’s critical accounting policies are as follows:

Revenue Recognition

Revenue is recognized on an accrual basis as earned under contract terms. Specifically, revenue from tenant rentals is recognized on a straight-line basis over the reasonably assured lease term, and collectability is reasonably assured. Revenue from security services is recognized as invoiced and when collectability is reasonably assured, usually monthly or bi-monthly, and is billed in accordance with terms set forth in the contracts with customers. Consulting revenue is recognized based upon the payment terms within the contracts, and collectability is reasonably assured. Revenue relating to our wholesale business is recognized at the time goods are sold.

Conventional Convertible Debt

The Company records conventional convertible debt in accordance with Financial Accounting Standards Board (“FASB”), Accounting Standards Codification (“ASC”) 470-20, Debt with Conversion and Other Options. Conventional convertible debt is a financial instrument in which the holder may only realize the value of the conversion option by exercising the option and receiving the entire proceeds in a fixed number of shares or the equivalent amount of cash. Conventional convertible debt with a non-detachable conversion feature that does not contain a cash settlement option, and is not accounted for as a derivative, is recorded as a debt instrument in its entirety. The Company has accounted for a December 2013 debt issuance and an 8 �% Convertible Notes Payable as conventional convertible debt.

Derivatives Liabilities, Beneficial Conversion Features and Debt Discounts

The Company evaluates stock options, stock warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under the relevant sections of ASC 815-40, Derivative Instruments and Hedging: Contracts in Entity’s Own Equity (“ASC 815-40”). The result of this accounting treatment could be that the fair value of a financial instrument is classified as a derivative instrument and is marked-to-market at each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income or other expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially classified as equity that become subject to reclassification under ASC 815-40 are reclassified to a liability account at the fair value of the instrument on the reclassification date.

The common stock purchase warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. The warrants do not qualify for hedge accounting, and as such, all future changes in the fair value of these warrants are recognized currently in earnings until such time as the warrants are exercised, expire or the related rights have been waived. These common stock purchase warrants do not trade in an active securities market. The Company estimates the fair value of these warrants using the binomial method. The Company has recorded a derivative liability related to the Series C Warrants.

If a conversion feature of conventional convertible debt is not accounted for as a derivative instrument and provides for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (“BCF”). A BCF is recorded by the Company as a debt discount. The convertible debt is recorded net of the discount related to the BCF. The Company amortizes the discount to interest expense over the life of the debt using the straight-line method, which approximates the effective interest rate method. The Company has recorded a BCF to the notes issued in January 2014.

Fair Value Measurements

ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), provides a comprehensive framework for measuring fair value and expands disclosures, which are required about fair value measurements. Specifically, ASC 820 sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs. ASC 820 defines the hierarchy as follows:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equities listed on the New York Stock Exchange.

Level 2 – Pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable as of the reporting date. The types of assets and liabilities in Level 2 are typically either comparable to actively traded securities or contracts, or priced with models using highly observable inputs.

Level 3 – Significant inputs to pricing that are unobservable as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as complex and subjective models and forecasts used to determine the fair value of financial transmission rights.

Our financial instruments consist of cash, accounts receivable, other receivables, prepaid expenses, deferred financing costs, accounts payables and accrued expenses, notes payable and tenant deposits. The carrying values of these financial instruments approximate their fair value due to their short maturities. The Company’s derivative liability is a Level 3 estimated fair market value instrument.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities and the related notes at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s balances requiring management to make estimates and assumptions about future events include equity and debt transactions and the Company’s derivative liability. Actual results could differ from those estimates.

Going Concern

The financial statements have been prepared on a going concern basis which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and, or, obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management believes that actions presently being taken to further implement its business plan and generate additional revenues provide the opportunity for the Company to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and generate additional revenues. While the Company believes in the viability of its strategy to generate additional revenues and its ability to raise additional funds, there can be no assurances to that effect. The Company continues to aggressively seek real estate, finance, consulting, security and wholesale opportunities with companies throughout Colorado and other regions that comply with state and local cannabis regulation.

The Company had an accumulated deficit of approximately $7,641,000 and $711,000 as of December 31, 2014 and December 31, 2013, respectively, and further losses are anticipated in the development of its business. Accordingly, there is substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.