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Form 10-Q for ADVANCED CANNABIS SOLUTIONS, INC.


15-May-2015

Quarterly Report

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThis discussion should be read in conjunction with the Condensed Consolidated Unaudited Financial Statements contained in this quarterly report and the Consolidated Financial Statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of operations appearing in the Company’s Annual Report on Form 10-K as of December 31, 2014 and 2013 and for the year ended December 31, 2014 and for the period from June 5, 2013 (Inception) to December 31, 2013 (the “2013 Fiscal Period”). The results of operations for an interim period may not give a true indication of results for future interim periods or the year.Cautionary Statement Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q, Financial Statements and Notes to Financial Statements contain forward-looking statements that discuss, among other things, future expectations and projections regarding future developments, operations and financial conditions. All forward-looking statements are based on management’s existing beliefs about present and future events outside of management’s control and on assumptions that may prove to be incorrect. If any underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, projected or intended.

When this report uses the words “ACS,” and the “Company,” they refer to Advanced Cannabis Solutions, Inc., dba “General Cannabis Corporation.”

Products, Services and Customers

Advanced Cannabis Solutions, Inc. provides products and services to the regulated cannabis industry, which include the following:

Real Estate Leasing

The Company’s real estate 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 the Company to continually evaluate its tenants’ compliance with applicable laws and regulations.

The Company has a credit facility to finance the acquisition of real estate.

As of the date of this report, the Company owned one cultivation property that is located in a suburb of Pueblo, Colorado. The property consists of approximately three acres of land, which 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 (the “Pueblo West Property”).

The Company has identified other properties that are currently under review for purchase and leaseback to licensed cannabis cultivators in Colorado. These projects include the purchase and leaseback of existing, currently operating facilities, as well as proposed new construction projects. These opportunities are in Denver and Pueblo counties in Colorado and can be purchased and/or constructed for amounts ranging from $750,000 to $5 million for each project. There can be no assurance that the Company will be able to complete any of these transactions.

Shared Office Space, Networking and Event Services

In October 2014, the Company 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 2,000 square feet on its ground floor that is dedicated to a consumer banking design.


The Company plans to continue to acquire commercial real estate and lease office space to non-regulated 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, the Company expects to receive rental income in the form of cash. In certain cases, the Company may acquire equity interests or provide debt capital to these non-regulated businesses.Security and Cash Management Services

In March 2015, GC Security, LLC, a Colorado limited liability company incorporated in 2015 and wholly-owned subsidiary of the Company (“GCS”), acquired substantially all of the assets of Iron Protection Group, LLC (“IPG”), a Colorado limited liability company (the “IPG APA”). GCS, which will continue to do business as “Iron Protection Group,” provides advanced security, including on-site professionals and video surveillance, to licensed cannabis cultivators and retail shops. Iron Protection Group has approximately fifty static guards who service fifteen clients throughout Colorado. The acquisition is anticipated to add annualized revenue of approximately $1.5 million in 2015.

Industry Finance and Equipment Leasing Services

The Company leases cultivation equipment and facilities to customers in the cannabis industry. The Company expects it 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, the Company intends 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 the Company to continually evaluate its tenants’ compliance with applicable laws and regulations.

The Company is exploring lending opportunities in Oregon, Washington, and Colorado. The Company’s 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. The Company believes there is a significant demand for this financing. The Company is pursuing the prospects surrounding other finance services including customized finance, capital formation, and banking, for participants in the cannabis industry.

Wholesale Supply

The Company’s wholesale supply business, ACS Wholesale, is a reseller of supplies to the cannabis market. ACS Wholesale works with industry leaders and innovators to deliver high-quality products that are compliant with applicable regulations and with a focus on products that are manufactured in the United States. ACS Wholesale operates out of a leased, 1,800 square-foot warehouse located in Colorado Springs, Colorado.

Consulting and Advisory

The Company delivers comprehensive consulting services that include design and construction to approved and licensed cannabis operators, as well as assistance with licensure and related applications for potential cannabis operators. The Company’s business plan is based on the future growth of the regulated cannabis market in the United States. The Company will provide general advisory services for business development, facilities design and construction, cultivation and retail operations, marketing and the improvement and expansion of existing operations.

Operating Segments

As of the date of this filing, all of the Company’s operations were conducted within the state of Colorado. As of the date of this filing, the Company’s operations are divided into three operating segments: (i) Finance and Real Estate; (ii) Wholesale Supply; and (iii) Security.

The Company’s Finance and Real Estate operating segment provides participants in the cannabis industry with industry finance and leasing services, shared space, as well as networking and event services, as discussed above. The Company’s Wholesale Supply operating segment, ACS Wholesale, provides customers with nutrients and other supplies for growing and customizable specialty products.
Acquired in March 2015, the Company’s Security operating segment provides protection and security services to licensed and approved operators in the cannabis industry.


Subsidiary StructureThe Company has five wholly-owned subsidiaries, ACS Colorado Corp., a Colorado corporation formed in 2013; Advanced Cannabis Solutions Corporation, a Colorado corporation formed in 2013, 6565 E. Evans Avenue LLC (“6565 Evans”), a Colorado limited liability company formed in 2014, General Cannabis Capital Corporation (“GCCC”), a Colorado corporation formed in 2015 and GC Security LLC (“GCS”), a Colorado limited liability company formed in 2015.

Advanced Cannabis Solutions Corporation has one wholly-owned subsidiary company, ACS Corp., which was formed in the State of Colorado on June 6, 2013.

Results of Operations

The following discussion analyzes the Company’s financial condition and summarizes the results of operations for the three months ended March 31, 2015 and 2014. This discussion and analysis should be read in conjunction with the Company’s financial statements included as part of this report.

Net Revenues

Net revenues of $42,720 and $48,765 for the three months ended March 31, 2015 and 2014, respectively, were primarily comprised of tenant rental revenue, wholesale net sales, security services revenue, and consulting fee revenue. Tenant rental revenue, which relates to real estate leasing of the Company’s property in Pueblo, Colorado to a licensed medical cannabis cultivator, was $26,677 and $28,765 for March 31, 2015 and 2014, respectively. Net wholesale sales were $12,798 and $0 for the three months ended March 31, 2015 and 2014, respectively. 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. Net security services revenue was $3,245 and $0 for the three months ended March 31, 2015 and 2014, respectively.
The Company’s security services business was acquired on March 26, 2015 and includes on-site guard services, cash transport services, and remote video surveillance. Consulting revenue, net was $0 and $20,000 for the three months ended March 31, 2015 and 2014, respectively. Consulting revenue, net for the three months ended March 31, 2014 relates to revenue earned on a consulting contract that 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 $537,143 and $252,932 for the three months ended March 31, 2015 and 2014, respectively.
Operating expenses were similar for the comparable periods, with the exception of share-based compensation of $248,625 and $0 for the three months ended March 31, 2015 and 2014, respectively.

General and administrative expense, which is primarily comprised of corporate expenses, insurance premiums, travel and promotion, and website maintenance, was $82,941 and $54,476, for the three months ended March 31, 2015 and 2014, 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. The increase in general and administrative expenses is also a result of costs relating to the Company’s purchase of The Greenhouse, as well as expenses incurred in preparing for the Company’s acquisition of IPG at the end of March 2015. Payroll and related expense, which is primarily comprised of management and staff salaries and the Company’s share of health benefit premiums was $89,199 and $105,135 for the three months ended March 31, 2015 and 2014, respectively. This decrease is primarily due to lower executive compensation during the first quarter 2015 as compared with the same period 2014. Share-based compensation expense was $248,625 and $0 for the three months ended March 31, 2015 and 2014, respectively. Share-based compensation expense in 2015 was primarily due to issued and accrued stock payable to Infinity Capital. On August 4, 2014, pursuant to an agreement with Michael Feinsod, the Company’s Board of Directors (the “Board”) appointed Michael Feinsod as Chairman of the Board and approved the issuance of common stock to Infinity Capital, LLC (“Infinity Capital”), an investment management company Mr. Feinsod founded in 1999 (the “Feinsod Agreement”).

Professional fees, which are primarily comprised of legal, accounting and audit fees, and filing fees, were $94,107 and $82,516 for the three months ended March 31, 2015 and 2014, respectively. Professional fees incurred during 2015 were primarily related to the Company’s acquisition of IPG and fees incurred by the Company in its pursuit to be quoted on the OTC Markets Pink Sheets, which occurred on April 28, 2015. Professional fees during 2014 primarily relate to legal and accounting fees after the Company’s reverse merger during fourth quarter 2013. Office expense, which is primarily comprised of rent expense and office supplies, was $13,264 and $7,689 for the three months ended March 31, 2015 and 2014, respectively. The increase in office expense was primarily due to the Company’s change in its headquarters location to 6565 East Evans Avenue, Denver, CO 80224, which is a larger facility than the office space that the Company previously rented in Colorado Springs. Depreciation and amortization expense was $9,007 and $3,116 for the three months ended March 31, 2015 and 2014, respectively. The increase in depreciation and amortization expense is due to an increase in the Company’s depreciable asset base in 2015 compared with 2014.


Other ExpenseOther expense consists of amortization of debt discount and deferred financing costs, interest expense, and change in the fair value of derivative liability. Other expense was $334,070 and $1,001,755 for the three months ended March 31, 2015 and 2014, respectively. Amortization expense of debt discount and deferred financing costs was $242,630 and $304,841 for the three months ended March 31, 2015 and 2014, respectively. The decrease in amortization of debt discount relates primarily to the accelerated amortization expense as a result of debt conversions that occurred during first quarter 2014. Interest expense was $69,207 and $49,274 for the three months ended March 31, 2015 and 2014, respectively. Interest expense increased in 2015 primarily as a result of mortgage interest on The Greenhouse, which was 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 decrease in the loss on the change in the fair value of the derivative liability from $647,640 for the three months ended March 31, 2014 to $22,233 for the three months period ended March 31, 2015 is primarily due to the decrease in Series C Warrants outstanding from 1,000,000 at March 31, 2014 to 185,000 at March 31, 2015. On January 21, 2015, Full Circle executed its option to cashlessly exercise approximately 85% of its outstanding warrants in exchange for 660,263 shares of the Company’s common stock.

Net Loss and Per Share Data

Net loss was $828,493 and $1,205,922 for the three months ended March 31, 2015 and 2014, respectively. Based on the weighted average number of common shares outstanding for the three months ended March 31, 2015 and 2014 of 13,095,465 and 13,659,997, respectively, net loss per share was $0.06 and $0.09 for the three months ended March 31, 2015 and 2014, respectively. The Company’s net loss included approximately $522,000 and $956,000 for the three months ended March 31, 2015 and 2014, respectively, relating to non-cash items, primarily resulting from amortization of debt discount and deferred financing costs, loss in fair value of derivative liability and stock-based compensation expense.

The Company, which was incorporated on June 3, 2013 (Inception), has incurred a loss since Inception resulting in an accumulated deficit of approximately $8,470,000 as of March 31, 2015 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 three
months ended March 31, 2015 and 2014:


                                                            2015           2014
 Net cash used in operating activities                 $    290,061   $     329,983
 Amortization of debt discount and deferred financing
 costs (non-cash)                                           242,630         310,841
 Issuance of stock for services (non-cash)                  248,625               -
 Changes in fair value of derivative liability, net
 (non-cash)                                                  22,233         647,640

 Net cash used in investing activities                       13,253           8,250

 Net cash provided by financing activities                  237,466       1,795,663
 Proceeds from short-term financing from related
 party                                                      239,000               -
 Proceeds from sale of common stock and warrants                  -         400,000
 Proceeds from sale of convertible notes                          -       1,412,400

Operating Activities

During the three months ended March 31, 2015, cash flows used in operating activities were $290,061. During the first quarter 2015, the Company incurred net loss of $828,493, of which approximately $522,000 relates to non-cash items, primarily resulting from amortization of debt discount and deferred financing costs of $242,630, loss in fair value of derivative liability of $22,233 and stock-based compensation expense of $248,625. Approximately $15,900 was used in a net of increases in inventory and prepayments and other assets, offset by an increase in accounts payable and accruals, an increase in deferred rental revenue and a decrease in accounts receivable, as the Company continues to improve its cash management procedures.


During the three months ended March 31, 2014, cash flows used in operating activities were $329,983. During the first quarter 2014, the Company incurred net loss of $1,205,922, of which approximately $956,000 related to non-cash items, primarily resulting from amortization of debt discount and deferred financing costs of $310,841 and loss in fair value of derivative liability of $647,640. The Company used approximately $86,000 for increases in receivables, prepaid expenses and decreases in accounts payable and accruals.Investing Activities

During the three months ended March 31, 2015, cash flows used in investing activities were $13,253 relating to construction in progress 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 three months ended March 31, 2014, cash flows used in investing activities were $8,250 relating to the purchase of office furniture, fixtures and equipment.

Financing Activities

During the three months ended March 31, 2015, cash provided by financing activities was $237,466, primarily as a result of an increase in short-term financing from Infinity Capital, LLC. During the three months ended March 31, 2014, the Company raised net funding of $1,812,400 through its sale of warrants of $400,000, and issuance of convertible notes of $1,412,400.

 

Contractual Obligations


The Company had the following contractual obligations, including interest, as of
March 31, 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    $   211,065 $  15,067  $   20,089 $ 20,089 $   155,820 $     -  $          -
Mortgage on The Greenhouse,
Denver, CO (1)                 $   780,306 $  53,351  $  726,955 $      - $         - $     -  $          -
Senior secured note to
Infinity Capital (2)           $   239,000 $ 239,000  $        - $      - $         - $     -  $          -
Office rental                  $    27,333 $   9,639  $   13,238 $  4,456 $         - $     -  $          -
  TOTAL                        $ 2,617,704 $ 317,057  $  760,282 $ 24,545 $ 1,515,820 $        $          -

(1)
Pursuant to the terms of the Company’s Greenhouse Mortgage with Evans Lendco.

(2)
Pursuant to the terms of the Company’s note with Infinity Capital.

(3)
As of December 1, 2015, 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

Preparation of the Company’s financial statements requires us to make estimates and assumptions which affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2014 describes the significant accounting policies used in preparation of the Consolidated Financial Statements. On an ongoing basis, management evaluates the critical accounting policies used to prepare the Company’s consolidated financial statements, including, but not limited to, those related to:

revenue recognition;

conventional convertible debt;

derivative liabilities, beneficial conversion features and debt discounts;

fair value measurements;

use of estimates; and

going concern.

There have been no significant changes in these aforementioned critical accounting policies.

Off-Balance Sheet Arrangements

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


ITEM 3.


MAPH Enterprises, LLC | (305) 414-0128 | 1501 Venera Ave, Coral Gables, FL 33146 | new@marijuanastocks.com
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