AmeriCann, Inc. - Quarter Report: 2016 December (Form 10-Q)

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NOTE 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

 

AmeriCann, Inc. ("the Company", “we”, “our” or "the Issuer") was organized under the laws of the State of Delaware on June 25, 2010.

 

On January 17, 2014, a privately held limited liability company acquired approximately 93% of the Company's outstanding shares of common stock from several of the Company's shareholders, which resulted in a change in control of the Company.

 

The Company's business plan is to offer a comprehensive, turnkey package of services that includes consulting, design, construction and financing to approved and licensed marijuana operators throughout the United States. The Company's business plan is based on the anticipated growth of the regulated marijuana market in the United States.

 

The Company's activities are subject to significant risks and uncertainties including failure to secure funding to properly expand its operations.

 

Basis of Presentation

 

The (a) balance sheet as of September 30, 2016, which has been derived from audited financial statements, and (b) the unaudited financial statements as of and for the three months ended December 31, 2016 and 2015, have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission ("SEC"), and should be read in conjunction with the audited financial statements and notes thereto contained in the Company's Form 10-K filed with the SEC on January 12, 2017. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for future quarters or for the full year. Notes to the financial statements which substantially duplicate the disclosure contained in the audited financial statements for fiscal 2016 as reported in the Form 10-K have been omitted.

 

Certain prior period amounts have been reclassified to conform with current period presentation. These reclassifications have no impact on net loss.

 

Recent Accounting Pronouncements

 

Between May 2014 and December 2016, the Financial Accounting Standards Board(FASB) has issued several Accounting Standards Updates(ASU) on Revenue from Contracts with Customers (Topic 606). These updates will supersede nearly all existing revenue recognition guidance under current U.S. generally accepted accounting principles (GAAP). The core principle is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. A five-step process has been defined to achieve this core principle, and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standards are effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standards in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting the standards recognized at the date of adoption (which includes additional footnote disclosures). The Company is currently evaluating the impact of its pending adoption of these standards on its financial statements and has not yet determined the method by which it will adopt the standard in 2018.

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force), to provide guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flow. The amendments should be applied using a retrospective transition method, and are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact of these amendments on its financial statements.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments should be applied using a retrospective transition method, and are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact of these amendments on its financial statements.

 

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, to reduce complexity in accounting standards involving several aspects of the accounting for employee share-based payment transactions, including (1) the income tax consequences, (2) classification of awards as either equity or liabilities, and (3) classification on the statement of cash flows. The amendments will be effective for financial statements issued for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and early adoption is permitted. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition method, amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively, amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively, and amendments related to the presentation of excess tax benefits on the statement of cash flows can be applied using either a prospective transition method or a retrospective transition method. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently evaluating the impact of these amendments on its financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases: (Topic 842), to provide guidance on recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements, specifically differentiating between different types of leases. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from all leases. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous GAAP. There continues to be a differentiation between finance leases and operating leases. However, the principal difference from previous guidance is that the lease assets and lease liabilities arising from operating leases should be recognized in the balance sheet. The accounting applied by a lessor is largely unchanged from that applied under previous GAAP. The amendments will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. An entity that elects to apply the practical expedients will, in effect, continue to account for leases that commence before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. The Company is currently evaluating the impact of these amendments on its financial statements.

 

NOTE 2. GOING CONCERN 

 

The accompanying financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. The Company had an accumulated deficit of $6,421,696 and $5,904,931 at December 31, 2016 and September 30, 2016, respectively, and had a net loss of $516,765 for the three months ended December 31, 2016. Further, the amount due from WGP of $1,262,122 (before an allowance of $473,024) may not be collectible. These matters, among others, raise substantial doubt about the Company’s ability to continue as a going concern. While the Company is attempting to increase operations and generate additional revenues, the Company's cash position may not be significant enough to support the Company's daily operations. Management intends to raise additional funds through the sale of its securities.

  

Management believes that the 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. While the Company believes in the viability of its strategy to generate additional revenues and in its ability to raise additional funds, there can be no assurances to that effect. 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. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

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NOTE 3. NOTES AND OTHER RECEIVABLES

 

Notes and Other Receivables as of December 31, 2016 and September 30, 2016, consisted of the following: 

 

 

The notes and other receivables from WGP are classified as long term due to ongoing disputes between the Company and WGP.

NOTE 4.  NOTES PAYABLE

 

Unrelated

 

On September 15, 2015, an unrelated third party loaned the Company $900,000. The loan bore interest at 12% per year and was due and payable on March 16, 2016. The Company used $650,000 of the proceeds to repay existing loans that were secured by the land held for sale. On April 6, 2016, the loan was modified as follows: 

 

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The principal balance of the loan was increased to $990,000;

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The interest rate was increased to 18% per year; and

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The maturity date of the loan was extended to March 15, 2017.

 

The Company considered ASC Subtopic 470-50, Debt Modifications and Extinguishments, and determined that the modification was an extinguishment and therefore, recognized a loss on the extinguishment of the original debt of $90,000. The Company may repay the loan at any time without penalty. The loan is secured by a first lien on the five-acre parcel of land in Denver. Accrued interest on this note payable at December 31, 2016 and September 30, 2016 was $0 and $8,924, respectively.

 

In September 2016, we had borrowed funds from various unrelated parties. The interest rates on these notes ranged from 8% to 18%, due dates ranged from December 14, 2016, through January 15, 2017, and $75,000 was convertible into the Company’s common stock at a conversion price of $0.75. In addition to the notes, we issued warrants to purchase 75,000 shares of our common stock, exercisable at a price of $0.75 per share, and warrants to purchase an additional 75,000 shares of common stock, exercisable at a price of $1.25 per share. Both sets of warrants expire on September 15, 2020. We allocated the new proceeds to the warrants, stock options, and the convertible debt based on their relative fair values, as determined by the Black Scholes option pricing model. Based on the Black Scholes option pricing model, $35,250 was allocated to the warrants which are reflected in additional paid-in-capital and $35,250 was allocated to a debt discount. The debt discount is being amortized on a straight-line basis over the term of the note. At December 31, 2016, there was no outstanding principle or interest, and unamortized debt discount was $3,819.

 

 

Related Party

 

On February 1, 2016, we entered into an agreement with an unrelated party which provided us with borrowing capacity of $200,000. On May 1, 2016, the agreement was amended to increase the borrowing capacity to $1,000,000. On July 14, 2016, Strategic Capital Partners (“SCP”) assumed the $521,297 loan borrowed against this credit line, increasing the total balance owed to SCP to $2,431,646. SCP is controlled by Benjamin J. Barton, one of our officers and directors and a principal shareholder. The amounts borrowed from SCP were used to fund our operations.

 

On July 14, 2016, we entered into a debt modification agreement whereby a portion of the debt was converted into common stock and the remaining debt was renegotiated into two promissory notes.

 

Of the amounts owed to SCP, $500,000 was converted into 400,000 shares of our common stock ($1.25 conversion rate).

 

The remaining $1,931,646 owed to SCP was divided into two promissory notes.

 

The first note, in the principal amount of $1,000,000, bears interest at 9.5% per year and matures on December 31, 2019. Interest is payable quarterly. The note can be converted at any time, at the option of the lender, into shares of our common stock, initially at a conversion price of $1.25 per share. The conversion price will be proportionately adjusted in the event of any stock split or capital reorganization. The note is not secured. Accrued interest on this note payable at December 31, 2016 and September 30, 2016 was $0 and $20,301, respectively.

 

If the average closing price of our common stock is at least $2.50 for twenty consecutive trading days, and the average daily volume of trades of our common stock during the twenty trading days is at least 100,000 shares, we may, within 10 days of the end of such twenty-day period, notify SCP that its right to convert the note into shares of our common stock will end 45 days after the date of the notice to SCP.

 

The second note, in the principal amount of $931,640, bears interest at 8% per year and matures on December 31, 2019. Interest is payable quarterly. The note is not convertible into shares of our common stock. The note is secured by a second lien on our property in Denver, Colorado and a first lien on all amounts due to us by WGP. Any payments received from the sale, lease or commercialization of the property in Denver, and any amounts received from WGP, will be applied to the principal amount of the note. Otherwise, all unpaid principal and interest will be due on December 31, 2019. Accrued interest on this note payable at December 31, 2016 and September 30, 2016 was $0 and $15,297, respectively.

 

In connection with the debt modification agreement, we issued SCP warrants to purchase 800,000 shares of our common stock, exercisable at a price of $1.50 per share, and warrants to purchase an additional 800,000 shares of common stock, exercisable at a price of $3.00 per share. Both sets of warrants expire on June 30, 2020.

 

NOTE 5. RELATED PARTY TRANSACTIONS

 

Strategic Capital Partners. At December 31, 2016 and September 30, 2016, we had outstanding notes payable to SCP of $1,994,534 and $2,024,297, respectively.

 

Interest expense was $32,968 and $21,858 for the three months ended December 31, 2016 and 2015, respectively. Interest payable – related party of $0 and $109,825 was included in the accompanying balance sheets at December 31, 2016 and September 30, 2016, respectively.  We made interest payments of $152,556 during 2017, and made no interest payments during 2016 associated with this related party notes payable.  During the three months ended December 31, 2016, we received advances of $0 and made payments of $20,000. During the three months ended December 31, 2015, we received advances of $180,000 and made no payments.

  

Coastal Compassion. On April 7, 2016, we signed agreements with Coastal Compassion Inc. (“CCI”). CCI is one of a limited number of non-profit organizations that has received a provisional or final registration to cultivate, process and sell medical cannabis by the Massachusetts Department of Public Health. CCI has agreed to become the initial tenant in our planned MMCC. Tim Keogh, our Chief Executive Officer, is a Board Member of CCI.

 

 

Pursuant to the agreements, we agreed to provide CCI with financing of up to $2.5 million for a five-year term at 18% interest per year for construction and working capital required for CCI’s approved dispensary and cultivation center in Fairhaven, MA. For a three- year period beginning April 1, 2016, we agreed to consult with CCI in the design, construction and operation of the Fairhaven facility. CCI will pay us $10,000 each month for these consulting services. Although the DPH has approved our agreement with CCI relating to the development and lease terms of the MMCC, the actual lease agreement with CCI has not been finalized or approved by the DPH. We will need to secure significant capital to provide the financing to CCI.

 

As of December 31, 2016, we have provided financing to CCI of $182,686, which includes accrued consulting fees of $90,000, construction and working capital advances of $80,089, and accrued interest of $12,597. At December 31, 2016, we had deferred revenue of $90,000 from consulting services provided to CCI.

 

NOTE 6. LOSS PER SHARE

 

The following table sets forth the computation of basic and diluted net loss per share:

 

 

We have excluded 1,205,000 of stock options from the computation of diluted net loss per share since the effects are anti-dilutive.

 

NOTE 7. INCOME TAXES

 

We did not record any income tax expense or benefit for the three months ended December 31, 2016. We increased our valuation allowance and reduced its net deferred tax assets to zero. Our assessment of the realization of its deferred tax assets has not changed, and as a result we continue to maintain a full valuation allowance for our net deferred assets as of December 31, 2016.

 

As of December 31, 2016, we did not have any unrecognized tax benefits. There were no significant changes to the calculation since September 30, 2016.

 

NOTE 8. STOCK BASED COMPENSATION

 

Restricted Stock Awards. We use restricted stock awards to compensate certain key executives and other individuals. At December 31, 2016, we had 300,000 outstanding unvested restricted stock awards which vest on March 20, 2017. Stock-based compensation expense associated with restricted stock awards was $18,725 and $46,813 for the three months ended December 31, 2016 and 2015. As of December 31, 2016, unrecognized stock-based compensation associated with restricted stock awards totaled $18,725, which is to be recognized over a weighted average period of 0.2 years.

 

 

Stock Options. Stock option activity as of and for the three months ended December 31, 2016 is as follows: 

 

										Weighted
						Weighted				Average
						Average				Contractual				Aggregate
		Number of				Exercise				Term				Intrinsic
		Shares				Price				(Years)				Value
Outstanding at September 30, 2016			1,205,000			$	8.70				1.5			$	-
Granted			-				-				-				-
Cancelled			-				-				-				-
Exercised			-				-				-				-
Outstanding as of December 31, 2016			1,205,000			$	8.70				1.2			$	-
Vested and expected to vest at December 31, 2016			1,205,000			$	8.70				1.2			$	-
Exercisable at December 31, 2016			1,205,000			$	8.70				1.2			$	-

Stock-based compensation expense associated with stock options totaled $0 and $4,909 for the three months ended December 31, 2016 and 2015, respectively. At December 31, 2016, there is no remaining unrecognized stock-based compensation associated with stock options.

 

NOTE 9.  COMMITMENTS AND CONTIGENCIES

 

Coastal Compassion. On April 7, 2016, we signed agreements with Coastal Compassion Inc. (“CCI”). CCI is one of a limited number of non-profit organizations that has received a provisional or final registration to cultivate, process and sell medical cannabis by the Massachusetts Department of Public Health. CCI has agreed to become the initial tenant in our planned MMCC. Tim Keogh, our Chief Executive Officer, is a Board Member of CCI.

 

Pursuant to the agreements, we agreed to provide CCI with financing of up to $2.5 million for a five-year term at 18% interest per year for construction and working capital required for CCI’s approved dispensary and cultivation center in Fairhaven, MA. For a three- year period beginning April 1, 2016, we agreed to consult with CCI in the design, construction and operation of the Fairhaven facility. CCI will pay us $10,000 each month for these consulting services. Although the DPH has approved our agreement with CCI relating to the development and lease terms of the MMCC, the actual lease agreement with CCI has not been finalized or approved by the DPH. We will need to secure significant capital to provide the financing to CCI.

 

As of December 31, 2016, we have provided financing to CCI of $182,686, which includes accrued consulting fees of $90,000, construction and working capital advances of $80,089, and accrued interest of $12,597.

 

AQUSCAN Delaware. On April 12, 2016, we signed agreements with AQUSCAN Delaware Corp. (“AQUSCAN”). AQUSCAN is one of eleven applicants for a vertically-integrated license to cultivate, process and sell medical cannabis in Delaware. The Delaware Division of Public Health is scheduled announce the application results in August of 2016 and award licenses for up to two new Registered Compassion Centers (“RCC”). AQUSCAN has agreed to become the sole tenant in our planned Delaware Medical Cannabis Center (“DMCC”) if a RCC license is awarded. We will build and own the facility.

 

The DMCC project is designed on 10 acres of unimproved land located in Garrison Oak Technology Park in Dover, DE. We have signed a Purchase and Sale Agreement for the property with the City of Dover that is contingent upon the award of a license.

 

In addition to building a state-of-the-art cultivation facility at the DMCC, we plan to purchase and renovate an existing 3,200 square foot building located in Dover as a secure, medical cannabis dispensary.

 

Additionally, we may provide AQUSCAN with financing of up to $750,000 for a five-year term at 18% interest per year for working capital associated with establishing and maintaining the RCC.

 

As of December 31, 2016, we have provided no financing to AQUSCAN.

 

 

Operating Leases

 

Land

 

On October 17, 2016, the Company closed the previously announced acquisition of a 52.6-acre parcel of undeveloped land in Freetown, Massachusetts. The deposits of $925,000 previously paid by the Company to the seller, Boston Beer Company (“BBC”), were credited against the total purchase price of $4,475,000. The remaining balance of $3,550,000 was paid to BBC by Massachusetts Medical Properties, LLC (“MMP”). The property is located approximately 47 miles southeast of Boston. The Company plans to develop the property as the Massachusetts Medical Cannabis Center (the “MMCC”). Plans for the MMCC include the construction of sustainable greenhouse cultivation, processing, and infused product facilities that will be leased or sold to Registered Marijuana Dispensaries under the Massachusetts Medical Marijuana Program.

 

As part of a simultaneous transaction, the Company assigned the property rights to MMP for a nominal fee and entered a lease agreement pursuant to which MMP agreed to lease the property to the Company for an initial term of fifty (50) years. We have the option to extend the term of the lease for four (4) additional ten (10) year periods. The lease is a triple net lease, with the Company paying all real estate taxes, repairs, maintenance and insurance.

 

The lease payments will be the greater of (a) $30,000 per month; (b) $0.38 per square foot per month of any structure built on the property; or (c) 1.5% of all gross monthly sales of products sold by the Company, any assignee of the Company, or any subtenant of the Company. The lease payments will be adjusted up (but not down) every five (5) years by any increase in the Consumer Price Index.

 

Between October 17, 2016 and April 17, 2017, the monthly lease payments will accrue, with all accrued lease payments to be paid to MMP on April 17, 2017. On April 17, 2017, the Company will reimburse MMP’s costs and expenses associated with the acquisition of the property, the lease, and the acquisition of the shares and the warrant from the Company (as further described below).

 

Under the terms of the lease, the Company has six (6) months to obtain capital funding for the construction of the first phase building. In the event that the Company is unable to raise these funds within the six (6) month period, the Company will have an additional six (6) month period to do so; provided, that the Company has paid accrued lease payments and closing costs. If the Company is then unable to raise these funds on or before twelve (12) months from October 17, 2016, the lease will terminate.  

The Company shall receive credit for the $925,000 paid towards the purchase price of the land in the form of discounted lease payments. For the initial fifty (50) year term of the lease, the lease payments will be reduced by $1,542 each month.

 

 In connection with the sale of the property to MMP and the lease, the Company and MMP entered into a Share Purchase Agreement pursuant to which the Company issued to MMP 100,000 shares of its common stock at par value of $0.0001 (“Common Stock”), and a warrant to purchase up to 3,640,000 shares of Common Stock at an exercise price of $1.00 per share. The warrant can be exercised at any time on or after October 17, 2018 and on or before October 17, 2020. The warrant does not contain a cashless exercise provision. The fair value of the warrant was established using the Black Scholes option pricing model using the following assumptions:

 

	●	Risk-free interest rate – 1.12 percent
	●	Expected term – 4.0 years
	●	Volatility – 100 percent

  

The Company allocated $1,697,333 to the warrant which is reflected in additional paid-in-capital and was allocated to prepaid land lease. The fair value of the common stock on the date of the agreement was $73,000, which is also reflected in additional paid-in-capital and was allocated to prepaid land lease. The prepaid land lease is being amortized on a straight-line basis over the term of the lease.

 

The lease expense was $98,852 and $0 for the three months ended December 31, 2016 and 2015, respectively.  At December 31, 2016, the future rental payments required under this lease are $450,000 for the remainder of fiscal 2017, $360,000 for fiscal years 2018 through 2012, and $16,110,000 thereafter.

 

Office space

 

The Company leases its office space located at 3200 Brighton Boulevard, Denver, Colorado for $2,870 per month under a month-to-month lease.

 

The Company leases an automobile under an operating lease commencing October 4, 2014 for 39 months at $611 per month. At December 31, 2016, the future rental payments required under this lease are $5,650 for the remainder of fiscal 2017 and $910 for fiscal 2018.

Except as described above, the Company has no other non-cancelable lease commitments.

 

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NOTE 10.  SHAREHOLDERS’ EQUITY

 

Sale of Equity Securities. On November 7, 2016, we issued 2,000,000 shares of common stock through the sale of 2,000,000 Units at a price of $1.00 per Unit. The Units were sold in a private offering to a group of accredited investors. Each Unit consisted of one share of our common stock and one Series I Warrant. Each Series I Warrant allows the Holder to purchase one share of our common stock at a price of $3.00 per share at any time on or before November 4, 2020. The relative fair value of the warrants issued was approximately 41% of the proceeds received.

  

The offering provided us with $2,000,000 in gross proceeds and the potential for an additional $6,000,000 in proceeds with the exercise of the Series I Warrants. The proceeds from the placement will be utilized for the MMCC development, to pursue new opportunities in California, Pennsylvania, Florida and other states, and general corporate purposes.

 

Shares issued to lessor. As described in Note 9, we entered into a Share Purchase Agreement with MMP pursuant to which we issued to MMP 100,000 shares of our common stock at par value of $0.0001 (“Common Stock”), and a warrant to purchase up to 3,640,000 shares of Common Stock at an exercise price of $1.00 per share. The warrant can be exercised at any time on or after October 17, 2018 and on or before October 17, 2020. The warrant does not contain a cashless exercise provision.

 

Warrants. Warrant activity as of and for the three months ended December 31, 2016 is as follows: 

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