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

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		June 30, 2016 (unaudited)				September 30, 2015
Assets
Current Assets:
Cash and cash equivalents		$	6,922			$	201,353
Interest receivable			3,423				5,975
Prepaid expenses			11,728				35,758
Land held for resale			-				2,250,809
Note receivable			335,904				-
Total current assets			357,977				2,493,895
Land held for resale			2,250,809				-
Furniture and equipment (net of depreciation of $2,300 and $1,458)			9,885				6,399
Notes and other receivables (net of allowance of $466,374 and $456,470)			751,279				1,251,105
Note receivable - related party			55,630				-
Website development costs (net of amortization of $11,528 and $1,153)			29,972				40,347
Deposits on land			725,000				200,000
Security deposit			3,110				3,110
Total assets		$	4,183,662			$	3,994,856
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses		$	281,165			$	85,298
Interest payable (including $69,266 and $0 to related parties)			76,232				-
Other payables			9,937				11,716
Notes payable			1,511,297				900,000
Note payable - related party			1,910,349				-
Total current liabilities			3,788,980				997,014
Note payable - related party			-				1,682,849
Total liabilities			3,788,980				2,679,863
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $0.0001 par value; 20,000,000 shares authorized; no shares issued and outstanding			-				-
Common stock, $0.0001 par value; 100,000,000 shares authorized; 16,631,000 and 16,631,000 shares issued and outstanding as of June 30, 2016 and September 30, 2015, respectively			1,663				1,663
Additional paid in capital			5,129,021				5,007,497
Accumulated deficit			(4,736,002	)			(3,694,167	)
Total stockholders' equity			394,682				1,314,993
Total liabilities and stockholders' equity		$	4,183,662			$	3,994,856

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	Three Months Ended June 30,						Nine Months Ended June 30,
	2016			2015			2016			2015
Revenues:
Consulting fees	$	45,000		$	45,000		$	75,000		$	125,000
Total revenues		45,000			45,000			75,000			125,000
Operating expenses:
Advertising and marketing		14,990			4,954			17,338			11,029
Professional fees		140,369			191,002			493,449			464,469
General and administrative expenses		124,571			163,674			462,116			659,352
Provision for doubtful accounts		3,290			-			9,904			-
Total operating expenses		283,220			359,630			982,807			1,134,850
Loss from operations		(238,220	)		(314,630	)		(907,807	)		(1,009,850	)
Other income (expense):
Interest income		44,482			61,629			138,269			161,430
Interest expense		(48,826	)		(38,574	)		(113,031	)		(41,607	)
Loss on extinguishment of debt		(90,000	)		-			(90,000	)		-
Interest expense - related party		(23,814	)		(21,656	)		(69,266	)		(42,717	)
Total other income (expense)		(118,158	)		1,399			(134,028	)		77,106
Net loss	$	(356,378	)	$	(313,231	)	$	(1,041,835	)	$	(932,744	)
Basic and diluted loss per common share	$	(0.02	)	$	(0.02	)	$	(0.06	)	$	(0.06	)
Weighted average common shares outstanding		16,631,000			16,631,000			16,631,000			16,619,645

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		Nine Months Ended June 30,
		2016				2015
Cash flows from operating activities:
Net loss		$	(1,041,835	)		$	(932,744	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			11,217				45,196
Provision for doubtful accounts			9,904				-
Stock based compensation and option expense			121,524				301,223
Loss on extinguishment of debt			90,000				-
Expenses paid on behalf of the company			-				37,720
Changes in operating assets and liabilties:
Interest receivable			(93,831	)			(6,559	)
Prepaid expenses			24,030				(5,000	)
Accounts payable and accrued expenses			195,867				16,629
Related party payables			-				(54,077	)
Interest payable			30,780				7,689
Interest payable - related party			45,452				25,033
Other payables			(1,779	)			4,112
Deferred revenue			-				(11,740	)
Net cash flows used in operations			(608,671	)			(572,518	)
Cash flows from investing activities:
Purchase of fixed assets			(4,328	)			-
Capitalization of website development costs			-				(41,500	)
Deposit on land			(525,000	)			(100,000	)
Payments received on notes receivable			250,401				335,000
Advances made on notes receivable - related party			(55,630	)			(987,556	)
Net cash flows used in investing activities			(334,557	)			(794,056	)
Cash flows from financing activities:
Proceeds from note payable			521,297				611,006
Proceeds from note payable - related party			227,500				890,000
Payments on note payable - related party			-				(207,000	)
Net cash flows provided by financing activities			748,797				1,294,006
Net decrease in cash and cash equivalents			(194,431	)			(72,568	)
Cash and cash equivalents at beginning of period			201,353				173,956
Cash and cash equivalents at end of period		$	6,922			$	101,388
Supplementary Disclosure of Cash Flow Information:
Cash paid for interest		$	57,431			$	36,357
Cash paid for income taxes		$	-			$	-

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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) condensed balance sheet as of September 30, 2015, which has been derived from audited financial statements, and (b) the unaudited condensed financial statements as of and for the three and nine months ended June 30, 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 13, 2016. 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 condensed financial statements which substantially duplicate the disclosure contained in the audited financial statements for fiscal 2015 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

 

In May 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, to clarify certain core recognition principles including collectability, sales tax presentation, noncash consideration, contract modifications and completed contracts at transition and disclosures no longer required if the full retrospective transition method is adopted. The effective date and transition requirements for these amendments are the same as the effective date and transition requirements of ASU 2014-09 (discussed below). The Company is currently evaluating the impact of these amendments on its financial statements.

 

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, to clarify the following two aspects of Topic 606: 1) identifying performance obligations, and 2) the licensing implementation guidance. The effective date and transition requirements for these amendments are the same as the effective date and transition requirements of ASU 2014-09 (discussed below). 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 March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations, to clarify the implementation guidance on principal versus agent considerations and address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties. The effective date and transition requirements for these amendments are the same as the effective date and transition requirements of ASU 2014-09 (discussed below). 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.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 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. ASU 2014-09 defines a five step process 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. As amended by the FASB in July 2015, the standard is 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 standard 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 ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). The Company is currently evaluating the impact of its pending adoption of ASU 2014-09 on its consolidated financial statements and has not yet determined the method by which it will adopt the standard in 2018.

 

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 $4,376,002 and $3,694,167 at June 30, 2016 and September 30, 2015, respectively, and had a net loss of $1,041,835 for the nine months ended June 30, 2016. 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. Further, the amount due from WGP of $1,217,653 (before an allowance of $466,374) may not be collectible and the agreement for the sale of land for $2,500,000 has been terminated.

 

 

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.

 

NOTE 3. NOTES AND OTHER RECEIVABLES

 

Notes and Other Receivables as of June 30, 2016 and September 30, 2015, 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

 

On March 21, 2015, the Company closed on a $650,000 loan from a third party. The loan was due September 21, 2015 and was secured by the land held for sale the Company owns at 4200 Monaco Street, Denver, Colorado. The annual interest rate for the loan was 14%. The loan was due on September 21, 2015. Interest expense was $80,623 and $0 for the years ended September 30, 2015 and 2014, respectively. As part of the financing the Company incurred $27,772 of deferred financing costs that were recognized as interest expense in 2015. This note was repaid as described below.

 

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

 

●

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

●

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 in the three and nine months ended June 30, 2016. 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. At June 30, 2016, accrued interest on this note payable was $0.

 

 

On February 1, 2016, the Company entered into an agreement with an unrelated party which provided the Company with borrowing capacity of $200,000. On May 1, 2016, the agreement was amended to increase the borrowing capacity to $1,000,000. As of June 30, 2016, the Company had borrowed $521,297 against this credit line. The loan bears interest at 8% per year, and all unpaid principal and interest is due on December 31, 2016. The Company may repay the loan at any time without penalty. As of June 30, 2016, accrued interest on this loan was $6,965. This loan was assumed by Strategic Capital Partners (“SCP”) in July 2016. See Notes 5 and 10 for additional details.

 

NOTE 5. RELATED PARTY TRANSACTIONS

 

Strategic Capital Partners. At June 30, 2016, we had an outstanding note payable of $1,910,349 to SCP, an entity controlled by our Chief Financial Officer. Under the note payable, as amended, outstanding amounts accrue interest at 5% per year payable on March 31^st and September 30^th, with all outstanding principal and interest due on December 31, 2016, and can be repaid at any time prior to maturity. Interest expense was $23,814 and $21,656 for the three months ended June 30, 2016 and 2015, respectively; and $69,266 and $42,717 for the nine months ended June 30, 2016 and 2015, respectively. Interest payable – related party of $69,266 and $0 was included in the accompanying balance sheets at June 30, 2016 and September 30, 2015, respectively. In September 2015, the Company agreed to include $49,849 of accrued and unpaid interest in the principal balance of the loan. During the nine months ended June 30, 2016, the Company received advances of $227,500 and no payments were made.

 

In July 2016, SCP assumed, and then restructured, the $521,297 loan referred to in Note 4. See Note 10 for more information.

 

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 June 30, 2016, we have provided financing to CCI of $55,630, which includes construction and working capital advances of $54,191, and accrued interest of $1,439.

 

NOTE 6. LOSS PER SHARE

 

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

 

 

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

 

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NOTE 7. INCOME TAXES

 

The Company did not record any income tax expense or benefit for the three or nine months ended June 30, 2016. The Company increased its valuation allowance and reduced its net deferred tax assets to zero. The Company's assessment of the realization of its deferred tax assets has not changed, and as a result the Company continues to maintain a full valuation allowance for its net deferred assets as of June 30, 2016.

 

As of June 30, 2016, the Company did not have any unrecognized tax benefits. There were no significant changes to the calculation since September 30, 2015.

 

NOTE 8. STOCK BASED COMPENSATION

 

Restricted Stock Awards. The Company uses restricted stock awards to compensate certain key executives and other individuals. At June 30, 2016, the Company had 300,000 of 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 June 30, 2016 and 2015, respectively, and $112,351 and $252,789 for the nine months ended June 30, 2016 and 2015, respectively. As of June 30, 2016, unrecognized stock-based compensation associated with restricted stock awards totaled $56,175, which is to be recognized over a weighted average period of 0.4 years.

 

Stock Options. Stock option activity as of and for the nine months ended June 30, 2016 is as follows: 

 

 

 

Stock-based compensation expense (benefit) associated with stock options totaled $0 and $(1,229) for the three months ended June 30, 2016 and 2015, respectively, and $9,173 and $48,434 for the nine months ended June 30, 2016 and 2015, respectively. At June 30, 2016, there is no remaining unrecognized stock-based compensation associated with stock options.

 

NOTE 9.  COMMITMENTS AND CONTIGENCIES

 

Massachusetts Land Purchase.  On January 14, 2015, the Company entered into an agreement to purchase a 52.6 acre parcel of undeveloped land in Freetown, Massachusetts. The property is located approximately 47 miles southeast of Boston. The Company plans to develop the property as the Massachusetts Medical Cannabis Center ("MMCC"). Plans for the MMCC may include the construction of sustainable greenhouse cultivation and processing facilities that will be leased or sold to Registered Marijuana Dispensaries under the Massachusetts Medical Marijuana Program. Additional plans for the MMCC may include a testing laboratory, a research facility, a training center, an infused product production facility and corporate offices. The Company paid the seller a $100,000 deposit upon the signing of the agreement which will be applied toward the purchase price at the closing.

 

 

On December 8, 2015, The Town of Freetown Planning Board unanimously approved the Company’s site plan application for the MMCC.  The site plan application requested 977,000 square feet of infrastructure for medical marijuana cultivation, processing, testing and associated administration in Freetown's Industrial Park.  On March 24, 2016, the Department of Public Health (the “DPH”) for the Commonwealth of Massachusetts approved the Company’s consulting and development agreements relating to the MMCC. Although the DPH has approved these agreements, the actual lease agreement with the first tenant for the MMCC has not been finalized or approved by the DPH. 

 

Between August 2015 and June 2016, there were several amendments to the land purchase agreement to extend the closing date. As consideration for the extensions, the Company agreed to increase the purchase price and paid the seller $625,000, which will be applied to the purchase price of the land if and when the Company closes on this transaction. On July 14, 2016, the Company, at its election, extended the closing date to August 14, 2016. As consideration for the extension of the closing date, the Company agreed to increase the purchase price for the property to $4,325,000 and the Company paid an additional $50,000 to the seller, which payment will be applied to the purchase price if the closing occurs.

 

To date, the Company has paid $775,000 that will be applied to the purchase price of the land if, and when, the Company closes on the transaction. If the closing does not occur, for any reason, the full deposit of $775,000 is nonrefundable.

 

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 June 30, 2016, we have provided financing to CCI of $55,630, which includes construction and working capital advances of $54,191, and accrued interest of $1,439.

 

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 June 30, 2016, we have provided no financing to AQUSCAN.

 

Operating Leases. 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 June 30, 2016, the future rental payments required under this lease are $1,833 for the remainder of fiscal 2016, $7,332 for fiscal 2017 and $1,834 for fiscal 2018.

 

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

 

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NOTE 10.  SUBSEQUENT EVENTS

 

MMCC. Previously the Company entered into an agreement to purchase a 52.6-acre parcel of undeveloped land in Freetown, Massachusetts. The Company paid the seller $100,000 upon the signing of the agreement which will be applied toward the purchase price at the closing.

 

Between August 2015 and June 2016, there were several amendments to the Agreement to extend the closing date to August 14, 2016.

 

On July 14, 2016, the Company, at its election, extended the closing date to August 14, 2016. As consideration for the extension of the closing date, the Company agreed to increase the purchase price for the property to $4,325,000 and the Company paid an additional $50,000 to the seller, which payment will be applied to the purchase price if the closing occurs.

 

To date, the Company has paid $775,000 that will be applied to the purchase price of the property if and when the Company closes on the transaction. If the closing does not occur, for any reason, the full deposit of $775,000 is nonrefundable.

 

Strategic Capital Partners. On July 14, 2016, Strategic Capital Partners (“SCP”) assumed the $521,297 loan referred to in Note 4, increasing the total balance owed to SCP by the Company 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, $500,000 of the amount owed to SCP was converted into 400,000 shares of our common stock ($1.25 conversion rate). In connection with the conversion, 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

 

The warrants to purchase the first 800,000 shares of our common stock will expire 45 days after written notice to SCP that the average closing price of our common stock was at least $3.00 for twenty consecutive trading days, and the average daily volume of trades of our common stock during the twenty trading days was at least 100,000 shares, provided a registration statement is in effect with respect to the shares issuable upon the exercise of the Warrants.

 

The warrants to purchase the additional 800,000 shares of our common stock will expire 45 days after written notice to SCP that the average closing price of our common stock was at least $4.80 for twenty consecutive trading days, and the average daily volume of trades of our common stock during the twenty trading days was at least 100,000 shares, provided a registration statement is in effect with respect to the shares issuable upon the exercise of the Warrants.

 

The remaining $1,931,646 owed to SCP was converted 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 with the first interest payment due on September 30, 2016. The Note can be converted at any time 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.

 

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, with the first interest payment due on September 30, 2016. The Note is not convertible into shares of our common stock. The Note will be secured by a second lien on our property in Denver, Colorado and a first lien on all amounts due to us by Wellness Group Pharms. Any payments received from the sale, lease or commercialization of the property in Denver, and any amounts received from Wellness Group Pharms, will be applied to the principal amount of the Note. Otherwise, all unpaid principal and interest will be due on December 31, 2019.

 

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