AmeriCann, Inc. - Quarter Report: 2017 December (Form 10-Q)

 

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q 

 

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2017

 

OR

 

[  ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________________ to _________________

 

Commission file number: 001-35902

 

AMERICANN, INC

(Exact name of registrant as specified in its charter)

 

Delaware	27-4336843
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
1550 Wewatta St, Denver, CO	80202
(Address of principal executive offices)	(Zip Code)
(303) 862-9000
(Registrant’s telephone number, including area code)
3200 Brighton Blvd, Unit 114, Denver, CO 80216
(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

 

Indicate by a checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐		Accelerated filer	☐
Non-accelerated filer	☐		Smaller reporting company	☑
(Do not check if a smaller reporting company)			Emerging growth company	☐

 

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☑ 

 

As of February 12, 2018, the registrant had 19,366,000 shares of common stock outstanding.

 

 

 

AmeriCann, Inc.

FORM 10-Q

 

TABLE OF CONTENTS

 

			PAGE NO.
PART I	FINANCIAL INFORMATION
	Item 1.	Unaudited Financial Statements:
		Consolidated Balance Sheets as of December 31, 2017 and September 30, 2017	F-1
		Consolidated Statements of Operations for the Three Months Ended December 31, 2017 and 2016	F-2
		Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2017 and 2016	F-3
		Notes to Consolidated Financial Statements	F-4
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
	Item 4.	Controls and Procedures	18
PART II	OTHER INFORMATION
	Item 6.	Exhibits	18
	SIGNATURES		19

 

 

 

		December 31, 2017				September 30, 2017
		(unaudited)
Assets
Current Assets:
Cash and cash equivalents		$	732,355			$	1,627
Restricted cash			365,480				-
Current portion of prepaid land lease			57,959				57,959
Prepaid expenses and other current assets			5,000				5,000
Total current assets			1,160,794				64,586
Land held for sale			-				1,611,312
Construction in progress			681,181				680,028
Furniture and equipment (net of depreciation of $3,985 and $3,704)			3,872				4,153
Website development costs (net of amortization of $32,278 and $28,820)			9,222				12,680
Notes and other receivables (net of allowance of $469,699)			782,130				780,315
Note receivable - related party			131,589				125,327
Prepaid land lease and related deposits, net of current portion			2,767,557				2,782,047
Security deposit			3,110				3,110
Total assets		$	5,539,455			$	6,063,558
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses		$	429,320			$	624,623
Interest payable (including $106,596 and $84,998 to related parties)			115,337				86,253
Other payables			11,913				19,699
Notes payable (net of discount of $843,452 and $0)			440,862				1,070,000
Total current liabilities			997,432				1,800,575
Notes payable - related party (inclusive of premium of $41,696 and $47,037)			1,973,342				1,978,683
Total liabilities			2,970,774				3,779,258
Commitments and contingencies - see Note 10
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; 19,366,000 and 19,366,000 shares issued and outstanding as of December 31, 2017 and September 30, 2017, respectively			1,937				1,937
Additional paid in capital			12,617,933				10,959,188
Accumulated deficit			(10,051,189	)			(8,676,825	)
Total stockholders' equity			2,568,681				2,284,300
Total liabilities and stockholders' equity		$	5,539,455			$	6,063,558

---

 

		Three Months Ended December 31,
		2017				2016
Revenues:
Consulting fees		$	-			$	15,000
Total revenues			-				15,000
Operating expenses:
Advertising and marketing			962				2,247
Professional fees			151,987				150,404
General and administrative expenses			434,862				288,433
Provision for doubtful accounts			-				3,325
Total operating expenses			587,811				444,409
Loss from operations			(587,811	)			(429,409	)
Other income (expense):
Interest income			8,077				27,187
Interest expense			(754,379	)			(81,575	)
Other income (expense)			(2,861	)			-
Interest expense - related party			(37,390	)			(32,968	)
Total other income (expense)			(786,553	)			(87,356	)
Net loss		$	(1,374,364	)		$	(516,765	)
Basic and diluted loss per common share		$	(0.07	)		$	(0.03	)
Weighted average common shares outstanding			19,366,000				18,286,435

---

 

		Three Months Ended December 31,
		2017				2016
Cash flows from operating activities:
Net loss		$	(1,374,364	)		$	(516,765	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			3,739				3,740
Provision for doubtful accounts			-				3,325
Stock based compensation and option expense			171,307				18,725
Loss on disposal of land			2,861				-
Amortization of equity instruments issued to lessor			14,490				-
Amortization of debt discount/(premium)			708,645				21,668
Changes in operating assets and liabilities:
Interest receivable			(8,077	)			2,521
Amounts due from WGP			-				(12,108	)
Prepaid expenses			-				13,477
Accounts payable and accrued expenses			(178,215	)			(233,708	)
Interest payable			50,682				(8,924	)
Interest payable - related party			(21,598	)			(109,825	)
Other payables			1,891				1,354
Deferred revenue			-				30,000
Net cash flows used in operating activities			(628,639	)			(786,520	)
Cash flows from investing activities:
Additions to construction in progress			(1,153	)			-
Payments received on notes receivable			-				86,231
Advances made on notes receivable - related party			-				(64,993	)
Advances made on notes receivable			-				(15,000	)
Net cash flows provided by (used) in investing activities			(1,153	)			6,238
Cash flows from financing activities:
Common stock issued for cash, net			-				1,806,274
Proceeds from note payable, net of financing costs			1,726,000				24,657
Payments on note payable - related party			-				(20,000	)
Payments on notes payable			-				(227,904	)
Net cash flows provided by financing activities			1,726,000				1,583,027
Net increase in cash, cash equivalents, and restricted cash			1,096,208				802,745
Cash, cash equivalents, and restricted cash at beginning of period			1,627				24
Cash, cash equivalents, and restricted cash at end of period		$	1,097,835			$	802,769
Supplementary Disclosure of Cash Flow Information:
Cash paid for interest		$	54,040			$	164,450
Cash paid for income taxes		$	-			$	-
Non-Cash Investing and Financing Activities:
Shares and warrants issued to lessor as consideration for land lease			-				1,770,333
Proceeds from sale of land used to satisfy debt obligations			1,608,451				-
Debt discount related to warrants issued with debt and beneficial conversion feature			1,536,000				-

---

 

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, 2017, which has been derived from audited financial statements, and (b) the unaudited financial statements as of and for the three months ended December 31, 2017 and 2016, 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 December 4, 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 2017 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.

 

Restricted Cash

 

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts in the consolidated statements of cash flows:

 

 

Amounts included in restricted cash represent those required to be set aside by a contractual agreement with a lender for the payment of specific construction related expenditures as part of the Company’s property development in Massachusetts. See Notes 5 and 10.

 

Recent Accounting Pronouncements

 

In July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The ASU was issued to address the complexity associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics of liabilities and equity. The ASU, among other things, eliminates the need to consider the effects of down round features when analyzing convertible debt, warrants and other financing instruments.  As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The amendments are effective for fiscal years beginning after December 15, 2018, and should be applied retrospectively. Early adoption is permitted, including adoption in an interim period. The Company plans to early adopt the ASU, and is currently evaluating implementation date and the impact of this amendment on its financial statements.

 

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. The ASU provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC 718. The amendments are effective for fiscal years beginning after December 15, 2017, and should be applied prospectively to an award modified on or after the adoption date. Early adoption is permitted, including adoption in an interim period. The Company does not expect this amendment to have a material impact on its financial statements.

  

In February 2017, the FASB issued ASU No. 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, to clarify the scope of Subtopic 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets, and to add guidance for partial sales of nonfinancial assets. Subtopic 610-20, which was issued in May 2014 as a part of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. The amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, which is the same time as the amendments in ASU No. 2014-09, and early adoption is permitted. The Company is currently evaluating the impact of this amendment on its financial statements.

 

In January 2017, the FASB issued ASU No. 2017-03, Accounting Changes and Error Corrections (Topic 250). The ASU adds SEC disclosure requirements for both the quantitative and qualitative impacts that certain recently issued accounting standards will have on the financial statements of a registrant when such standards are adopted in a future period. Specially, these disclosure requirements apply to the adoption of ASU No. 2014- 09, Revenue from Contracts with Customers (Topic 606); ASU No. 2016-02, Leases (Topic 842); and ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.   As indicated below, the Company does not believe that the adoption of ASU No. 2014-09 will have a material impact on its revenue recognition as it pertains to current revenue streams.

 

Between May 2014 and December 2016, the FASB issued several ASU’s 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 expects to adopt the modified retrospective approach. However, the adoption of these new standards will not have a material impact on its revenue recognition as it pertains to current revenue streams.

 

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. This current quarter represents the first period in which the Company has maintained restricted cash balances, and the Company has elected to early adopt this amendment as of October 1, 2017. As this amendment affects presentation and disclosures only, the adoption had no impact on the Company’s financial position or results of operations.

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 will require lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Under ASU 2016-02, a lessee will be required to recognize assets and liabilities for leases with terms of more than 12 months. Lessor accounting remains substantially similar to current GAAP. In addition, disclosures of leasing activities are to be expanded to include qualitative along with specific quantitative information. ASU 2016-02 will be effective in fiscal years beginning after December 15, 2018 (with early adoption permitted). ASU 2016-02 mandates a modified retrospective transition method. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

 

NOTE 2. GOING CONCERN 

 

The accompanying consolidated 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 $10,051,189 and $8,676,825 at December 31, 2017 and September 30, 2017, respectively, and had a net loss of $1,374,364 for the three months ended December 31, 2017. Further, the amount due from WGP of $1,251,829 (before an allowance of $469,699) 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. The Company filed a Demand for Arbitration against WGP on April 7, 2017. There are no indicators to suggest that the amounts due from WGP will not be collectible. On January 18, 2018, the arbitration panel awarded us $1,045,000 plus interest at the rate of 18% per year from April 18, 2015 to January 18, 2018 for $523,023. In addition to the principal and interest awarded of $1,568,023, we were also awarded our attorneys’ fees and arbitration fees. The Company has not collected on the award as of the filing date.

 

 

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 December 31, 2017 and September 30, 2017, 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. The Company recently won an arbitration hearing against WGP, but will not reclassify the amounts from long-term until such time that actual payment is made or becomes known.

 

NOTE 4. LAND

 

On July 31, 2014, the Company purchased a five-acre parcel of land located at 4200 Monaco Street, Denver, Colorado for $2,250,809. The property is currently zoned for cannabis cultivation and processing by the City and County of Denver. On October 5, 2017, the Company entered into a purchase and sale agreement to sell the parcel of land for $1,760,000 to an unrelated third party. An impairment loss was recognized for the year ended September 30, 2017 to adjust the carrying value to $1,611,312, net of estimated selling costs. The property was reported in the Company’s consolidated balance sheet at September 30, 2017 as Land Held for Sale of $1,611,312.

 

 

The land sale was completed on December 4, 2017 and a loss of $2,861 was recognized during the quarter ended December 31, 2017 based on the difference between the net proceeds and the carrying amount of the land at the date of sale. The proceeds were used to repay a $990,000 loan and interest of $17,088 secured by the property and $601,363 was used to partially repay an $800,000 loan that was secured by a second lien on the property.

 

NOTE 5.  NOTES PAYABLE

 

Unrelated

 

The Company maintained a loan secured by a first lien on the five-acre parcel of land in Denver. During the quarter ended December 31, 2017, the land was sold and the related loan balance of $990,000 was repaid. See Note 4.

 

On August 25, 2017, we entered into a Promissory Note with an unrelated party that provides financing of up to $150,000. The note bears interest at 12% and is due and payable on May 31, 2018. As of December 31, 2017, we had borrowed $89,677 and accrued interest on this note payable was $4,311. Interest expense was $3,057 and $0 for the three months ended December 31, 2017 and 2016, respectively.

 

Convertible loans

 

On October 5, 2017, the Company borrowed $128,000 from an unrelated party. The loan bears interest at a rate of 12% and is due and payable on October 5, 2018. At any time on or before April 5, 2018 the Company may prepay the loan by paying the Lender the outstanding loan principal and accrued interest plus premiums ranging from 15% to 35%. After April 5, 2018, the Company may not repay the loan with the consent of the Lender. At any time after  April 5, 2018, the full value of any unpaid principal is convertible into the Company’s common stock at a variable conversion price. The conversion price is equal to: (a) if the market price is greater than or equal to $1.35, the greater of (1) the variable conversion price (defined as market price multiplied by 65 percent) and (2) the fixed conversion price of $1.00, and (b) if the market price is less than $1.35, the lessor of (1) the variable conversion price and (2) the fixed conversion price. Market price is defined as the average of the lowest two daily dollar volume-weighted average sales price for the common stock during the fifteen day trading period ending on the latest complete trading day prior to the conversion date. The Company incurred debt issuance costs of $3,000 which is reflected as a debt discount in the accompanying consolidated balance sheet at December 31, 2017. As the instrument is not yet convertible, no beneficial conversion feature has been recognized at December 31, 2017. Amortization expense related to the debt discount was $750 and $0 for the three months ended December 31, 2017 and 2016, respectively.

 

On November 13, 2017, the Company borrowed $68,000 from an unrelated party. The loan bears interest at a rate of 12% and is due and payable on November 13, 2018. At any time on or before May 13, 2018 the Company may prepay the loan by paying the Lender the outstanding loan principal and accrued interest plus premiums ranging from 15% to 35%. After May 13, 2018, the Company may not repay the loan with the consent of the Lender. At any time after  May 13, 2018, the full value of any unpaid principal is convertible into the Company’s common stock at a variable conversion price. The conversion price is equal to: (a) if the market price is greater than or equal to $1.35, the greater of (1) the variable conversion price (defined as market price multiplied by 65 percent) and (2) the fixed conversion price of $1.00, and (b) if the market price is less than $1.35, the lessor of (1) the variable conversion price and (2) the fixed conversion price. Market price is defined as the average of the lowest two daily dollar volume-weighted average sales price for the common stock during the fifteen day trading period ending on the latest complete trading day prior to the conversion date. The Company incurred debt issuance costs of $3,000 which is reflected as a debt discount in the accompanying consolidated balance sheet at December 31, 2017. As the instrument is not yet convertible, no beneficial conversion feature has been recognized at December 31, 2017. Amortization expense related to the debt discount was $500 and $0 for the three months ended December 31, 2017 and 2016, respectively.

 

Construction loan

 

On October 30, 2017 the Company secured $800,000 in financing from three unrelated parties (the “Lenders”) in the form of a loan. The primary use of the loans proceeds will be to prepare the Company’s Massachusetts Medical Cannabis Center (the “MMCC”) for the first phase of development, which will include a pad-ready site for Building 3 and the improvements to the entrance and roadways for the entire project. The remaining loan proceeds will be used to pay lease payments, thru Nov 17, 2017, to Medical Massachusetts Properties, LLC, owner of the land on which the MMCC will be built, and for working capital.

 

 

The loan bears interest at 8% per year and is due and payable on April 30, 2018. At the options of the Lenders upon the sale of the Denver property or the Company’s notice to prepay the note, all or any portion of the outstanding loan balance is convertible into shares of the Company’s common stock. The number of shares of the Company’s common stock which will be issued upon any conversion will be determined by dividing the amount to be converted by $1.50, which amount will be proportionately adjusted in the event of any stock split or capital reorganization. The loan may be prepaid at any time, without penalty on 5 days’ notice to the Lenders.

 

As further consideration for the loan, the Company issued warrants to the Lenders which allow the Lenders to purchase up to 660,000 shares of the Company’s common stock. The warrants are exercisable at a price of $1.50 per share any time on or before October 30, 2022. The Company allocated the proceeds between the note and the warrants based on their relative fair values. The relative fair value of the 660,000 warrants was $442,388 which was recognized as additional paid in capital and a corresponding debt discount. After such allocation, the effective conversion price on the issuance date was less than the fair value of the stock into which the note is convertible, giving rise to a beneficial conversion feature of $357,612 which is recognized as additional paid in capital and a corresponding debt discount.

 

As described in Note 4, on December 4, 2017, the Company sold its property in Denver, Colorado and used $601,363 of the sale proceeds to partially repay this loan. triggering the conversion option described above and the lenders elected not to exercise their conversion option. As the conversion period had passed, the Company’s has fully expensed the debt discount associated with the beneficial conversion feature. The remaining debt discount is being recognized on a straight line basis over the life of the note. Amortization expense related to the debt discounts were $712,736 and $0 for the three months ended December 31, 2017 and 2016, respectively.

 

Convertible Note Offering

 

On December 29, 2017 the Company sold convertible notes in the principal amount of $800,000 to a group of accredited investors. The notes bear interest at 8% per year, are unsecured, and are due and payable on December 31, 2018. At the option of the note holders, the notes may be converted at any time into shares of the Company's common stock at an initial conversion price of $1.50 per share.

 

The note holders also received warrants which entitle the note holders to purchase up to 533,333 shares of the Company's common stock. The warrants are exercisable at a price of $1.50 per share and expire on October 17, 2022.

 

GVC Capital LLC acted as the placement agent for the offering and received a cash commission of $64,000, plus warrants to purchase 106,667 shares of the Company's common stock. The warrants are exercisable at a price of $1.50 per share and expire on December 29, 2022.

 

The Company allocated the proceeds between the note and the warrants based on their relative fair values. The relative fair value of the 640,000 warrants was $607,024 which was recognized as additional paid in capital and a corresponding debt discount. After such allocation, the effective conversion price on the issuance date was less than the fair value of the stock into which the note is convertible, giving rise to a beneficial conversion feature of $128,976 which is recognized as additional paid in capital and a corresponding debt discount.

 

In connection with the offering, the Company paid fees of $64,000 to the placement agent, which was allocated on a pro-rata basis to the warrants and the debt, which was recorded as an offset to additional paid in capital and an increase in debt discount of $48,562 and $15,438, respectively

 

All debt discounts are being recognized on a straight-line basis over the terms of the notes. As the transaction occurred just prior to the quarter end, no amortization expense was recorded as of December 31, 2017.

 

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.

 

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 $931,646, 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 but is secured by 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 these notes payable was $106,596 and $84,998 at December 31, 2017 and 2016, 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. We allocated the relative fair values to the warrants, stock options, and convertible debt, as determined by the Black Scholes option pricing model. Based on the Black Scholes option pricing model, a net debt premium of $72,651 was allocated to the warrants which are reflected in additional paid-in-capital. The debt premium is being amortized on a straight-line basis over the term of the notes. At December 31, 2017, the outstanding principal on these notes was $1,931,646, and the unamortized debt premium was $41,696. Amortization of debt premium was $5,341 and $9,763 for the three months ended December 30, 2017 and 2016.

 

NOTE 6. RELATED PARTY TRANSACTIONS

 

Strategic Capital Partners. At December 31, 2017 and September 30, 2017, we had outstanding notes payable to SCP of $1,931,646 and $1,978,683, respectively.

 

Interest expense was $37,390 and $32,968 for the three months ended December 31, 2017 and 2016, respectively. Interest payable – related party of $106,596 and $84,998 was included in the accompanying consolidated balance sheets at  December 31, 2017 and September 30, 2017, respectively.  We made interest payments of $21,133 during the quarter ended December 31, 2017. 

  

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, 2017, we have provided financing to CCI of $131,589, which includes construction and working capital advances of $119,635, and accrued interest of $11,954.

 

 

 

NOTE 7. LOSS PER SHARE

 

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

 

 

As of December 31, 2017, we have excluded 1,305,000 of stock options and 11,566,000 of warrants from the computation of diluted net loss per share since the effects are anti-dilutive. As of December 31, 2016, we have excluded 1,205,000 of stock options and 9,981,000 of warrants from the computation of diluted net loss per share since the effects are anti-dilutive.

 

NOTE 8. INCOME TAXES

 

We did not record any income tax expense or benefit for the three months ended December 31, 2017. We increased our valuation allowance and reduced our net deferred tax assets to zero. Our assessment of the realization of our 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, 2017.

 

As of December 31, 2017, we did not have any unrecognized tax benefits. There were no significant changes to the calculation since September 30, 2017.

 

NOTE 9. STOCK BASED COMPENSATION

 

Restricted Stock Awards. We use restricted stock awards to compensate certain key executives and other individuals.  At December 31, 2017, we had no outstanding unvested restricted stock awards. Stock-based compensation expense associated with restricted stock awards was $0 and $18,725 for the three months ended December 31, 2017 and 2016, respectively. As of December 31, 2017, there is no remaining unrecognized stock-based compensation associated with restricted stock awards. 

 

Stock Options. There was no stock option activity for the quarter ended December 31, 2017. Stock option details are as follows: 

 

 

There was no stock-based compensation expense associated with stock options for the three months ended December 31, 2017 and 2016. At December 31, 2017, there is no remaining unrecognized stock-based compensation associated with stock options.

 

 

 

NOTE 10.  COMMITMENTS AND CONTINGENCIES

 

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, 2017, we have provided financing to CCI of $131,589, which includes construction and working capital advances of $119,635, and accrued interest of $11,954.

 

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 had six months to obtain $2.6 million in 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 month period, the Company had an additional six months to do so; provided, that the Company has paid accrued lease payments and closing costs. On October 17, 2017, the lease agreement was amended to provide that the Company will have until 16 months from October 17, 2016 to raise $2.6 million in capital funding. In addition to extending the funding deadline, this amendment granted MMP a warrant to purchase up to 100,000 shares of the Company’s common stock at an exercise price of $1.50 per share. The warrant can be exercised on October 17, 2022. The Company recognized an expense of $171,307 during the three months ended December 31, 2017, representing the entire grant date fair value of the warrant.

 

On February 16, 2018, the lease agreement was amended to provide that the Company will have until 18 months from October 17, 2016 to raise $2.6 million in capital funding. In addition to extending the funding deadline, this amendment granted MMP a warrant to purchase up to 50,000 shares of the Company’s common stock at an exercise price of $1.50 per share. The warrant can be exercised on October 17, 2022.

 

The Company received a 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 $1,899,966 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 $108,625 and $98,852 for the three months ended December 31, 2017 and 2016. At December 31, 2017, the future rental payments required under this lease are $256,122 for the remainder of fiscal 2018, $341,496 for fiscal years 2019 through 2022, and $15,026,024 thereafter.

 

Office space

 

The Company leases its office space located at 1550 Wewatta, Denver, Colorado 80202 for $1,845 per month under a month-to-month lease.

 

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

 

NOTE 11.  SHAREHOLDERS’ EQUITY

 

Equity Line Agreement. On December 12, 2017, the Company entered into an amended and restated equity line agreement with Mountain States Capital, LLC (MSC). Under the equity line agreement, MSC agreed to provide the Company with up to $10,000,000 of funding through the purchase of shares of the Company's common stock.

 

During the term of the Agreement, the Company, at its sole discretion, may deliver a Put Notice to MSC, which will specify the dollar amount which the Company wants to draw down under the Equity Line. The amount the Company can draw down at any one time is the lesser of twice the average of the 10-day average daily trading volume (computed by multiplying the volume weighted average price for each day by the number of shares traded for that day), or $500,000.

 

A closing will occur on the date which is no earlier than five trading days following and no later than seven trading days following the applicable Put Notice. On each Closing Date, the Company will sell, and MSC will purchase, the shares of the Company's common stock specified in the Put Notice.

 

The amount to be paid by MSC on a particular Closing Date will be determined by dividing the dollar amount specified in the Put Notice by the Purchase Price. The Purchase Price is 90% of the lowest daily volume weighted average price of the Company's common stock during the Pricing Period. The Pricing Period, with respect to a particular Put Notice, is five consecutive trading days including, and immediately following, the delivery of a Put Notice. However, no Put Notice may be delivered on a day that is not a Trading Day.

 

The Company may specify a Minimum Price when submitting a Put Notice, provided however that the Minimum Price must be more than 75% of the Closing Price of the Company's Common Stock on the date immediately preceding the date of the delivery of the Put Notice. If the Purchase Price is less than the Minimum Price, the Company may, at its option, sell shares to MSC on the Closing Date using the Purchase Price. Notwithstanding the above, the Company will not sell any shares at a price below $1.00 per share.

 

The Company is under no obligation to submit any Put Notices.

 

The equity line agreement has a term of 18 months, which will begin on the effective date of the registration statement which the Company has agreed to file with the Securities and Exchange Commission so that the shares of common stock to be sold to MSC may be sold in the public market. As of December 31, 2017, the Company has not drawn from this line.

 

 

Warrants. Warrant activity as of and for the three months ended December 31, 2017 is as follows: 

 

 

As disclosed in Notes 5 and 10, the Company issued warrants to purchase up to 1,400,000 shares of Common Stock at an exercise price of $1.50 per share. The fair value of the warrants was determined using the Black-Scholes option pricing model using the following assumptions:

 

●

Expected term – 3 to 5 years

●

Volatility – 163% to 176%

●

Risk-free rate – 1.73% to 2.00%

●

Stock price - $1.74 to $4.09

●

Expected dividends – $0

 

For those warrants that were issued with debt, the proceeds were allocated to the respective instruments on a pro rata basis based on the fair value of each instrument. See Note 5.

 

NOTE 12. SUBSEQUENT EVENTS

 

On April 7, 2017, we filed an arbitration claim against Wellness Groups Pharms LLC (“WGP”). On January 18, 2018, the arbitration panel awarded us $1,045,000 plus interest at the rate of 18% per year from April 18, 2015 to January 18, 2018 for $523,023. In addition to the principal and interest awarded of $1,568,023, we were also awarded our attorneys’ fees and arbitration fees.

 

On February 12, 2018, the Company sold convertible notes in the principal amount of $810,000 to a group of accredited investors. The notes bear interest at 8% per year, are unsecured, and are due and payable on December 31, 2018. At the option of the note holders, the notes may be converted at any time into shares of the Company’s common stock at an initial conversion price of $1.50 per share. The note holders also received warrants which entitle the note holders to purchase up to 540,000 shares of the Company’s common stock. The warrants are exercisable at a price of $1.50 per share and expire on October 17, 2022.

 

As described in Note 10, on February 16, 2018, the Company’s lease agreement with MMP was amended to provide that the Company will have until 18 months from October 17, 2016 to raise $2.6 million in capital funding. In addition to extending the funding deadline, this amendment granted MMP a warrant to purchase up to 50,000 shares of the Company’s common stock at an exercise price of $1.50 per share. The warrant can be exercised on October 17, 2022.

 

 

 

---

---

---

---

---