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

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		March 31, 2017 (unaudited)				September 30, 2016
Assets
Current Assets:
Cash and cash equivalents		$	204,411			$	24
Interest receivable			527				2,521
Current portion of prepaid land lease			57,959				-
Prepaid expenses and other current assets			11,726				11,726
Note receivable			62,747				247,378
Total current assets			337,370				261,649
Land held for resale			2,250,809				2,250,809
Construction in progress			214,881				-
Furniture and equipment (net of depreciation of $3,143 and $2,581)			4,714				5,276
Notes and other receivables (net of allowance of $469,699 and $469,699)			780,315				780,315
Note receivable - related party			98,741				57,693
Website development costs (net of amortization of $21,903 and $14,986)			19,597				26,514
Prepaid land lease and related deposits, net of current portion			2,811,027				925,000
Security deposit			3,110				3,110
Total assets		$	6,520,564			$	4,310,366
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses		$	54,448			$	385,380
Interest payable (including $0 and $109,825 to related parties)			30,270				118,749
Other payables			23,008				14,927
Notes payable (net of discount of $0 and $35,250)			990,000				1,157,997
Total current liabilities			1,097,726				1,677,053
Note payable - related party (inclusive of premium of $57,719 and $72,651)			1,989,365				2,024,297
Total liabilities			3,087,091				3,701,350
Commitments and contingencies - see Note 9			-				-
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; 19,181,000 and 17,031,000 shares issued and outstanding as of March 31, 2017 and September 30, 2016, respectively			1,918				1,703
Additional paid in capital			10,366,219				6,512,244
Accumulated deficit			(6,934,664	)			(5,904,931	)
Total stockholders' equity			3,433,473				609,016
Total liabilities and stockholders' equity		$	6,520,564			$	4,310,366

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		Three Months Ended March,								Six Months Ended March 31,
		2017				2016				2017				2016
Revenues:
Consulting fees		$	15,000			$	15,000			$	30,000			$	30,000
Total revenues			15,000				15,000				30,000				30,000
Operating expenses:
Advertising and marketing			4,973				250				7,220				2,348
Professional fees			148,686				134,751				201,083				353,080
General and administrative expenses			364,817				162,400				653,250				337,545
Provision for doubtful accounts			-				3,289				-				6,614
Total operating expenses			518,476				300,690				861,553				699,587
Loss from operations			(503,476	)			(285,690	)			(831,553	)			(669,587	)
Other income (expense):
Interest income			2,584				45,492				10,759				93,787
Interest expense			(57,762	)			(32,249	)			(139,337	)			(64,205	)
Interest expense - related party			(36,634	)			(23,594	)			(69,602	)			(45,452	)
Total other income (expense)			(91,812	)			(10,351	)			(198,180	)			(15,870	)
Net loss		$	(595,288	)		$	(296,041	)		$	(1,029,733	)		$	(685,457	)
Basic and diluted loss per common share		$	(0.03	)		$	(0.02	)		$	(0.06	)		$	(0.04	)
Weighted average common shares outstanding			19,136,555				16,631,000				18,706,825				16,631,000

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		Six Months Ended March 31,
		2017				2016
Cash flows from operating activities:
Net loss		$	(1,029,733	)		$	(685,457	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			7,479				7,478
Provision for doubtful accounts			-				6,614
Stock based compensation and option expense			37,450				102,799
Amortization of debt discount/(premium)			20,318				-
Changes in operating assets and liabilities:
Interest receivable			1,994				1,951
Amounts due from WGP			-				(64,371	)
Prepaid expenses			28,980				25,022
Accounts payable and accrued expenses			(330,932	)			127,856
Interest payable			21,346				25,467
Interest payable - related party			(109,825	)			45,452
Other payables			8,081				(8,018	)
Deferred revenue			-				5,000
Net cash flows used in operations			(1,344,842	)			(410,207	)
Cash flows from investing activities:
Additions to construction in progress			(214,881	)			(4,327	)
Deposit on land			-				(250,000	)
Payments received on notes receivable			214,631				184,234
Advances made on notes receivable - related party			(41,048	)			-
Advances made on notes receivable			(30,000	)			-
Net cash flows used in investing activities			(71,298	)			(70,093	)
Cash flows from financing activities:
Common stock issued for cash, net			1,843,774				-
Proceeds from note payable			24,657				116,185
Proceeds from note payable - related party			-				227,500
Payments on note payable - related party			(20,000	)			-
Payments on note payable			(227,904	)			-
Net cash flows provided by financing activities			1,620,527				343,685
Net increase (decrease) in cash and cash equivalents			204,387				(136,615	)
Cash and cash equivalents at beginning of period			24				201,353
Cash and cash equivalents at end of period		$	204,411			$	64,738
Supplementary Disclosure of Cash Flow Information:
Cash paid for interest (including $194,368 to related parties)		$	277,100			$	15,932
Cash paid for income taxes		$	-			$	-
Non-Cash Investing and Financing Activities:
Shares and warrants issued to lessor as consideration for land lease			1,972,966				-

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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 and six months ended March 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 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

 

In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, to amend the amortization period for certain purchased callable debt securities held at a premium. The ASU shortens the amortization period for the premium to the earliest call date. Under current Generally Accepted Accounting Principles (“GAAP”), entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. The amendments should be applied on a modified retrospective basis, and are effective for fiscal years beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of this amendment 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.   The Company is currently evaluating the impact of these amendments on its financial statements.

 

 

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 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.

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 $6,934,664 and $5,904,931 at March 31, 2017, and September 30, 2016, respectively, and had a net loss of $1,029,733 for the six months ended March 31, 2017. Further, the amount due from Wellness Group Pharms, LLC (“WGP”) of $1,250,014 (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. See Note 11, Subsequent Events, for additional discussion.

 

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 March 31, 2017, 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. The Company filed a Demand for Arbitration against WGP on April 7, 2017. See Note 11, Subsequent Events, for additional discussion.

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 to increase the principal balance to $990,000, increase the interest rate to 18% per year, and extend the due date to March 15, 2017. On March 15, 2017, the maturity date of the loan was extended to March 15, 2018, and the interest rate remained the same at 18% per year. 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 March 31, 2017 and September 30, 2016 was $30,270 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 March 31, 2017, there was no outstanding principal or interest, and no unamortized debt discount due to the full payment of the notes.

 

 

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 March 31, 2017 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 $931,646, 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. 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 March 31, 2017 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. 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 March 31, 2017, the outstanding principal on these notes was $1,931,646, and the unamortized debt premium was $57,719. Amortization of debt premium was $5,169 and $14,932 for the three and six months ended March 31, 2017. There was no such amortization for the three and six months ended March 31, 2016.

NOTE 5. RELATED PARTY TRANSACTIONS

 

Strategic Capital Partners. At March 31, 2017 and September 30, 2016, we had outstanding notes and accrued interest payable, inclusive of premium, to SCP of $1,989,365 and $2,024,297, respectively.

 

Interest expense was $36,634 and $23,594 for the three months ended March 31, 2017 and 2016, respectively; and $69,602 and $45,452 for the six months ended March 31, 2017 and 2016. There was no interest payable to related parties at March 31, 2017. Interest payable – related party of $109,825 was included in the accompanying balance sheets at September 30, 2016.  We made interest payments of $194,368 during 2017, and made no interest payments during 2016 associated with this related party notes payable.  During the six months ended March 31, 2017, we received advances of $0 and made payments of $20,000. During the six months ended March 31, 2016, we received advances of $227,500 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 Massachusetts Medical Cannabis Center (“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 owe us $10,000 each month for these consulting services, but is not required to pay until six months after generating certain revenues. 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 March 31, 2017, we have provided financing to CCI of $98,741, which includes construction and working capital advances of $93,049 and accrued interest of $5,692.

NOTE 6. LOSS PER SHARE

 

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

  

 

We have excluded 1,155,000 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 7. INCOME TAXES

 

We did not record any income tax expense or benefit for the three or six months ended March 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 March 31, 2017.

 

As of March 31, 2017, 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 March 31, 2017, we had no outstanding unvested restricted stock awards. Stock-based compensation expense associated with restricted stock awards was $18,725 and $46,813 for the three months ended March 31, 2017 and 2016, respectively, and $37,450 and $93,626 for the six months ended March 31, 2017 and 2016, respectively. As of March 31, 2017, there is no remaining unrecognized stock-based compensation associated with restricted stock awards.

 

 

Stock Options. Stock option activity as of and for the six months ended March 31, 2017 is as follows: 

 

 

Stock-based compensation expense associated with stock options totaled $0 and $4,264 for the three months ended March 31, 2017 and 2016, respectively; and $0 and $9,173 for the six months ended March 31, 2017 and 2016, respectively. At March 31, 2017, there is no remaining unrecognized stock-based compensation associated with stock options. During the three and six months ended March 31, 2017, we received proceeds of $37,500 from stock option exercises.

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 owe us $10,000 each month for these consulting services, but is not required to pay until six months after generating certain revenues. 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 March 31, 2017, we have provided financing to CCI of $98,741, which includes construction and working capital advances of $93,049 and accrued interest of $5,692.

 

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 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. As of March 31, 2017, the Company has paid all accrued lease payments and closing costs.

 

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 – 115 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 $208,184 and $307,036 for the three and six months ended March 31, 2017. No such expense was incurred in the three and six months ended March 31, 2016.  At March 31, 2017, the future rental payments required under this lease are $142,290 for the remainder of fiscal 2017, $341,496 for fiscal years 2018 through 2021, and $15,367,520 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 March 31, 2017, the future rental payments required under this lease are $3,666 for the remainder of fiscal 2017 and $910 for fiscal 2018.

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

NOTE 10.  SHAREHOLDERS’ EQUITY

 

Sale of Equity Securities. On November 7, 2016, we sold 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 43% 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 six months ended March 31, 2017 is as follows: 

 

 

 

NOTE 11.  SUBSEQUENT EVENTS

 

On April 7, 2017, we filed an arbitration claim against WGP. In our arbitration claim we requested an award for damages consisting of $1,005,000 previously advanced to WGP, unpaid consulting fees of $2,880,000, amounts that should have been paid to us under the lease agreement, including the base annual rent of $1,944,000 per year, interest at the rate of 25% on damages awarded by the Arbitrator, all costs and attorney’s fees incurred in the arbitration, and the immediate appointment of a receiver by the Arbitrator pursuant to the terms of our agreements with WGP.

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