AmeriCann, Inc. - Annual Report: 2018 (Form 10-K)

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

☒   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended September 30, 2018

 

☐   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:  000-54231

 

AMERICANN, INC.

(Exact name of registrant as specified in its charter)

 

Delaware	27-4336843
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

 

1550 Wewatta St, Denver, CO 80202

(Address of Issuer's Principal Executive Offices, Zip Code)

 

Issuer’s telephone number, including area code:  (303) 862-9000

 

Securities registered under section 12(g) of the Exchange Act: Common Stock, ($0.001 Par Value)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes ☐     No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.   Yes ☐     No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports 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 check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,  and will not be contained,  to the best of Registrant's  knowledge,  in definitive proxy or information  statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ☒

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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	☑
			Emerging growth company	☐

 

If an emerging growth company, indicate by check mark 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).  Yes ☐     No ☒

 

The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of the registrant’s common stock on March 31, 2018, was approximately $17,886,000.

 

As of January 14, 2019, the registrant had 22,782,907 outstanding shares of common stock.

 

 

 

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		September 30, 2018				September 30, 2017
Assets
Current Assets:
Cash and cash equivalents		$	198,144			$	1,627
Restricted cash			3,818,805				-
Current portion of prepaid land lease			57,959				57,959
Prepaid expenses and other current assets			7,470				5,000
Total current assets			4,082,378				64,586
Land held for sale			-				1,611,312
Construction in progress			1,681,382				680,028
Furniture and equipment (net of depreciation of $4,827 and $3,704)			5,794				4,153
Website development costs (net of amortization of $41,500 and $28,820)			-				12,680
Notes and other receivables (net of allowance of $977,770 and $469,699)			783,905				780,315
Note receivable - related party			176,764				125,327
Prepaid land lease and related deposits, net of current portion			2,724,088				2,782,047
Security deposit and other assets			3,110				3,110
Total assets		$	9,457,421			$	6,063,558
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses		$	268,065			$	624,623
Interest payable (including $12,742 and $84,998 to related parties)			46,605				86,253
Other payables			8,906				19,699
Notes payable (net of discount of $138,750 and $0)			521,250				1,070,000
Total current liabilities			844,826				1,800,575
Notes payable - related party (inclusive of premium of $25,673 and $47,037)			1,782,319				1,978,683
Total liabilities			2,627,145				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; 22,106,706 and 19,366,000 shares issued and outstanding as of September 30, 2018 and 2017, respectively			2,211				1,937
Additional paid in capital			19,937,606				10,959,188
Accumulated deficit			(13,109,541	)			(8,676,825	)
Total stockholders' equity			6,830,276				2,284,300
Total liabilities and stockholders' equity		$	9,457,421			$	6,063,558

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		Years Ended September 30,
		2018				2017
Revenues:
Consulting fees		$	-			$	40,000
Total revenues			-				40,000
Operating expenses:
Advertising and marketing			36,539				10,712
Professional fees			554,673				415,173
General and administrative expenses			1,438,215				1,412,314
Impairment of long-lived assets			-				639,497
Total operating expenses			2,029,427				2,477,696
Loss from operations			(2,029,427	)			(2,437,696	)
Other income (expense):
Interest income			45,028				11,086
Interest expense			(2,300,396	)			(201,367	)
Other income (expense)			(2,861	)			-
Interest expense - related party			(145,060	)			(143,917	)
Total other income (expense)			(2,403,289	)			(334,198	)
Net loss		$	(4,432,716	)		$	(2,771,894	)
Basic and diluted loss per common share		$	(0.22	)		$	(0.15	)
Weighted average common shares outstanding			20,066,824				19,007,371

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																		Additional
		Preferred Stock								Common Stock								Paid In				Accumulated
		Shares				Amount				Shares				Amount				Capital				Deficit				Total
Balances, September 30, 2016			-			$	-				17,031,000			$	1,703			$	6,512,244			$	(5,904,931	)		$	609,016
Stock-based compensation expense			-				-				-				-				37,450				-				37,450
Shares and warrants issued to lessor			-				-				100,000				10				1,972,956				-				1,972,966
Stock option expense			-				-				-				-				222,988				-				222,988
Stock issued for options exercised			-				-				50,000				5				37,495				-				37,500
Stock issued for cash, net			-				-				2,185,000				219				2,176,055				-				2,176,274
Net loss			-				-				-				-				-				(2,771,894	)			(2,771,894	)
Balances, September 30, 2017			-			$	-				19,366,000			$	1,937			$	10,959,188			$	(8,676,825	)		$	2,284,300
Stock-based compensation expense			-				-				-				-				432,787				-				432,787
Stock issued for options exercised			-				-				25,000				3				18,747				-				18,750
Stock issued for cash, net			-				-				447,801				45				1,222,367				-				1,222,412
Conversion of debt			-				-				794,962				79				1,192,366				-				1,192,445
Stock issued for warrants exercised, net			-				-				1,473,000				147				3,814,713				-				3,814,860
Benefical conversion feature and warrants issued with debt			-				-				-				-				2,297,438				-				2,297,438
Net loss			-				-				-				-				-				(4,432,716	)			(4,432,716	)
Balances, September 30, 2018			-			$	-				22,106,763			$	2,211			$	19,937,606			$	(13,109,541	)		$	6,830,276

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		Years Ended September 30,
		2018				2017
Cash flows from operating activities:
Net loss		$	(4,432,716	)		$	(2,771,894	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			13,803				14,957
Impairment of long-lived assets			-				639,497
Stock based compensation and option expense			432,787				260,438
Loss on disposal of land			2,861				-
Amortization of equity instruments issued to lessor			39,459				39,456
Amortization of debt discount/(premium)			2,207,324				9,636
Noncash interest income			(45,027	)			2,521
Changes in operating assets and liabilities:
Bank overdraft			-				10,616
Prepaid expenses			(2,470	)			25,230
Accounts payable and accrued expenses			(483,181	)			49,319
Interest payable			(53,113	)			(7,669	)
Interest payable - related party			(72,255	)			(24,827	)
Other payables			(10,793	)			4,772
Net cash flows used in operations			(2,403,321	)			(1,747,948	)
Cash flows from investing activities:
Additions to construction in progress			(702,702	)			(500,720	)
Payments received on notes receivable			-				247,378
Advances made on notes receivable - related party			(10,000	)			(67,634	)
Net cash flows used in investing activities			(712,702	)			(320,976	)
Cash flows from financing activities:
Common stock issued for cash, net			1,222,412				2,176,274
Proceeds from note payable			2,536,000				104,657
Proceeds from the exercise of warrants			3,814,860				-
Proceeds from the exercise of stock options			18,750				37,500
Payments on note payable - related party			(175,000	)			(20,000	)
Payments on notes payable			(285,677	)			(227,904	)
Net cash flows provided by financing activities			7,131,345				2,070,527
Net increase in cash, cash equivalents, and restricted cash			4,015,322				1,603
Cash, cash equivalents, and restricted cash at beginning of period			1,627				24
Cash, cash equivalents, and restricted cash at end of period		$	4,016,949			$	1,627
Supplementary Disclosure of Cash Flow Information:
Cash paid for interest		$	363,500			$	396,841
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
Proceeds from sale of land used to satisfy debt obligations			1,608,451				-
Construction in progress expenditures incurred but not yet paid			171,888				179,308
Debt discount related to warrants issued with debt and Beneficial Conversion Feature			2,297,438				-
Notes payable and interest converted into shares of stock			1,192,445				-
Interest capitalized into construction in progress			129,528				-

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NOTE 1.

DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

 

Description of Business

 

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 new 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 expand its operations. 

 

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

 

All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.

 

Summary of Significant Accounting Policies

 

This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s consolidated financial statements. The consolidated financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States and have been consistently applied in the preparation of the consolidated financial statements.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of AmeriCann, Inc. and its wholly-owned subsidiary. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant estimates and assumptions made by management are valuation of equity instruments, deferred tax asset valuation and allowance and collectability of long-lived assets. Actual results could differ from those estimates as the current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions. See Note 4 for a discussion of our provision for doubtful accounts for amount amounts owed from WGP.

 

Cash and Cash Equivalents

 

Cash and cash equivalents includes cash on hand, demand deposit accounts and temporary cash investments with maturities of ninety days or less at the date of purchase.

 

Income Taxes

 

In accordance with ASC Topic 740, Income Taxes, the provision for income taxes is computed using the asset and liability method. The liability method measures deferred income taxes by applying enacted statutory rates in effect at the consolidated balance sheet date to the differences between the tax basis of assets and liabilities and their reported amounts on the consolidated financial statements. The resulting deferred tax assets or liabilities have been adjusted to reflect changes in tax laws as they occur. A valuation allowance is provided when it is more likely than not that a deferred tax asset will not be realized.

 

 

We expect to recognize the financial statement benefit of an uncertain tax position only after considering the probability that a tax authority would sustain the position in an examination. For tax positions meeting a "more-likely-than-not" threshold, the amount to be recognized in the consolidated financial statements will be the benefit expected to be realized upon settlement with the tax authority. For tax positions not meeting the threshold, no financial statement benefit is recognized. As of September 30, 2018, we had no uncertain tax positions. We recognize interest and penalties, if any, related to uncertain tax positions as general and administrative expenses. We currently have no federal or state tax examinations nor have we had any federal or state examinations since our inception. To date, we have not incurred any interest or tax penalties.

 

For federal tax purposes, our 2016 through 2018 tax years remain open for examination by the tax authorities under the normal three-year statute of limitations.

 

Concentration of Credit Risks and Significant Customers

 

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash, notes receivables, deposits, accounts receivables and notes receivable. We place our cash with high credit quality financial institutions. As of September 30, 2018, we had outstanding notes receivable of $176,764 with BASK (Formerly Coastal Compassion Inc.), and a note and a receivable in the amount of $1,761,675 with WGP (exclusive of provision for doubtful accounts of $977,770). See Note 4 for a discussion of our provision for doubtful accounts for amounts owed from WGP.

 

For the year ended September 30, 2017, all of the Company’s revenue was earned from one customer, 4900 Jackson, LLC.

 

Financial Instruments and Fair Value of Financial Instruments

 

We adopted ASC Topic 820, Fair Value Measurements and Disclosures, for assets and liabilities measured at fair value on a recurring basis. ASC Topic 820 establishes a common definition for fair value to be applied to existing US GAAP that requires the use of fair value measurements that establishes a framework for measuring fair value and expands disclosure about such fair value measurements. 

 

ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC Topic 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:

 

	Level 1:	Observable inputs such as quoted market prices in active markets for identical assets or liabilities
	Level 2:	Observable market-based inputs or unobservable inputs that are corroborated by market data
	Level 3:	Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.

 

The carrying value of financial assets and liabilities recorded at fair value is measured on a recurring or nonrecurring basis. Financial assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs. We had no financial assets or liabilities carried and measured on a nonrecurring basis during the reporting periods. Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared. We had no financial assets or liabilities carried and measured on a recurring basis during the reporting periods. The carrying value of short-term financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, and short-term borrowings approximate fair value due to the relatively short period to maturity for these instruments. The long-term borrowings approximate fair value since the related rates of interest approximates current market rates.

 

Derivative Liabilities

 

We evaluate stock options, stock warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under the relevant sections of ASC Topic 815-40, Derivative Instruments and Hedging: Contracts in Entity’s Own Equity. The result of this accounting treatment could be that the fair value of a financial instrument is classified as a derivative instrument and is marked-to-market at each consolidated balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the consolidated statement of operations as other income or other expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815-40 are reclassified to a liability account at the fair value of the instrument on the reclassification date. We determined that none of our financial instruments meet the criteria for derivative accounting as of September 30, 2018 and 2017.

 

 

Long-Lived Assets

 

Our long-lived assets consisted of property, equipment and real estate and are reviewed for impairment in accordance with the guidance of ASC Topic 360, Property, Plant, and Equipment. We test for impairment losses on long-lived assets used in operations whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Impairment evaluations involve management's estimates on asset useful lives and future cash flows. Actual useful lives and cash flows could be different from those estimated by management which could have a material effect on our reporting results and financial positions. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. For the year ended September 30, 2017, we recognized impairment losses of $639,497 on our long-lived assets. There were no such charges for the year ended September 30, 2018.

 

Property and Equipment

 

Property and equipment are stated at cost. Depreciation of property and equipment is provided using the straight-line method for financial reporting purposes at rates based on the estimated useful lives of the assets. Estimated useful lives range from three to seven years. Land is classified as held for sale when management has the ability and intent to sell, in accordance with ASC Topic 360-45.

 

Construction in progress (CIP)

 

CIP consists of initial costs associated with construction of manufacturing facilities, including material, equipment and interest expenses. When CIP is finished the assets will be transferred to facilities assets. No provision for depreciation is made on CIP until such time that the relevant assets are available and ready to use.

 

Capitalized Interest

 

The Company capitalizes interest to construction in progress made in connection with facility construction that are not subject to current depreciation. Interest is capitalized only for the period that activities are in progress to bring the projects to their intended use. Capitalized interest was $129,528 and $28,697 for the years ended September 30, 2018, and 2017, respectively.

 

Equity Instruments Issued to Non-Employees for Acquiring Goods or Services

 

Issuances of our common stock or warrants for acquiring goods or services are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The measurement date for the fair value of the equity instruments issued to consultants or vendors is determined at the earlier of (i) the date at which a commitment for performance to earn the equity instruments is reached (a "performance commitment" which would include a penalty considered to be of a magnitude that is a sufficiently large disincentive for nonperformance) or (ii) the date at which performance is complete.  

 

Although situations may arise in which counter performance may be required over a period of time, the equity award granted to the party performing the service is fully vested and non-forfeitable on the date of the agreement. As a result, in this situation in which vesting periods do not exist if the instruments is fully vested on the date of agreement, we determine such date to be the measurement date and will record the estimated fair market value of the instruments granted as a prepaid expense and amortize such amount to general and administrative expense in the accompanying consolidated statement of operations over the contract period. When it is appropriate for us to recognize the cost of a transaction during financial reporting periods prior to the measurement date, for purposes of recognition of costs during those periods, the equity instrument is measured at the then-current fair values at each of those interim financial reporting dates.

 

Non-Cash Equity Transactions

 

Shares of equity instruments issued for noncash consideration are recorded at the estimated fair market value of the consideration granted based on the estimated fair market value of the equity instrument, or at the estimated fair market value of the goods or services received, whichever is more readily determinable.

 

Stock-Based Compensation

 

We account for share-based awards to employees in accordance with ASC Topic 718, Stock Compensation. Under this guidance, stock compensation expense is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the estimated service period (generally the vesting period) on the straight-line attribute method. Share-based awards to non-employees are accounted for in accordance with ASC Topic 505-50, Equity, wherein such awards are expensed over the period in which the related services are rendered.

 

 

Related Parties

 

A party is considered to be related to us if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with us. Related parties also include our principal owners, our management, members of the immediate families of our principal owners and our management and other parties with which we may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties, or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests, is also a related party.

 

Revenue Recognition

 

We recognize revenue when (i) persuasive evidence of an arrangement exists; (ii) the fee is fixed or determinable; (iii) performance of service has been delivered; and (iv) collection is reasonably assured.

 

Advertising Expense

 

Advertising, promotional and selling expenses consisted of sales and marketing expenses, and promotional activity expenses. Expenses are recognized when incurred.

 

General and Administrative Expense

 

General and administrative expenses consisted of professional service fees, rent and utility expenses, meals, travel and entertainment expenses, and other general and administrative overhead costs. Expenses are recognized when incurred.

 

Loss per Share

 

We compute net loss per share in accordance with the ASC Topic 260. The ASC specifies the computation, presentation and disclosure requirements for loss per share for entities with publicly held common stock.

 

Basic loss per share amounts is computed by dividing the net loss by the weighted average number of common shares outstanding. Shares issuable upon the exercise of equity instruments such as warrants, options and conversion of convertible notes were not included in the loss per share calculations because the inclusion would have been anti-dilutive.

 

Recently Adopted Accounting Pronouncements

 

In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Consolidated Financial Statements - Going Concern (Subtopic 205-40). The guidance requires management to evaluate whether there are conditions or events that raise substantial doubt about an entity's ability to continue as a going concern. If such conditions or events exist, disclosures are required that enable users of the consolidated financial statements to understand the nature of the conditions or events, management's evaluation of the circumstances and management's plans to mitigate the conditions or events that raise substantial doubt about the entity's ability to continue as a going concern. We adopted this standard effective on October 1, 2017; however, the adoption of this guidance did not impact our financial position, results of operations or cash flows. See Note 2 for a discussion regarding our ability to continue as a going concern.

 

Recently Issued Accounting Pronouncements

 

In January 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-01, LEASES (TOPIC 842): LAND EASEMENT PRACTICAL EXPEDIENT FOR TRANSITION TO TOPIC 842; On February 25, 2016, the FASB issued Accounting Standards Update No. 2016- 02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing transactions. The FASB has been assisting stakeholders with implementation questions and issues as organizations prepare to adopt Topic 842. In connection with the FASB’s transition support efforts, a number of stakeholders inquired about the application of the new lease requirements in Topic 842 to land easements. Land easements (also commonly referred to as rights of way) represent the right to use, access, or cross another entity’s land for a specified purpose The amendments in this Update affect the amendments in Update 2016-02, which are not yet effective but may be early adopted, and Example 10 of Subtopic 350- 30. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Update 2016-02. An entity that early adopted Topic 842 should apply the amendments in this Update upon issuance. The Company does not expect this amendment to have a material impact on its financial statements.

 

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. 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 flows. The amendments should be applied using a retrospective transition method, and are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This year 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. The Company is 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 $13,109,541 and $8,676,825 at September 30, 2018 and 2017, respectively, and had a net loss of $4,432,716 for the year ended September 30, 2018. Further, the amount due from WGP of $1,761,675 (before an allowance of $977,770) 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. On January 18, 2018, the arbitration panel awarded the Company $1,045,000 plus interest at the rate of 18% per year from April 18, 2015 to March 18, 2018 for $550,000. In addition to the principal and interest awarded of $1,595,000, the Company was also awarded its attorneys’ fees and arbitration fees. The Company has not collected on the award as of the filing date of this report.

 

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 consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

 

NOTE 3.

CASH AND CASH EQUIVALENTS – RESTRICTED CASH

 

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that total to the same 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 Note 6.

 

 

NOTE 4.

NOTES AND OTHER RECEIVABLES

 

 

Notes and Other Receivables 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.

 

We filed a Demand for Arbitration against WGP on April 7, 2017. On January 18, 2018, the arbitration panel awarded the Company $1,045,000 plus interest at the rate of 18% per year from April 18, 2015 to March 18, 2018 for $550,000. In addition to the principal and interest awarded of $1,595,000, the Company was also awarded its attorneys’ fees and arbitration fees. The Company has not collected on the award as of the filing date of this report

 

 

 

NOTE 5.

LAND HELD FOR SALE

 

On July 31, 2014, the Company purchased a five-acre parcel of land located at 4200 Monaco Street, Denver, Colorado for $2,250,000. The property was 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 year ended September 30, 2018 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 6.

NOTES PAYABLE

 

Unrelated

 

The Company maintained a loan secured by a first lien on the five-acre parcel of land in Denver. During the year ended September 30, 2018, the land was sold and the related loan balance of $990,000 was repaid. See Note 5.

 

On August 25, 2017, we entered into a Promissory Note with an unrelated party that provides financing of up to $150,000, of which the Company borrowed $9,677 and $80,000 during the years ended September 30, 2018 and 2017, respectively. The note bore interest at 12% per year and was due on May 31, 2018. A total payment of $89,677 was made during the year ended September 30, 2018. As of September 30, 2018, the Company had a balance borrowed of $0 and accrued interest on the load payable was $0. Interest expense was $3,142 and $1,255 for the years ended September 30, 2018 and 2017, respectively.

 

Convertible loans

 

On October 5, 2017, the Company borrowed $128,000 from an unrelated party. The loan bore interest at a rate of 12% per year and was due and payable on October 5, 2018. At any time on or before April 5, 2018 the Company could prepay the loan by paying the Lender the outstanding loan principal and accrued interest plus premiums ranging from 15% to 35%. The Company incurred debt issuance costs of $3,000 which was reflected as a debt discount. As the loan was fully repaid on April 5, 2018, no beneficial conversion feature has been recognized at September 30, 2018. Amortization expense related to the debt discount was $3,000 and $0 for the years ended September 30, 2018 and 2017, respectively.

 

On November 13, 2017, the Company borrowed $68,000 from an unrelated party. The loan bore interest at a rate of 12% per year and is due on November 13, 2018. At any time on or before May 13, 2018 the Company could prepay the loan by paying the Lender the outstanding loan principal and accrued interest plus premiums ranging from 15% to 35%. The Company incurred debt issuance costs of $3,000 which was reflected as a debt discount. As the loan was fully repaid on May 11, 2018, no beneficial conversion feature has been recognized at September 30, 2018. Amortization expense related to the debt discount was $3,000 and $0 for the years ended September 30, 2018 and 2017 respectively.

 

Construction loan

 

On October 30, 2017 the Company borrowed $800,000 from three unrelated parties (the “Lenders”). The primary use of the loans proceeds were 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 were 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 bore interest at 8% per year and was due and payable on April 30, 2018. At the option 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 was convertible into shares of the Company’s common stock. The number of shares of the Company’s common stock which would be issued upon any conversion will be determined by dividing the amount to be converted by $1.50.

 

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 5, 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. In May 2018 the remaining principal balance of approximately $199,000, plus accrued interest of approximately $13,508, was converted into 141,672 shares of the Company’s common stock. 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 $800,000 and $0 for the years ended September 30, 2018 and 2017, respectively.

 

December 2017 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.

 

The $64,000 paid to the placement agent, 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.

 

During May 2018, a loan principal of $575,000 was converted into 383,333 shares of common stock. In addition, interest payable in the amount of $15,233 was converted into 10,155 shares.

 

All debt discounts are being recognized on a straight-line basis over the terms of the notes. Amortization expense related to the debt discounts were $699,689 and $0 for the years ended September 30, 2018 and 2017, respectively.

 

February 2018 Convertible Note Offerings

 

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.

 

The Company allocated the proceeds between the note and the warrants based on their relative fair values. The relative fair value of the 540,000 warrants was $523,013 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 $286,987 which is recognized as additional paid in capital and a corresponding debt discount.

 

During July 2018, a loan principal of $375,000 was converted into 250,000 shares of common stock. In addition, interest payable in the amount of $14,704 was converted into 9,802 shares.

 

All debt discounts are being recognized on a straight-line basis over the terms of the notes. Amortization expense related to the debt discounts were $722,999 and $0 for the years ended September 30, 2018 and 2017, respectively.

 

 

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 $1,756,646 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 trading volume 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 $756,646, 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 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 $12,742 and $84,998 at September 30, 2018 and 2017, 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 September 30, 2018, the outstanding principal on these notes was $1,756,646, and the unamortized debt premium was $25,673. Amortization of debt premium was $21,364 and $25,614 for the years ended September 30, 2018 and 2017, respectively.

 

 

NOTE 7.

RELATED PARTY TRANSACTIONS

 

Strategic Capital Partners. At September 30, 2018 and 2017, we had outstanding notes payable to SCP, of $1,782,319 and $1,978,683, respectively. On July 14, 2016, $500,000 of the amount owed to SCP was converted into 400,000 shares of our common stock, and the remaining $1,931,646 owed to SCP was divided into two promissory notes. See Notes 6 and 10.

 

Interest expense was $166,424 and $143,917 for the years ended September 30, 2018 and 2017, respectively. Interest payable – related party of $12,742 and $84,998 was included in the accompanying consolidated balance sheets at September 30, 2018 and September 30, 2017, respectively. During 2018, the Company made interest payments of $238,680, principal payments of $175,000, and received no advances. During 2017, the Company made interest payments of $194,358, principal payments of $20,000, and received no advances.

 

As of September 30, 2018, the Company owed SCP $30,000 which is reported under accounts payable in the consolidated balance sheet. The Company agreed to reimburse travel expenses incurred in which the Company primarily benefited.

 

Coastal Compassion. On April 7, 2016, we signed agreements with Bask Inc. (formerly Coastal Compassion Inc) (“BASK”). BASK 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. Bask has agreed to become the initial tenant in our planned MMCC. Tim Keogh, our Chief Executive Officer, is a Board Member of Bask.

 

Pursuant to the agreements, we agreed to provide BASK 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 BASK’s approved dispensary and cultivation center in Fairhaven, MA. For a three- year period beginning April 1, 2016, we agreed to consult with BASK in the design, construction and operation of the Fairhaven facility. BASK 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 BASK relating to the development and lease terms of the MMCC, the actual lease agreement with BASK has not been finalized or approved by the DPH. We will need to secure significant capital to provide the financing to BASK.

 

 

On August 15, 2018, which was 6-months after the first sales, the Company combined the construction and working capital advances of $129,634 and accrued interest of $44,517 with a payment schedule created for the 5 years with 18% interest as stipulated in the original agreement. As of September 30, 2018, there is additional accrued interest of $2,612.

 

As of September 30, 2017, we have provided financing to BASK of $125,327, which includes construction and working capital advances of $119,635, and accrued interest of $5,692.

 

 

NOTE 8.

EARNINGS PER SHARE

 

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

 

 

 

As of September 30, 2018, we have excluded 150,000 of stock options, 9,478,650 of warrants and 440,000 of convertible notes outstanding from the computation of diluted net loss per share since the effects are anti-dilutive. As of September 30, 2017, we have excluded 1,305,000 of stock options and 10,166,000 of warrants from the computation of diluted net loss per share since the effects are anti-dilutive.

 

 

NOTE 9.

INCOME TAXES

 

Deferred income taxes arise from the temporary differences between financial statement and income tax recognition of net operating losses and other items. As of September 30, 2018, the Company has adjusted the deferred tax benefit as the federal tax rates will decrease from 34% to 21%. Loss carryovers are limited under the Internal Revenue Code should a significant change in ownership occur.  The Company accounts for income taxes pursuant to ASC Topic 740.

 

Deferred income taxes arise from the temporary differences between financial statement and income tax recognition of net operating losses and other items. Loss carryovers are limited under the Internal Revenue Code should a significant change in ownership occur.

 

The components of the deferred income tax assets and liabilities arising under ASC Topic 740 were as follows:

 

 

 

The types of temporary differences between the tax basis of assets and their financial reporting amounts that give rise to a significant portion of the deferred assets and liabilities are as follows:

 

 

At September 30, 2018 and September 30, 2017, the Company had approximately and $6,743,134 and $4,370,404 respectively, in unused federal net operating loss carryforwards, which begin to expire principally in the year 2034. A deferred tax asset for the years ended September 30, 2018 and 2017, respectively, of approximately $436,270 and $1,619,672 resulting from the loss carryforwards and other temporary differences and has been offset by a 100% valuation allowance. The change in the valuation allowance for the period ended September 30, 2018 and September 30, 2017 was approximately $(492,716) and $497,018.

 

A reconciliation of the U.S. statutory federal income tax rate to the effective tax rate is as follows:

 

 

The Company’s income tax filings are subject to audit by various taxing authorities. The Company’s open audit periods are September 30, 2016, 2017, and 2018. In evaluating the Company’s provisions and accruals, future taxable income, and reversal of temporary differences, interpretations and tax planning strategies are considered. The Company believes its estimates are appropriate based on current facts and circumstances.

 

 

NOTE 10.

EQUITY

 

Preferred Stock

 

The Company has authorized 20,000,000 shares of $.0001 par value preferred stock. No preferred shares were outstanding at September 30, 2018 and 2017.

 

Common Stock

 

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. Stock issuance costs of $193,726 were netted against the proceeds from this placement. 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.

 

On March 21, 2017, we issued 50,000 shares of the Company’s common stock related to the exercise of 50,000 options and received cash proceeds of $37,500.

 

 

During the year ended September 30, 2017, we sold 185,000 Units at a price of $2.00 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 V Warrant. Each Series V Warrant allows the Holder to purchase one share of our common stock at a price of $5.00 per share at any time on or before May 18, 2021. The relative fair value of the warrants issued was approximately 48% of the proceeds received. The offering provided us with $370,000 in gross proceeds and the potential for an additional $925,000 in proceeds with the exercise of the Series V Warrants. As of December 31, 2018, no shares of common stock had been issued in exchange for the Series V Warrants.

 

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 began on February 14, 2018.

 

During the year ended September 30, 2018, the Company submitted Put Notices for a total of 447,801 shares for $1,222,412 in cash.

 

During the year ended September 30, 2018, the Company converted debt and interest of $1,192,445 into 794,962 shares of common stock as described in Note 6.

 

During year ended September 30, 2018, the Company issued 25,000 shares of common stock and received $18,750 as a result of the exercise of stock options. These options were fully vested and expensed at the time of exercise.

 

During the year ended September 30, 2018 the Company issued 1,473,000 shares of common stock and received $4,044,000 less the commission of $229,140 as a result of the exercise of outstanding warrants.

 

Shares Issued to Officer

 

In connection with an employment agreement described in Note 11, SCP, the Company's largest shareholder, sold 1,200,000 shares of the Company's common stock to Mr. Keogh at a price of $0.001 per share. The estimated fair market value of the stock was $0.75 per share based the then current Private Placement Memorandum in place resulting in an aggregate stock based compensation of $898,800 for the difference between the estimated fair market value of $0.75 and the purchase price of $0.001 per share. As the Company expects the shares to be earned over the vesting period, the Company will amortize the entire amount to stock based compensation in the Company's consolidated statement of operations over the vesting period. Stock based compensation expense for these shares was $0 and $37,450 for the years ended September 30, 2018 and 2017, respectively. As of September 30, 2018, there was no unrecognized stock based compensation expense associated with this award. As of September 30, 2018, all shares have vested.

 

Shares Issued to Lessor

 

As described in Note 10, on October 17, 2016, 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.

 

 

Stock Options

 

Options Issuances in 2018

 

There were no stock options granted in 2018.

 

Options Issuances in 2017

 

On August 18, 2017, our board of directors adopted a stock incentive plan (“the plan”) that provides for the grant of Incentive Stock Options, Non-Qualified Stock Options or Stock Bonuses to persons who are employees of the Company, employees of subsidiaries of the Company, directors, officers, and consultants. Under the plan, the Company may grant up to 1,500,000 options, each to purchase one share of common stock, subject to an exercise price and vesting schedule to be established by the board of directors at the time of the grant. On August 18, 2017, the Company awarded a total of 150,000 options to four consultants at an exercise price of $2.50 per share under the plan. The options vested immediately and can be exercised at any time on or before August 21, 2021. The fair value of the options was established using the Black Scholes option pricing model using the following assumptions:

 

●

Risk-free interest rate – 1.62 percent

●

Expected term – 4.0 years

●

Volatility – 179 percent

 

As these options were fully vested at grant date, the full value of $222,988 was recognized immediately as stock based compensation expense and no further expense will be recognized associated with these awards. As of December 31, 2018, 25,000 shares have been exercised.

 

The following table shows the stock option activity for the years ended September 30, 2018 and 2017: 

 

 

 

Stock based compensation expense related to the options was $0 and $222,988 for the years ended September 30, 2018 and 2017, respectively. At September 30, 2018, there is no remaining unrecognized stock-based compensation associated with stock options. During the years ended September 30, 2018 and 2017, we received proceeds of $18,750 and $37,500, respectively, from stock option exercises.

 

Warrants

 

Warrant Issuances in 2017

 

During the year ended September 30, 2017, we sold 185,000 Units at a price of $2.00 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 V Warrant. Each Series V Warrant allows the Holder to purchase one share of our common stock at a price of $5.00 per share at any time on or before May 18, 2021. The relative fair value of the warrants issued was approximately 48% of the proceeds received. The offering provided us with $370,000 in gross proceeds and the potential for an additional $925,000 in proceeds with the exercise of the Series V Warrants.

 

 

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.

 

As described in Note 11, on October 17, 2016, 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.

 

Warrant Issuances in 2018

 

As disclosed in Notes 6 and 11, the Company issued warrants to purchase up to 2,040,000 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 – 157% to 176%

 

●

Risk-free rate – 1.73% to 2.68%

 

●

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 6.

 

During the year ended September 30, 2018, the Company issued 200,000 shares from the exercise of warrants for a value of $225,000.

 

On November 7, 2016 the Company sold 2,000,000 units to a group of investors in a private offering. Each unit consisted of one share of the Company’s common stock and one Series I Warrant. Each Series I Warrant entitles the holder to purchase one share of the Company’s common stock at a price of $3.00 per share at any time on or before November 4, 2020. To encourage holders to exercise their Series I Warrants, the Company agreed to issue one Series IX Warrant to each person that exercised a Series I warrant on or before July 10, 2018. Each Series IX Warrant is exercisable at a price of $1.00 per share at any time on or before July 10, 2021.

 

As of July 10, 2018, a total of 1,273,000 Series I Warrants were exercised and the Company issued 1,273,000 shares of its common stock (as a result of the exercise of the Series I Warrants) and 1,273,000 Series IX Warrants to the persons that exercised the Series I Warrants. The Company raised $3,819,000 in equity through the exercise of 1,273,000 warrants at $3.00 per share. Stock issuance costs of $229,140 were netted against the proceeds from this placement.  The Company granted 63,650 warrants to GVC Capital LLC, the Solicitation Agent for the offering. The warrants issued to GVC are exercisable at a price of $1.00 per share at any time on or before July 10, 2023.

 

 

The following table shows the warrant activity for the years ended September 30, 2018 and 2017: 

 

 

 

 

 

NOTE 11.

COMMITMENTS AND CONTINGENCIES

 

Officer Employment Agreement. On March 25, 2014, the Company entered into an employment agreement with Mr. Keogh. The agreement: (i) has an initial term of three years; (ii) requires that Mr. Keogh devote at least 50% of his time to the Company and; (iii) provides that the Company will pay Mr. Keogh $12,000 per month during the term of the agreement. In connection with this employment agreement the Company granted Mr. Keogh shares of common stock and options.  See Note 10. This agreement has expired but the terms are continuing on a month to month basis.

 

MMCC. On January 14, 2015, we 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. We plan to develop the property as the MMCC. Plans for the 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. We paid the seller $100,000 upon the signing of the agreement which amount will be applied toward the purchase price at the closing.

 

Between August 2015 and September 2016, there were several amendments to the Agreement to extend the closing date to October 14, 2016. As consideration for the extensions, the Company, at closing, agreed to increase the purchase price to $4,325,000 and paid the seller $725,000, which was be applied to the purchase price of the land if and when the Company closes on this transaction. As of September 30, 2016, the Company had paid $925,000 that was to be applied to the purchase price of the land at closing. On October 17, 2016, the Company closed on the land purchase via a sales-leaseback transaction. See ‘Operating Leases’ section below for additional information.

 

Operating Leases 

 

Land

 

On October 17, 2016, the Company closed the acquisition of the 52.6-acre parcel of undeveloped land in Freetown, Massachusetts. The deposits of $925,000 previously paid by the Company to the seller, 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 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 accrued, with all accrued lease payments paid to MMP on April 17, 2017. On April 17, 2017, the Company reimbursed 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 (6) months to obtain $2.6 million in capital funding for the construction of the first phase building. In the event that the Company was unable to raise these funds within the six (6) month period, the Company had an additional six (6) month period to do so; provided, that the Company has paid accrued lease payments and closing costs. If the Company was then unable to raise these funds on or before twelve (12) months from October 17, 2016, the lease would terminate. 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 warrants to purchase up to 100,000 shares of Common Stock at an exercise price of $1.50 per share. The warrant can be exercised at any time on or after October 17, 2017 and on or before October 17, 2022. In February and April, 2018, the lease agreement was amended to provide that the Company will have until 20 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 at any time on or before October 17, 2022. The Company recognized an expense of $432,787 during the year ended September 30, 2018, representing the entire grant date fair value of the warrants issued for the above amendments.

 

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 – 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, which includes the amortization related to the prepaid land lease, was $399,459 and $506,765 for the years ended September 30, 2018 and 2017, respectively.

 

Office space

 

In January 2018 the Company's offices moved to 1550 Wewatta St, Denver, CO 80202. The Company leases this new space on a month-to-month basis at a rate of $1,230 per month. The lease expense was $24,280 and $35,610 for the years ended September 30, 2018 and 2017, respectively.

 

Automobiles

 

The Company leases an automobile under an operating lease commencing October 4, 2014 for 39 months at $611 per month. The lease expense was $2,344 and $7,390 for the year ended September 30, 2018 and 2017, respectively.  

 

 

At September 30, 2018, the future rental payments required under operating leases are as follows:

 

 

 

 

 

NOTE 12.

SUBSEQUENT EVENTS

 

Common Stock

As part of the existing agreement with MSC, on November 5, 2018 and December 11, 2018, the Company submitted Put Notices on the Equity Line for a combined total of 311,816 shares for $649,454 in cash.

 

Subsequent to year end, the Company issued 333,000 shares of common stock from the exercise of warrants for a value of $395,500.

 

In October 2018, the Company converted debt and interest of $46,992 into 31,328 shares of common stock. This debt was included in the outstanding debt disclosed in Note 6.