AmeriCann, Inc. - Quarter Report: 2018 December (Form 10-Q)

 

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		December 31, 2018				September 30, 2018
Assets
Current Assets:
Cash and cash equivalents		$	71,817			$	198,144
Restricted cash			4,435,085				3,818,805
Current portion of prepaid land lease			57,959				57,959
Prepaid expenses and other current assets			7,320				7,470
Current portion of note receivable - related party			24,683				-
Total current assets			4,596,864				4,082,378
Construction in progress			1,708,115				1,681,382
Furniture and equipment (net of depreciation of $461 and $4,827)			2,303				5,794
Notes and other receivables (net of allowance of $977,770)			783,905				783,905
Note receivable - related party			146,486				176,764
Prepaid land lease and related deposits, net of current portion			2,709,598				2,724,088
Security deposit and other assets			3,110				3,110
Total assets		$	9,950,381			$	9,457,421
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses		$	59,627			$	268,065
Related party payables			-				-
Interest payable (including $219 and $12,742 to related parties)			44,491				46,605
Other payables			5,025				8,906
Notes payable (net of discount of $0 and $138,750)			615,000				521,250
Notes payable - related party (inclusive of premium of $20,332 and $0)			1,776,978				-
Total current liabilities			2,501,121				844,826
Notes payable - related party (inclusive of premium of $0 and $25,673)			-				1,782,319
Total liabilities			2,501,121				2,627,145
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; 22,782,907 and 21,106,706 shares issued and outstanding as of December 31, 2018 and September 30, 2018, respectively			2,279				2,211
Additional paid in capital			21,095,030				19,937,606
Accumulated deficit			(13,648,049	)			(13,109,541	)
Total stockholders' equity			7,449,260				6,830,276
Total liabilities and stockholders' equity		$	9,950,381			$	9,457,421

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		Three months ended December 31,
		2018				2017
Revenues:
Consulting fees		$	-			$	-
Total revenues			-				-
Operating expenses:
Advertising and marketing			16,856				962
Professional fees			128,933				151,987
General and administrative expenses			212,112				434,862
Total operating expenses			357,901				587,811
Loss from operations			(357,901	)			(587,811	)
Other income (expense):
Interest income			7,672				8,077
Interest expense			(151,388	)			(754,379	)
Other income (expense)			(3,030	)			(2,861	)
Interest expense - related party			(33,861	)			(37,390	)
Total other income (expense)			(180,607	)			(786,553	)
Net loss		$	(538,508	)		$	(1,374,364	)
Basic and diluted loss per common share		$	(0.02	)		$	(0.07	)
Weighted average common shares outstanding			22,568,375				19,366,000

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																		Additional
		Preferred Stock								Common Stock								Paid In				Accumulated
		Shares				Amount				Shares				Amount				Capital				Deficit				Total
Balances, September 30, 2017			-			$	-				19,366,000			$	1,937			$	10,959,188			$	(8,676,825	)		$	2,284,300
Stock-based compensation expense			-				-				-				-				171,307				-				171,307
Benefical conversion feature and warrants			-				-				-				-				1,487,438				-				1,487,438
Net loss			-				-				-				-				-				(1,374,364	)			(1,374,364	)
Balances, December 31, 2017			-			$	-				19,366,000			$	1,937			$	12,617,933			$	(10,051,189	)		$	2,568,681

																		Additional
		Preferred Stock								Common Stock								Paid In				Accumulated
		Shares				Amount				Shares				Amount				Capital				Deficit				Total
Balances, September 30, 2018			-			$	-				22,106,763			$	2,211			$	19,937,606			$	(13,109,541	)		$	6,830,276
Stock issued for cash			-				-				311,816				31				649,969				-				650,000
Conversion of debt			-				-				31,328				3				46,989				-				46,992
Stock issued for warrants exercised, net			-				-				308,000				31				395,469				-				395,500
Stock issued for services			-				-				25,000				3				64,997				-				65,000
Net loss			-				-				-				-				-				(538,508	)			(538,508	)
Balances, December 31, 2018			-			$	-				22,782,907			$	2,279			$	21,095,030			$	(13,648,049	)		$	7,449,260

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		Three Months Ended December 31,
		2018				2017
Cash flows from operating activities:
Net loss		$	(538,508	)		$	(1,374,364	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			461				3,739
Stock based compensation and option expense			-				171,307
Stock issued for services			65,000				-
Loss on disposal of land			-				2,861
Loss on disposal of fixed assets			3,030				-
Amortization of equity instruments issued to lessor			9,865				14,490
Amortization of debt discount/(premium)			133,409				708,645
Noncash interest income			-				(8,077	)
Changes in operating assets and liabilities:
Prepaid expenses			150				-
Accounts payable and accrued expenses			(203,813	)			(178,215	)
Interest payable			(10,531	)			50,682
Interest payable - related party			10,409				(21,598	)
Other payables			(3,881	)			1,891
Net cash flows used in operations			(534,409	)			(628,639	)
Cash flows from investing activities:
Additions to construction in progress			(26,733	)			(1,153	)
Payments received on notes receivable			5,595				-
Net cash flows used in investing activities			(21,138	)			(1,153	)
Cash flows from financing activities:
Common stock issued for cash, net			650,000				-
Proceeds from note payable, net of financing costs			-				1,726,000
Proceeds from the exercise of warrants			395,500				-
Net cash flows provided by financing activities			1,045,500				1,726,000
Net increase in cash, cash equivalents, and restricted cash			489,953				1,096,208
Cash, cash equivalents, and restricted cash at beginning of period			4,016,949				1,627
Cash, cash equivalents, and restricted cash at end of period		$	4,506,902			$	1,097,835
Supplementary Disclosure of Cash Flow Information:
Cash paid for interest		$	51,959			$	54,040
Cash paid for income taxes		$	-			$	-
Proceeds from sale of land used to satisfy debt obligations		$	-			$	1,608,451
Debt discount related to warrants issued with debt and Beneficial Conversion Feature		$	-			$	1,536,000
Shares issued for converstion of debt and accrued interest		$	46,992			$	-

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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 design, develop, lease and operate state-of-the-art cultivation, processing and manufacturing facilities for licensed cannabis businesses throughout the United States.

 

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

 

Basis of Presentation

 

The (a) balance sheet as of September 30, 2018, which has been derived from audited financial statements, and (b) the unaudited financial statements as of and for the three months ended December 31, 2018 and 2017, 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 15, 2019. 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 2018 as reported in the Form 10-K have been omitted.

 

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

 

Restricted Cash

 

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

 

 

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

 

Recent 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 will be October 1, 2019, 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 adopted the changes effective October 1, 2018 and the changes did not have a material impact 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 adopted the changes effective October 1, 2018 and the changes did not 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 adopted the changes effective October 1, 2018 and the changes did not have a material impact 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 adopted ASU No. 2014-09 effective October 1, 2018 and the adoption did not 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 adopted Topic 606, effective October 1, 2018 and the adoption did not have a material impact on its revenue recognition as it pertains to current revenue streams.

 

 

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

 

 

 

NOTE 2. GOING CONCERN 

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. The Company had an accumulated deficit of $13,648,049 and $13,109,541 at December 31, 2018 and September 30, 2018, respectively, and had a net loss of $538,508 for the three months ended December 31, 2018. Further, the amount due from Wellness Group Pharms (“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 generate revenue, 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 15, 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. Although there are no indicators to suggest that the amounts due from WGP will not be collectible, 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 revenue provide the opportunity for the Company to continue as a going concern. While the Company believes in the viability of its strategy to generate revenue 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 revenue. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

 

 

NOTE 3. NOTES AND OTHER RECEIVABLES

 

Notes and other receivables as of December 31, 2018 and September 30, 2018, consisted of the following: 

 

 

 

The notes and other receivables from WGP are classified as long term due to ongoing disputes between the Company and WGP. The Company recently won an arbitration hearing against WGP, but will not reclassify the amounts from long-term until such time that actual payment is made or becomes known.

 

 

 

NOTE 4.  NOTES PAYABLE

 

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 were due and payable on December 31, 2018. On December 31, 2018, the notes were extended to mature on December 31, 2019. 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.

 

The placement agent for the offering 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 in the principal amount 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 $51,749 and $0 for the three months ended December 31, 2018 and 2017, respectively. 

 

February 2018 Convertible Note Offering

 

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. On December 31, 2018, the notes were extended to mature on December 31, 2019. 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, loans in the principal amount 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.

 

In October 2018, a loan in the principal amount of $45,000 was converted into 30,000 shares of common stock. In addition, interest payable in the amount of $1,992 was converted into 1,328 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 $87,001 and $0 for the three months ended December 31, 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 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 $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 payments received from the sale, lease or commercialization of the property in Denver, and any amounts received from WGP, will be applied to the principal amount of the note. Otherwise, all unpaid principal and interest will be due on December 31, 2019.

 

Accrued interest on these notes payable was $219 and $12,742 at December 31, 2018 and September 30, 2018, respectively. In connection with the debt modification agreement, we issued SCP warrants to purchase 800,000 shares of our common stock, exercisable at a price of $1.50 per share, and warrants to purchase an additional 800,000 shares of common stock, exercisable at a price of $3.00 per share. Both sets of warrants expire on June 30, 2020. We allocated the relative fair values to the warrants, stock options, and convertible debt, as determined by the Black Scholes option pricing model. Based on the Black Scholes option pricing model, a net debt premium of $72,651 was allocated to the warrants which are reflected in additional paid-in-capital. The debt premium is being amortized on a straight-line basis over the term of the notes. At December 31, 2018, the outstanding principal on these notes was $1,756,646, and the unamortized debt premium was $20,332. Amortization of debt premium was $5,341 and $5,341 for the three months ended December 31, 2018 and 2017.

 

 

 

NOTE 5. RELATED PARTY TRANSACTIONS

 

Strategic Capital Partners. At December 31, 2018 and September 30, 2018, we had outstanding notes payable to SCP of $1,776,978 and $1,782,319, respectively.

 

Interest expense was $33,861 and $37,390 for the three months ended December 31, 2018 and 2017, respectively. Interest payable – related party of $219 and $12,742 was included in the accompanying consolidated balance sheets at December 31, 2018 and September 30, 2018, respectively.  We made interest payments of $51,726 during the three months ended December 31, 2018.

  

In October 2018, the Company paid SCP $30,000 to reimburse for travel expenses incurred on the Company's behalf.

 

Bask, Inc. 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 Final Certificate of Registration cultivate, process and sell medical cannabis by the Massachusetts Cannabis Control Commission (formerly Massachusetts Department of Public Health). BASK has agreed to become the initial tenant in our planned MMCC.

 

Pursuant to the agreements, we agreed to provide BASK with financing for construction and working capital required for BASK’s approved dispensary and cultivation center in Fairhaven, MA. The financing accrued interest of 18% until 6-months after BASK opened its dispensary at which point the financing would be repaid over a five year term at 18%.

 

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. The outstanding balance was $171,169 and $176,764 as of December 31, 2018 and September 30, 2018, respectively. As of December 31, 2018, there is additional interest income of $7,672.

 

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. 

 

 

Tim Keogh, our Chief Executive Officer, has been a Board Member of BASK since August of 2013. On November 7, 2012, Massachusetts voters approved a measure to legalize medical marijuana. At that time, Massachusetts law required Registered Marijuana Dispensaries (RMDs) to form and operate as nonprofit corporations pursuant to Massachusetts General Law (M.G.L.) .c.180.

 

In October 2017, the Massachusetts Department of Public Health released guidance outlining the steps by which a nonprofit RMD may convert to a for-profit entity. The guidance provides a straight-forward process to follow in order to complete the required paperwork with the Secretary of State’s Office. 

 

Existing RMDs with a Final Certificate of Registration may complete the non-profit conversion documents provided by the Secretary of State, submit the completed conversion documents to the RMD Program for certification, and then file the certified documents with the Secretary of State. The non-profit conversion may not occur, however, in the event that Bask, Inc. converts to a for-profit entity, Mr. Keogh would own less than 10% of the Bask, Inc. for-profit entity.

 

 

 

NOTE 6. LOSS PER SHARE

 

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

 

 

 

As of December 31, 2018, we have excluded 150,000 of stock options and 9,170,650 of warrants from the computation of diluted net loss per share since the effects are anti-dilutive. As of December 31, 2017, we have excluded 1,305,000 of stock options and 11,566,000 of warrants from the computation of diluted net loss per share since the effects are anti-dilutive.

 

 

 

 

NOTE 7.  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.   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 previously announced acquisition of a 52.6-acre parcel of undeveloped land in Freetown, Massachusetts. The deposits of $925,000 previously paid by the Company to the seller, Boston Beer Company (“BBC”), were credited against the total purchase price of $4,475,000. The remaining balance of $3,550,000 was paid to BBC by Massachusetts Medical Properties, LLC (“MMP”). The property is located approximately 47 miles southeast of Boston. The Company plans to develop the property as the Massachusetts Medical Cannabis Center (the “MMCC”). Plans for the MMCC include the construction of sustainable greenhouse cultivation, processing, and infused product facilities that will be leased or sold to Registered Marijuana Dispensaries under the Massachusetts Medical Marijuana Program.

 

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

 

 

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

 

Between October 17, 2016 and April 17, 2017, the monthly lease payments 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 $0 during the three months ended December 31, 2018 related to those warrants. In July 2018, the Company fulfilled the $2.6 million capital funding commitment.

 

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 and office space, was $99,865 and $108,625 for the three months ended December 31, 2018 and 2017. At December 31, 2018, the future rental payments required under this lease are $256,122 for the remainder of fiscal 2019, $341,496 for fiscal years 2020 through 2023, and $14,684,528 thereafter.

 

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. Lease expense for office space was $3,750 for the three months ended December 31, 2018 and $8,760 for three months ended December 31, 2017.

 

 

 

NOTE 8.  SHAREHOLDERS’ EQUITY

 

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

 

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

 

 

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

 

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

 

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

 

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

 

The equity line agreement has a term of 18 months, which began on February 14, 2018.

 

During the three months ended December 31, 2018, we submitted Put Notices for a total of 311,816 shares for $650,000 in cash.

 

In October 2018, the Company issued 65,000 shares for stock in exchange for consulting services.

 

Restricted Stock Awards. We use restricted stock awards to compensate certain key executives and other individuals.  At December 31, 2018, we had no outstanding unvested restricted stock awards. Stock-based compensation expense associated with restricted stock awards was $0 and $0 for the three months ended December 31, 2018 and 2017, respectively. As of December 31, 2018, there was no remaining unrecognized stock-based compensation associated with restricted stock awards. 

 

Stock Options. There was no stock option activity for the quarter ended December 31, 2018. Stock option details are as follows: 

 

 

There was no stock-based compensation expense associated with stock options for the three months ended December 31, 2018 and 2017. At December 31, 2018, there is no remaining unrecognized stock-based compensation associated with stock options.

 

Warrants. Warrant activity as of and for the three months ended December 31, 2018 is as follows: 

 

 

During the three months ended December 31, 2018, the Company issued 308,000 shares from the exercise of warrants for total proceeds of $395,500.

 

 

 

NOTE 9. SUBSEQUENT EVENTS

 

As part of the existing agreement with MSC, on January 9, 2019, the Company submitted Put Notices on the Equity Line for a total of 95,708 shares for $170,000 in cash. 

 

In February 2019, the Company converted debt of $30,000 into 20,000 shares of common stock. This debt was included in the outstanding debt disclosed in Note 4.

 

 

 

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