AmeriCann, Inc. - Quarter Report: 2019 June (Form 10-Q)

 

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q 

 

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

 

For the quarterly period ended June 30, 2019

 

OR

 

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

 

For the transition period from __________________ to _________________

 

Commission file number: 001-35902

 

AMERICANN, INC

(Exact name of registrant as specified in its charter)

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None	N/A	N/A

 

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

 

Indicate by a checkmark whether the registrant has submitted electronically every Interactive Date File required to be submitted 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 such files). Yes ☑ No ☐

 

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

 

Large accelerated filer	☐		Accelerated filer	☐
Non-accelerated filer	☑		Smaller reporting company	☑
			Emerging growth company	☐

 

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

 

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

Yes ☐ No ☑ 

 

As of August 9, 2019, the registrant had 23,410,086 outstanding shares of common stock.

 

 

 

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		June 30, 2019				September 30, 2018
Assets
Current Assets:
Cash and cash equivalents		$	3,437			$	198,144
Restricted cash			3,052				3,818,805
Current portion of prepaid land lease			57,959				57,959
Prepaid expenses and other current assets			2,500				7,470
Current portion of note receivable - related party			26,990				-
Total current assets			93,938				4,082,378
Construction in progress			6,387,566				1,681,382
Furniture and equipment (net of depreciation of $921 and $4,827)			1,842				5,794
Notes and other receivables (net of allowance of $977,770)			783,905				783,905
Note receivable - related party			127,789				176,764
Prepaid land lease and related deposits, net of current portion			2,680,618				2,724,088
Security deposit and other assets			3,110				3,110
Total assets		$	10,078,768			$	9,457,421
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses		$	552,328			$	268,065
Related party payables			26,783				-
Interest payable (including $25,993 and $12,742 to related parties)			55,500				46,605
Other payables			17,754				8,906
Notes payable (net of discount of $0 and $138,750)			615,490				521,250
Notes payable - related party (inclusive of premium of $9,650 and $0)			1,766,296				-
Total current liabilities			3,034,151				844,826
Notes payable - related party (inclusive of premium of $0 and $25,673)			-				1,782,319
Total liabilities			3,034,151				2,627,145
Commitments and contingencies - see Note 7
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; 23,264,356 and 22,106,763 shares issued and outstanding as of June 30, 2019 and September 30, 2018, respectively			2,327				2,211
Additional paid in capital			21,803,504				19,937,606
Accumulated deficit			(14,761,214	)			(13,109,541	)
Total stockholders' equity			7,044,617				6,830,276
Total liabilities and stockholders' equity		$	10,078,768			$	9,457,421

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		Three Months Ended June 30,								Nine Months Ended June 30,
		2019				2018				2019				2018
Revenues:
Consulting fees		$	-			$	-			$	-			$	-
Total revenues			-				-				-				-
Operating expenses:
Advertising and marketing			37,832				9,300				98,878				13,049
Professional fees			273,621				67,819				572,864				337,934
General and administrative expenses			199,058				357,224				716,261				1,149,678
Total operating expenses			510,511				434,343				1,388,003				1,500,661
Loss from operations			(510,511	)			(434,343	)			(1,388,003	)			(1,500,661	)
Other income (expense):
Interest income			7,150				15,453				22,239				40,839
Interest expense			(19,449	)			(830,204	)			(182,573	)			(2,009,192	)
Other income (expense)			-				-				(3,030	)			(2,861	)
Interest expense - related party			(33,435	)			(36,926	)			(100,306	)			(110,777	)
Total other income (expense)			(45,734	)			(851,677	)			(263,670	)			(2,081,991	)
Net loss		$	(556,245	)		$	(1,286,020	)		$	(1,651,673	)		$	(3,582,652	)
Basic and diluted loss per common share		$	(0.02	)		$	(0.07	)		$	(0.07	)		$	(0.18	)
Weighted average common shares outstanding			23,005,753				19,447,377				22,858,359				19,396,514

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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			-								-				-				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
Stock issued for options exercised			-				-				25,000				3				18,747				-				18,750
Stock-based compensation			-				-				-				-				135,354				-				135,354
Benefical conversion feature and warrants			-				-				-				-				810,000				-				810,000
Net loss			-				-				-				-				-				(922,268	)			(922,268	)
Balances, March 31, 2018			-			$	-				19,391,000			$	1,940			$	13,582,034			$	(10,973,457	)		$	2,610,517
Stock-based compensation			-																126,126				-				126,126
Stock issued for cash											304,054				30				922,382								922,412
Conversion of debt											535,161				54				802,687								802,741
Stock issued for warrants exercised			-				-				200,000				20				224,980				-				225,000
Net loss			-				-				-				-				-				(1,286,020	)			(1,286,020	)
Balances, June 30, 2018			-			$	-				20,430,215			$	2,044			$	15,658,209			$	(12,259,477	)		$	3,400,776

																		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, net			-				-				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
Stock issued for cash, net			-				-				176,609				17				303,984				-				304,001
Conversion of debt			-				-				20,000				2				29,998				-				30,000
Stock issued for warrants exercised, net			-				-				25,000				3				24,997				-				25,000
Net loss			-				-				-				-				-				(556,920	)			(556,920	)
Balances, March 31, 2019			-			$	-				23,004,516			$	2,301			$	21,454,009			$	(14,204,969	)		$	7,251,341
Stock issued for cash, net			-				-				81,826				8				109,992				-				110,000
Conversion of debt			-				-				123,014				12				184,509				-				184,521
Stock issued for warrants exercised, net			-				-				55,000				6				54,994				-				55,000
Net loss			-				-				-				-				-				(556,245	)			(556,245	)
Balances, June 30, 2019			-			$	-				23,264,356			$	2,327			$	21,803,504			$	(14,761,214	)		$	7,044,617

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		Nine Months Ended June 30,
		2019				2018
Cash flows from operating activities:
Net loss		$	(1,651,673	)		$	(3,582,652	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			922				11,218
Stock based compensation and option expense			65,000				432,787
Loss on disposal of land			-				2,861
Loss on disposal of fixed assets			3,030				-
Amortization of equity instruments issued to lessor			29,595				28,979
Amortization of debt discount/(premium)			123,217				1,840,745
Changes in operating assets and liabilities:
Interest receivable			-				(40,838	)
Prepaid expenses			4,970				11,990
Accounts payable and accrued expenses			298,138				(536,217	)
Related party payables			26,783				(10,000	)
Interest payable			4,415				27,849
Interest payable - related party			25,993				(71,064	)
Other payables			8,848				(8,997	)
Net cash flows used in operations			(1,060,762	)			(1,893,339	)
Cash flows from investing activities:
Additions to construction in progress			(4,706,184	)			(214,951	)
Payments received on notes receivable			21,985				-
Net cash flows used in investing activities			(4,684,199	)			(214,951	)
Cash flows from financing activities:
Common stock issued for cash, net			1,064,001				922,412
Proceeds from note payable, net of financing costs			230,000				2,536,000
Proceeds from the exercise of warrants			475,500				225,000
Proceeds from the exercise of stock options			-				18,750
Principal payments on notes payable			(35,000	)			(285,677	)
Net cash flows provided by financing activities			1,734,501				3,416,485
Net increase (decrease) in cash, cash equivalents, and restricted cash			(4,010,460	)			1,308,195
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		$	6,489			$	1,309,822
Supplementary Disclosure of Cash Flow Information:
Cash paid for interest		$	129,254			$	322,438
Cash paid for income taxes		$	-			$	-
Non-Cash Investing and Financing Activities:
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			-				2,297,438
Notes payable and interest converted into shares of stock			261,513				802,741

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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.

 

Basis of Presentation

 

The (a) consolidated balance sheet as of September 30, 2018, which has been derived from audited financial statements, and (b) the unaudited consolidated financial statements as of and for the nine months ended June 30, 2019 and 2018, 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 consolidated 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 amounts 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 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.

 

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 $14,761,214 and $13,109,541 at June 30, 2019 and September 30, 2018, respectively, and had a net loss of $556,245 and $1,651,673, for the three and nine months ended June 30, 2019, respectively. 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, an arbitration panel awarded the Company $1,045,000 plus interest of $550,000 from WGP. 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 June 30, 2019 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

 

On May 2, 2019, the Company borrowed $153,000 from an unrelated party. The loan bears interest at a rate of 12% and is due and payable on May 2, 2020. At any time on or before October 29, 2019 the Company may prepay the loan by paying the Lender the outstanding loan principal and accrued interest plus premiums ranging from 15% to 35%. After October 29, 2019, the Company may not repay the loan without the consent of the Lender. At any time after October 29, 2019, the full value of any unpaid principal is convertible into the Company’s common stock at a variable conversion price. The conversion price is equal to: (a) if the market price is greater than or equal to $1.50, the greater of (1) the variable conversion price (defined as market price multiplied by 65 percent) and (2) $1.00, and (b) if the market price is less than $1.50, the lesser of (1) the variable conversion price and (2) $1.00.

 

On May 21, 2019, the Company borrowed $83,000 from an unrelated party. The loan bears interest at a rate of 12% and is due and payable on May 21, 2020. Any amount not paid when due will bear interest at 22%. At any time after November 17, 2019, any unpaid principal is convertible into the Company’s common stock at a conversion price equal to: (a) if the market price is greater than or equal to $1.50, the greater of (1) the variable conversion price (defined as market price multiplied by 65 percent) and (2) $1.00, and (b) if the market price is less than $1.50, the lesser of (1) the variable conversion price and (2) $1.00.

 

The Company recorded debt discounts of $6,000 on the above notes of which $490 was amortized during the nine months ended June 30, 2019.

 

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 February 2019, a loan in the principal amount of $30,000 was converted into 20,000 shares of common stock.

 

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 $645,768 for the nine months ended June 30, 2019 and 2018, 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 January 2019, a loan in the amount of $35,000 was repaid in cash.

 

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.

 

During July 2018, loans in the principal amount of $375,000 were 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 May 2019, loans in the principal amount of $150,000 were converted into 100,000 shares of common stock. In addition, interest payable in the amount of $19,521 was converted into 13,014 shares.

 

In April 2019, loans in the amount of $15,000 were converted to 10,000 shares of common stock.

 

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 $405,000 for the nine months ended June 30, 2019 and 2018, 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 $0 and $12,742 at June 30, 2019 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 June 30, 2019, the outstanding principal on these notes was $1,756,646, and the unamortized debt premium was $9,650. Amortization of debt premium was $16,023 for the nine months ended June 30, 2019 and 2018.

 

NOTE 5. RELATED PARTY TRANSACTIONS

 

Strategic Capital Partners. At June 30, 2019 and September 30, 2018, we had outstanding notes payable to SCP of $1,766,296 and $1,782,319, respectively.

 

Interest expense was $33,435 and $36,926 for the three months ended June 30, 2019 and 2018, respectively; and $100,306 and $110,777 for the nine months ended June 30, 2019 and 2018, respectively. Interest payable – related party of $25,993 and $12,742 was included in the accompanying consolidated balance sheets at June 30, 2019 and September 30, 2018, respectively. We made interest payments of $12,783 during the quarter ended June 30, 2019, and $103,078 during the nine months ended June 30, 2019.

 

During the nine months ended June 30, 2019, the Company incurred $90,000 of consulting expenses with SCP of which approximately $26,800 remains outstanding as of June 30, 2019.

 

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

 

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

  

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 to 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.

 

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.

 

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 by BASK, 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 $154,779 and $176,764 as of June 30, 2019 and September 30^, 2018, respectively. As of June 30, 2019, there is additional interest income of $22,239.

 

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 nine months after generating certain revenues. Although the DPH has approved our agreement with BASK relating to the development and lease terms of the MCCC, 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. 

 

NOTE 6. LOSS PER SHARE

 

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

 

 

As of June 30, 2019, we have excluded 150,000 of stock options and 9,090,650 of warrants from the computation of diluted net loss per share since the effects are anti-dilutive. As of June 30, 2018, we have excluded 180,000 of stock options and 9,415,000 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) had an initial term of three years; (ii) required Mr. Keogh to devote at least 50% of his time to the Company and; (iii) provided that the Company would 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 MMCC 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 was applied toward the purchase price at the closing of the sale of the land.

 

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, agreed to increase the purchase price to $4,325,000 and paid the seller $725,000, which was applied to the purchase price of the land when the property was purchased. 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’ 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. The Company has 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 are 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 nine (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 nine (6) month period, the Company had an additional nine (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 and $0 during the three and nine months ended June 30, 2019, respectively, related to those warrants. The Company recognized an expense an expense of $0 and $171,307 during the three and nine months ended June 30, 2018, respectively. 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 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 for each of the three months ended June 30, 2019 and 2018 and $199,730 for each of the nine months ended June 30, 2019 and 2018. At June 30, 2019, the future rental payments required under this lease are $85,374 for the remainder of fiscal 2019, $341,496 for fiscal years 2020 through 2023, and $14,684,528 thereafter.

 

On June 26, 2019 the expiration date of warrants to purchase 3,640,000 shares of common stock was extended to October 17, 2021.

 

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 $3,801 and $3,690 for the three months ended June 30, 2019 and 2018, respectively and $11,544 and $20,590 for the nine months ended June 30, 2019 and 2018, respectively.

 

 

 

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 the 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 and received $1,222,412 from the sale of the shares to Mountain States.

 

During the nine months ended June 30, 2019, the Company submitted Put Notices for the total of 570,251 shares and received $1,064,001 from the sale of these shares to Mountain States.

 

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

 

Stock Options. There was no stock option activity for the nine months ended June 30, 2019. Stock option details are as follows:

 

 

There was no stock-based compensation expense associated with stock options for the three and nine months ended June 30, 2019 and 2018. At June 30, 2019, there is no remaining unrecognized stock-based compensation associated with stock options.

 

 

Warrants. Warrant activity as of and for the nine months ended June 30, 2019 is as follows:

 

 

During the nine months ended June 30, 2019, the Company issued 388,000 shares upon the exercise of warrants for total proceeds of $475,500.

 

NOTE 9. INCOME TAXES

 

We did not record any income tax expense or benefit for the three or nine months ended June 30, 2019 or 2018. We increased our valuation allowance and reduced our net deferred tax assets to zero. Our assessment of the realization of our deferred tax assets has not changed, and as a result we continue to maintain a full valuation allowance for our net deferred assets as of June 30, 2019 and 2018.

 

As of June 30, 2019, we did not have any unrecognized tax benefits. There were no significant changes to the calculation since September 30, 2018.

 

NOTE 10. SUBSEQUENT EVENTS

 

As part of the existing agreement with MSC, on July 15, 2019, the Company submitted Put Notices on the Equity Line for a total of 65,000 shares for $65,000 in cash. 

 

On August 2, 2019 the Company borrowed $4,000,000 from an unrelated third party. The loan was evidenced by a note which bears interest at the rate of 11% per year, is due and payable on August 1, 2022 and is secured by a first lien on Building 1 at the Company’s Massachusetts Cannabis Center.

 

The note holder also received a warrant which allows the holder to purchase 600,000 shares of the Company’s common stock at a price of $1.50 per share. The warrant will expire on the earlier of (i) August2, 2024 or (ii) twenty days after written notice of the holder that the daily Volume Weighted Average Price of the Company’s common stock was at least $4.00 for twenty consecutive trading days and the average daily volume of trades of the Company’s common stock during the twenty trading days was at least 150,000 shares.

 

As part of the existing agreement with MSC, on August 7, the Company submitted Put Notices on the Equity Line for a total of 80,430 shares for $82,000 in cash.

 

 

 

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