AmeriCann, Inc. - Quarter Report: 2020 June (Form 10-Q)

 

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

 

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

 

For the quarterly period ended June 30, 2020

 

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.)
1555 Blake Street, Unit 502 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 7, 2020, the registrant had 23,504,820 shares of common stock outstanding.

 

 

 

AmeriCann, Inc.

FORM 10-Q

 

TABLE OF CONTENTS

 

			PAGE NO.
PART I   FINANCIAL INFORMATION
	Item 1.	Unaudited Financial Statements:
		Consolidated Balance Sheets as of June 30, 2020 and September 30, 2019	3
		Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2020 and 2019	4
		Consolidated Statements of Changes in Stockholders' Equity for the Nine Months Ended June 30, 2020 and 2019	5
		Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2020 and 2019	6
		Notes to Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
	Item 4.	Controls and Procedures	19
PART II  OTHER INFORMATION
	Item 6.	Exhibits	20
	SIGNATURES		21

 

 

Part I:  FINANCIAL INFORMATION

 

Item 1.      UNAUDITED Financial Statements

 

		June 30, 2020				September 30, 2019
Assets
Current Assets:
Cash and cash equivalents		$	87,140			$	465,843
Restricted cash			511				826,219
Tenant receivable			95,717				11,564
Current portion of prepaid land lease			-				57,959
Prepaid expenses and other current assets			2,500				13,632
Current portion of note receivable - related party			32,270				32,270
Total current assets			218,138				1,407,487
Property, Plant and Equipment, net			7,619,368				7,572,788
Operating lease - right-of-use asset			6,930,865				-
Notes and other receivables (net of allowance of $1,761,675 as of September 30, 2019)			-				-
Note receivable - related party			95,005				116,493
Prepaid land lease and related deposits, net of current portion			-				2,666,129
Security deposit and other assets			-				3,110
Total assets		$	14,863,376			$	11,766,007
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses		$	53,927			$	265,276
Accounts payable - related party			30,000				-
Interest payable (including $13,051 and $12,283 to related parties)			55,199				121,883
Other payables			7,572				9,129
Operating lease liability, short term			7,023				-
Notes payable (net of discounts of $0 and $0)			150,000				385,000
Total current liabilities			303,721				781,288
Notes payable (net of unamortized discounts of $649,412 and $882,603)			3,350,588				3,117,397
Notes payable - related party			581,646				1,756,646
Operating lease liability, long term			4,243,224				-
Total liabilities			8,479,179				5,655,331
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; 23,504,820 shares issued and outstanding as of June 30, 2020 and September 30, 2019			2,351				2,351
Additional paid in capital			24,286,633				24,121,534
Accumulated deficit			(17,904,787	)			(18,013,209	)
Total stockholders' equity			6,384,197				6,110,676
Total liabilities and stockholders' equity		$	14,863,376			$	11,766,007

 

		Three Months Ended June 30,								Nine months ended June 30,
		2020				2019				2020				2019
Revenues:
Rental income - related party		$	146,569			$	-			$	215,950			$	-
Total revenues			146,569				-				215,950				-
Operating expenses:
Advertising and marketing			638				37,832				38,179				98,878
Professional fees			89,778				273,621				320,166				572,864
General and administrative expenses			347,759				199,058				1,197,723				716,261
Recovery of loss provision for doubtful accounts			-				-				(1,761,675	)			-
Total operating expenses			438,175				510,511				(205,607	)			1,388,003
(Loss) income from operations			(291,606	)			(510,511	)			421,557				(1,388,003	)
Other income (expense):
Interest income			5,844				7,150				326,157				22,239
Interest expense			(190,666	)			(19,449	)			(556,721	)			(182,573	)
Other income (expense)			-				-				-				(3,030	)
Interest expense - related party			(13,051	)			(33,435	)			(82,571	)			(100,306	)
Total other income (expense)			(197,873	)			(45,734	)			(313,135	)			(263,670	)
Net (loss) income		$	(489,479	)		$	(556,245	)		$	108,422			$	(1,651,673	)
Basic and diluted (loss) income per common share		$	(0.02	)		$	(0.02	)		$	0.00			$	(0.07	)
Weighted average common shares outstanding			23,504,820				23,005,753				23,504,820				22,858,359

 

		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			-				-				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

		Preferred Stock								Common Stock								Paid In				Accumulated
		Shares				Amount				Shares				Amount				Capital				Deficit				Total
Balances, September 30, 2019			-			$	-				23,504,820			$	2,351			$	24,121,534			$	(18,013,209	)		$	6,110,676
Stock-based compensation			-								-				-				108,522				-				108,522
Net income			-								-				-				-				1,017,985				1,017,985
Balances, December 31, 2019			-			$	-				23,504,820			$	2,351			$	24,230,056			$	(16,995,224	)		$	7,237,183
Stock-based compensation			-								-				-				38,551				-				38,551
Net loss			-								-				-				-				(420,084	)			(420,084	)
Balances, March 31, 2020			-			$	-				23,504,820			$	2,351			$	24,268,607			$	(17,415,308	)		$	6,855,650
Stock-based compensation			-								-				-				18,026				-				18,026
Net loss			-								-				-				-				(489,479	)			(489,479	)
Balances, June 30, 2020			-			$	-				23,504,820			$	2,351			$	24,286,633			$	(17,904,787	)		$	6,384,197

 

		Nine months ended June 30,
		2020				2019
Cash flows from operating activities:
Net income (loss)		$	108,422			$	(1,651,673	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization			334,066				922
Amortization of right of use assets			50,092				-
Recovery of loss provision for doubtful accounts			(1,761,675	)			-
Stock based compensation and option expense			165,099				65,000
Loss on disposal of fixed assets			-				3,030
Amortization of equity instruments issued to lessor			-				29,595
Amortization of debt discount			233,191				123,217
Changes in operating assets and liabilities:
Tenant receivable			(84,153	)			-
Notes and other receivables			1,761,675				-
Prepaid expenses			14,242				4,970
Accounts payable and accrued expenses			(211,349	)			298,138
Operating lease liability			(6,622	)			-
Accounts payable - related party			30,000				26,783
Interest payable			(67,452	)			4,415
Interest payable - related party			768				25,993
Other payables			(1,557	)			8,848
Net cash flows provided by (used in) operations			564,747				(1,060,762	)
Cash flows from investing activities:
Additions to construction in progress			-				(4,706,184	)
Additions to fixed assets			(380,646	)			-
Payments received on notes receivable - related party			21,488				21,985
Net cash flows used in investing activities			(359,158	)			(4,684,199	)
Cash flows from financing activities:
Common stock issued for cash, net			-				1,064,001
Proceeds from note payable, net of financing costs			-				230,000
Proceeds from the exercise of warrants			-				475,500
Payments on note payable - related party			(1,175,000	)			-
Principal payments on notes payable			(235,000	)			(35,000	)
Net cash flows (used in) provided by financing activities			(1,410,000	)			1,734,501
Net decrease in cash, cash equivalents, and restricted cash			(1,204,411	)			(4,010,460	)
Cash, cash equivalents, and restricted cash at beginning of period			1,292,062				4,016,949
Cash, cash equivalents, and restricted cash at end of period		$	87,651			$	6,489
Supplementary Disclosure of Cash Flow Information:
Cash paid for interest		$	472,785			$	129,254
Cash paid for income taxes		$	-			$	-
Non-Cash Investing and Financing Activities:
ROU Asset and operating lease obligation recognized upon adoption of Topic 842		$	6,980,957			$	-
Notes payable and interest converted into shares of stock		$	-			$	261,513

 

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 potential failure to secure funding to properly expand its operations.

 

Basis of Presentation

 

The (a) consolidated balance sheet as of September 30, 2019, which has been derived from audited financial statements, and (b) the unaudited financial statements as of and for the nine months ended June 30, 2020 and 2019, 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 14, 2020. 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 2019 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.

 

Significant Accounting Policies

 

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.

 

Property, Plant and Equipment, net

 

Property and equipment are stated at cost. Depreciation of property and equipment begins in the month following the month when the asset is placed into service and is provided using the straight-line method for financial reporting purposes at rates based on the estimated useful lives of the assets. Estimated useful lives range from three to twenty years. Property, plant and equipment consist of:

 

 

 

Leases

 

Effective October 1, 2019, we adopted Topic 842 using the effective date method. Under this method, periods prior to adoption remain unchanged. We determine if an arrangement is a lease at inception.

 

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Variable lease payments are not included in the calculation of the right-of-use asset and lease liability due to uncertainty of the payment amount and are recorded as lease expense in the period incurred. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

 

Under the available practical expedient, we account for the lease and non-lease components as a single lease component for all classes of underlying assets as both a lessee and lessor. Further, we elected a short-term lease exception policy on all classes of underlying assets, permitting us to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less).

 

Recent Accounting Pronouncements

 

Recently Adopted Standards

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"), which provides guidance requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for substantially all leases, with the exception of short-term leases. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the statement of income. The Company adopted Topic 842 effective October 1, 2019 and elected the package of transition practical expedients for expired or existing contracts, which does not require reassessment of: (1) whether any of the Company’s contracts are or contain leases, (2) lease classification and (3) initial direct costs. In July 2018, the FASB issued ASU No. 2018-11, "Targeted Improvements - Leases (Topic 842)." The Company did not elect the hindsight practical expedient. This update provides an optional transition method that allows entities to elect to apply the standard using the modified retrospective approach at its effective date, versus recasting the prior years presented. If this adoption method is elected, an entity would recognize a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption. The Company elected this adoption method on October 1, 2019 and the adoption did not result in any cumulative impact to retained earnings.

 

Additionally, the Company’s adoption of Topic 842 did not have a significant impact on the recognition, measurement or presentation of lease revenue and lease expenses within the consolidated statements of operations or the consolidated statements of cash flows. The Company’s adoption of Topic 842 did not have a material impact on the timing or amount of the Company’s lease revenue as a lessor in its sublease agreement.  The Company’s prepaid land lease balance that was recorded in current and other assets in the Company’s September 30, 2019 balance sheet has been classified as a component of the Company’s right-of-use assets effective October 1, 2019. The consolidated financial statements for the nine months ended June 30, 2020 are presented under the new standard, while comparative years presented are not adjusted and continue to be reported in accordance with the Company’s historical accounting policy. See Note 7, Leases, Commitments and Contingencies, for more information. 

 

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 $17,904,787 and $ 18,013,209 at June 30, 2020 and September 30, 2019, respectively. These matters, among others, raise substantial doubt about the Company's ability to continue as a going concern. While the Company is attempting to increase operations and generate additional revenues, the Company's cash position may not be significant enough to support the Company's daily operations. Management intends to raise additional funds through the sale of its securities. 

 

Management believes that the actions presently being taken to further implement its business plan and generate additional revenues provide the opportunity for the Company to continue as a going concern. While the Company believes in the viability of its strategy to generate additional revenues and in its ability to raise additional funds, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company's ability to further implement its business plan and generate additional revenues. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

 

 

NOTE 3. NOTES AND OTHER RECEIVABLES

 

Notes and other receivables as of June 30, 2020 and September 30, 2019, consisted of the following: 

 

 

The notes and other receivables from Wellness Group Pharms (“WGP”) were fully reserved as of September 30, 2019 due to ongoing disputes between the Company and WGP. The Company filed a Demand for Arbitration against WGP on April 7, 2017. On January 18, 2018, the arbitration panel awarded the Company $1,045,000 plus interest at the rate of 18% per year from April 18, 2015 to March 18, 2018 for $550,000. In addition to the principal and interest awarded of $1,595,000, the Company was also awarded its attorneys’ fees and arbitration fees. The Company, as of December 31, 2019, reversed the previously recorded reserve on the receivable with WGP in the amount of $1,761,675 since on February 5, 2020 the Company received cash of $2,069,138 from WGP as payment in full for the fully reserved notes and other receivables which include principal, interest, attorneys’ fees and arbitration fees.

 

NOTE 4.  NOTES PAYABLE

 

Unrelated

 

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

 

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) August 2, 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 trading volume of the Company’s common stock during the twenty trading days was at least 150,000 shares.

 

 

The broker for the loan received a cash commission of $320,000 plus warrants to purchase 48,000 shares of the Company's common stock. The warrants are exercisable at a price of $1.50 per share and expire on August 2, 2024. The cash commission and the fair value of the warrants amounting to $52,392 were recognized as a discount to the note.

 

The Company allocated the proceeds between the note and the warrants based on their relative fair values. The relative fair value of the 600,000 warrants was $562,762 which was recognized as additional paid in capital and a corresponding debt discount. 

 

At June 30, 2020, the outstanding principal on these notes was $4,000,000 and the unamortized debt discount was $649,412. All debt discounts are being amortized on a straight-line basis over the term of the note. Amortization expense related to the debt discounts was $233,191 for the nine months ended June 30, 2020.

 

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 maturity date of the notes were extended to December 31, 2019. The notes were fully paid off in January 2020.

 

The original notes included a provision to 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 notes were convertible, giving rise to a beneficial conversion feature of $128,976 which was 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.

 

At June 30, 2020 and September 30, 2019, the outstanding principal on these notes was $0 and $195,000, respectively. 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 $0 and $51,749 for the nine months ended June 30, 2020 and 2019, 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.

 

A loan in the amount of $40,000 was paid off in January 2020.  On December 31, 2019, the remaining outstanding note in the amount of $150,000 was extended to mature on December 31, 2020.

 

At June 30, 2020 and September 30, 2019, the outstanding principal on these notes was $150,000 and $190,000, respectively. 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 $0 and $87,001 for the nine months ended June 30, 2020 and 2019, 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 was due and payable on December 31, 2019. Interest is payable quarterly. The note can be converted at any time, at the option of SCP, into shares of our common stock, initially at a conversion price of $1.25 per share.

  

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 was due on December 31, 2019.

 

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 expired 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.

 

On September 30, 2019, both notes were amended and combined into one note, in the principal amount of $1,756,646, bearing interest of 9% per year and maturing on December 31, 2022. Additionally, the conversion option in the first note was eliminated. The new note is secured by all amounts due from WGP or its affiliates. SCP also received warrants to purchase 1,500,000 shares of the Company's common stock. The warrants are exercisable at a price of $1.25 per share and expire on December 31, 2022. The debt modification was deemed substantial and was accounted for as a debt extinguishment. The fair value of the 1,500,000 warrants was $977,110 and was recognized as loss on extinguishment of debt and the remaining unamortized premium and discount was written off during the year ended September 30, 2019.

 

Accrued interest on these notes payable was $13,051 and $12,283 at June 30, 2020 and September 30, 2019, respectively. 

 

 

At June 30, 2020 and September 30, 2019, the outstanding principal on these notes was $581,646 and $1,756,646, respectively. Amortization of debt premium was $0 and $16,023 for the nine months ended June 30, 2020 and 2019, respectively.

 

NOTE 5. RELATED PARTY TRANSACTIONS

 

BASK (formerly Coastal Compassion, Inc). On April 7, 2016, we signed agreements with BASK. BASK is one of a limited number of organizations that has received a provisional or final registration to cultivate, process and sell medical and adult use cannabis by the Massachusetts Cannabis Control Commission.

 

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.

 

On August 15, 2018, the Company combined the construction and working capital advances of $129,634 and accrued interest of $44,517 into a new loan with payments over 5 years with 18% interest. At June 30, 2020 and September 30, 2019, the outstanding balance on the note receivable was $127,275 and 148,763, respectively

 

On July 26, 2019, the Company entered into a 15-Year Triple Net lease of Building 1 of the MCC with BASK. The lease commenced on September 1, 2019 and includes an annual base rent of $135,000 and a revenue participation fee equivalent to 15% of BASK's gross revenues. As of June 30, 2020, the BASK tenant receivable balance was $95,717.

 

Tim Keogh, our Chief Executive Officer, is a Board Member of BASK.

 

During the nine months ended June 30, 2020, the Company incurred $135,000 of consulting fees to SCP  of which $30,000 remains outstanding as of June 30, 2020.

 

NOTE 6. INCOME/LOSS PER SHARE

 

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

 

 

As of June 30, 2020, we excluded 1,050,000 of stock options and 11,238,650 of warrants and 100,000 shares that would be issued from conversion of outstanding convertible notes from the computation of diluted net income (loss) per share since the intrinsic value of these instruments was zero with the effect being anti-dilutive. 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. 

 

NOTE 7.  LEASES, COMMITMENTS AND CONTINGENCIES

 

MCC. 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 are developing the property as the MCC. Plans for the MCC 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.

 

 

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. As of September 30, 2016, the Company had paid $925,000 that was 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 MMP. The property is located approximately 47 miles southeast of Boston. The Company is developing the property as the MCC. Plans for the MCC 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 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. 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 initially 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 also initially allocated to prepaid land lease. On June 26, 2019 the expiration date of warrants to purchase 3,640,000 shares of common stock was extended to October 17, 2021. In August 2019, the Company completed construction of Building 1 at MCC and on September 1st, 2019, Bask, Inc commenced its 15-year lease of Building 1 which includes a base rent plus 15% of BASK’s gross revenue. The Company has the option to extend the term of the land lease for four (4) additional ten (10) year periods.

 

Effective October 1, 2019, the Company adopted Topic 842 and recorded ROU assets and lease liabilities of $6,980,957 and $4,256,869, respectively. As part of the adoption, prepaid land lease balance of $2,724,088 was classified as a component of the Company’s ROU assets.

 

The Company constructed Building 1 on the leased land and on September 1, 2019, BASK, commenced its 15-year sublease of Building 1 which includes a base rent plus 15% of BASK’s gross revenues. This sublease income is recorded as Rental income - related party on the Company’s consolidated statement of operations.

 

As of June 30, 2020, the Company’s right-of-use assets were $6,930,865, the Company’s current maturities of operating lease liabilities were $7,023, and the Company’s noncurrent lease liabilities were $4,243,224. During the nine months ended June 30, 2020, the Company had operating cash flows from operating leases of $256,125.

 

The table below presents lease related terms and discount rates as of June 30, 2020.

 

 

The reconciliation of the maturities of the operating leases to the lease liabilities recorded in the Consolidated Balance Sheet as of June 30, 2020 are as follows:

 

 

 

Office space

 

In January 2018 the Company's offices moved to 1550 Wewatta St, Denver, CO 80202. The office space lease is a month-to-month lease with an original term of less than 12 months. The leases require the Company to pay all taxes, maintenance, insurance, and other operating expenses. Lease expense for office space was $2,755 and $3,801 for the three months ended June 30, 2020 and 2019, respectively and $10,803 and $11,544 for the nine months ended June 30, 2020 and 2019, respectively. This lease was terminated effective April 30, 2020.

 

Aggregate rental expense under all leases totaled $102,620 and $103,615 for the three months ended June 30, 2020 and 2019, respectively. Aggregate rental expense under all leases totaled $293,656 and $311,139 for the nine months ended June 30, 2020 and 2019, respectively.

 

NOTE 8.  STOCKHOLDERS’ 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.

 

The equity line agreement expired on August 14, 2019.

 

During the three months ended December 31, 2018, we sold 311,816 shares of common stock pursuant to the equity line agreement and received $650,000 in cash from the sale of these shares

 

Stock Options. There was no stock option activity for the nine months ended June 30, 2020. Stock option details are as follows: 

 

 

Stock option-based compensation expense associated with stock options was $165,099 and $0 for the nine months ended June 30, 2020 and 2019, respectively. At June 30, 2020, the remaining unrecognized stock-based compensation associated with stock options is $75,503. These expenses are expected to be recognized over a remaining weighted average period of 1.75 years.

 

Warrants. There was no warrant activity for the nine months ended June 30, 2020. Warrant details are as follows:

 

 

 

 

NOTE 9. INCOME TAXES

 

We did not record any income tax expense or benefit for the three or nine months ended June 30, 2020 or 2019. 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, 2020 and 2019.

 

As of June 30, 2020, we did not have any unrecognized tax benefits. There were no significant changes to the calculation since September 30, 2019.