AmeriCann, Inc. - Quarter Report: 2021 December (Form 10-Q)

PART I:  FINANCIAL INFORMATION

ITEM 1.      UNAUDITED FINANCIAL STATEMENTS

AMERICANN, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

See accompanying notes to unaudited consolidated financial statements.

AMERICANN, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

See accompanying notes to unaudited consolidated financial statements.

AMERICANN, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

See accompanying notes to unaudited consolidated financial statements. 

AMERICANN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

See accompanying notes to unaudited consolidated financial statements.   

AMERICANN, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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.

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 the potential failure to secure funding to continue its operations.

Basis of Presentation

The (a) consolidated balance sheet as of September 30, 2021, which has been derived from audited financial statements, and (b) the unaudited financial statements as of and for the three months ended December 31, 2021 and 2020, 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 December 6, 2021. 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 2021 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 the Cannabis Control Commission in Massachusetts.

Property 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 and equipment consist of:

Depreciation expenses for the three months ended December 31, 2021 and December 31, 2020 amounted to $112,481 and $112,633, respectively.

Leases

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

Right-of-Use (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).

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 $20,118,473 and $19,585,445 at December 31, 2021 and September 30, 2021, respectively, and had a net loss of $533,028 for the three months ended December 31, 2021. 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 or borrowings from third parties.

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 December 31, 2021 and September 30, 2021, consisted of the following: 

NOTE 4.  NOTES PAYABLE

Unrelated

On February 25, 2021, the Company borrowed $300,000 from an unrelated party. The loan was unsecured, had an interest at a rate of 11% and was due and payable on August 2, 2021. This loan was fully paid in July 2021.

On August 25, 2020, the Company borrowed $153,000 from an unrelated party. The loan was unsecured, had an interest rate of 10% per year and was due and payable on August 25, 2021.  In February 2021, the Company paid off the loan principal balance of $153,000 and paid a prepayment fee of $47,941. The Company incurred debt issuance costs of $3,000 which was recorded as a debt discount. Amortization expense related to the debt discount was $0 during the three months ended December 31, 2021.

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 and was 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. 

On December 4, 2020, the loan was modified and increased by $500,000. The maturity date of the loan was extended to August 1, 2023. All other provisions of the original loan remain the same. The debt modification was deemed not substantial and was accounted for as a debt modification. The broker for the loan received a cash commission of $40,000 which was expensed when incurred.

At December 31, 2021, the outstanding principal on this note was $4,500,000 and the unamortized debt discount was $243,529. All debt discounts are being amortized on a straight-line basis over the term of the modified note. Amortization expense related to the debt discounts was $25,976 and $68,938 for the three months ended December 31, 2021 and 2020, respectively.

The note is secured by a first lien on Building 1 at the Company’s Massachusetts Cannabis Center (“MCC”).

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 are unsecured and bear interest at 8% per year.  At December 31, 2021 and September 30, 2021, the outstanding principal on these notes was $150,000.  On October 12, 2020, this remaining note was extended to mature on December 31, 2021. On December 15, 2021, the remaining note was extended to mature on December 31, 2022.

Related Party

SCP. 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”) was assigned 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 was not convertible into shares of our common stock. All unpaid principal and interest was due on December 31, 2019.

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 unsecured. 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 during the year ended September 30, 2019. On December 20, 2021, the Company extended the expiration date of those warrants to December 31, 2024 and recorded a warrants revaluation expense based on a Black Scholes model calculation of $255,600.

The Company made principal payments on the note of $1,175,000 during the year ended September 30, 2021. Accrued interest on the note payable was $17,497 and $4,303 at December 31, 2021 and September 30, 2021, respectively. 

At December 31, 2021 and September 30, 2021, the outstanding principal on this note was $581,646.

During the year ended September 30, 2021, the Company also incurred $180,000 of consulting expenses with SCP of which $97,500 remained outstanding at September 30, 2021. During the three months ended December 31, 2021, the Company incurred $45,000 of consulting expenses with SCP and paid $75,000. As of December 31, 2021, $67,500 remains outstanding.  

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 December 31, 2021 and September 30, 2021, the outstanding balance on the note receivable was $75,043 and $84,749, 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 December 31, 2021, the BASK tenant receivable balance was $235,869.

Tim Keogh, our Chief Executive Officer, was a Board Member of BASK between August 2013 and November 2021.

NOTE 6. INCOME/LOSS PER SHARE

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

As of December 31, 2021 we excluded 1,700,000 of stock options and 7,666,650 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 December 31, 2020 we excluded 1,850,000 of stock options and 8,911,650 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. 

NOTE 7.  COMMITMENTS AND CONTINGENCIES

Massachusetts Cannabis Center. 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 Massachusetts Cannabis Center. 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 acquisition of the 52.6-acre parcel of undeveloped land in Freetown, Massachusetts. The deposits of $925,000 previously paid by the Company to the seller, 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. In August 2019, the Company completed construction of Building 1 at MCC.

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.

In connection with the sale of the property to MMP and the lease, we entered into a Share Purchase Agreement pursuant to which we issued to MMP 100,000 shares of our 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, 2021. On October 12, 2021, the warrant’s expiration date was extended to April 17, 2022.

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 statements of operations.

As of December 31, 2021, the Company’s right-of-use assets were $6,829,455, the Company’s current maturities of operating lease liabilities were $10,638, and the Company’s noncurrent lease liabilities were $4,225,141. During the three months ended December 31, 2021, the Company had operating cash flows from operating leases of $92,228.

The table below presents lease related terms and discount rates as of December 31, 2021.

The reconciliation of the maturities of the operating leases to the lease liabilities recorded in the Consolidated Balance Sheet as of December 31, 2021 are as follows:

Office space

The Company leases its office space located at 1555 Blake St., Unit 502, Denver, CO 80202 for $2,500 per month with a lease term of less than 12 months.

Lease expense for office space was $7,500 for the three months ended December 31, 2021 and 2020.

Aggregate rental expense under all leases totaled $114,217 and $107,395 for the three months ended December 31, 2021 and 2020, respectively.

NOTE 8.  STOCKHOLDERS’ EQUITY

Common Stock. During the three months ended December 31, 2021, the Company issued 195,651 shares of stock for services valued $90,000.

Stock Options. In December 2021, the Company extended the expiration date of some stock options and recorded an additional stock option-based compensation expense of $119,346 based on the fair value established using the Black Scholes option pricing model.

Stock option details are as follows: 

Stock option-based compensation expense associated with stock options was $119,346 and $0 for the three months ended December 31, 2021 and 2020, respectively.

Warrants. Warrant activity as of and for the three months ended December 31, 2021 is as follows:

NOTE 9. INCOME TAXES

We did not record any income tax expense or benefit for the three months ended December 31, 2021 or 2020. 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 December 31, 2021 and September 30, 2021.

As of December 31, 2021, we did not have any unrecognized tax benefits. There were no significant changes to the calculation since September 30, 2021.

NOTE 10. SUBSEQUENT EVENTS

Management and legal to provide

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto as of and for the year ended September 30, 2021 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K

Forward-Looking Statements

The information in this discussion contains forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, (“the Exchange Act”), which are subject to the “safe harbor” created by those sections. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “should,” “could,” “predicts,” “potential,” “continue,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. The forward-looking statements are applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements. All forward-looking statements in this Form 10-Q are made based on our current expectations, forecasts, estimates and assumptions, and involve risks, uncertainties and other factors that could cause results or events to differ materially from those expressed in the forward-looking statements. In evaluating these statements, you should specifically consider various factors, uncertainties and risks that could affect our future results or operations. These factors, uncertainties and risks may cause our actual results to differ materially from any forward-looking statement set forth in this Form 10-Q. You should carefully consider these risk and uncertainties described and other information contained in the reports we file with or furnish to the SEC before making any investment decision with respect to our securities. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.

OVERVIEW

AmeriCann designs, develops, leases and plans to operate state-of-the-art cannabis cultivation, processing and manufacturing facilities. AmeriCann’s team includes board members, consultants, engineers and architects who specialize in real estate development, traditional horticulture, lean manufacturing, medical research, facility construction, regulatory compliance, security, marijuana cultivation and genetics, extraction processes, and infused product development.

AmeriCann’s flagship project is the Massachusetts Cannabis Center. The Massachusetts Cannabis Center (“MCC”) is being developed on a 52-acre parcel located in Southeastern Massachusetts. AmeriCann’s MCC project is permitted for 987,000 sq. ft. of cannabis cultivation and processing infrastructure which is being developed in phases to support both the existing medical cannabis and the newly emerging adult-use cannabis marketplace.

The first phase of the million square foot project, Building 1, a 30,000 square foot cultivation and processing facility, is fully-operational and is currently 100% leased by a vertically-integrated Massachusetts cannabis company. AmeriCann generates revenue through lease arrangements with the operators that includes base rent and royalty payments of 15% of gross revenue generated from products produced at the MCC.

The decrease in Operating Revenue for the quarter ending December 31, 2021 is result of seasonal sales and revenue decreases experienced industry wide, during October and November.

A summary of operational highlights included the following:

AmeriCann, through a 100% owned subsidiary, AmeriCann Brands, Inc., has received two licenses from the Massachusetts Cannabis Control Commission to cultivate cannabis and provide extraction and product manufacturing support to the entire MCC project, as well as to other licensed cannabis farmers throughout regulated markets. AmeriCann Brands plans to operate in Building 2 at the MCC which is in the final design process. In addition to large-scale extraction of cannabis plant material, AmeriCann Brands plans to produce branded consumer packaged goods including cannabis beverages, vaporizer products, edible products, non-edible products and concentrates at the state-of-the-art facility.

AmeriCann plans to replicate the brands, technology and innovations developed at its MCC project to new markets throughout the country as a multi-state operator. The outlook for new states continues to improve with legislation recently passing in New York, New Jersey, Connecticut, Virginia and New Mexico. Several additional states are expected to pass adult use regulations including Pennsylvania and Rhode Island in the near term which will create additional opportunities for AmeriCann’s business model.

COVID-19 Pandemic

The Company believes that the COVID- 19 pandemic has had certain impacts on its business, but management does not believe there has been a material long-term impact from the effects of the pandemic on the Company’s business and operations, results of operations, financial condition, cash flows, liquidity or capital and financial resources.

The Company has established policies to monitor the pandemic and has taken a number of actions to protect its employees, including restricting travel, encouraging quarantine and isolation when warranted, and directing most of its employees to work from home.

SIGNIFICANT ACCOUNTING POLICIES

Leases

Effective October 1, 2019, we adopted ASC 842, Lease Accounting using the effective date method. We determine if an arrangement is a lease at inception. 

Right-of-Use (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).

RESULTS OF OPERATIONS 

Total Revenues

During the three months ended December 31, 2021 and 2020, we generated $650,945 and $271,585 in revenue, respectively. The increase in revenues is due to higher rental revenue and participation fee revenues as a result of the completion of Building 1.

Advertising and Marketing Expenses

Advertising and marketing expenses were $12,967 and $1,426 for the three months ended December 31, 2021 and 2020, respectively. The increase is due to additional social media and marketing expenses during the quarter.

Professional Fees  

Professional fees were $125,059 and $96,856 for the three months ended December 31, 2021 and 2020, respectively. The increase is due to a decrease in accounting, consulting and legal fees.

General and Administrative Expenses

General and administrative expenses were $870,088 and $468,381 for the three months ended December 31, 2021 and 2020, respectively. The increase is primarily a result of an increase in stock compensation expenses resulting from an extension of stock options and a warrants revaluation expense offset by a decrease in loan fees and licenses and fees.

Interest Income

Interest income was $3,561 and $5,148 for the three months ended December 31, 2021 and 2020, respectively.  The decrease is a result of the BASK note receivable.

Interest Expense

Interest expense was $167,970 and $204,854 for the three months ended December 31, 2021 and 2020, respectively. The decrease is primarily attributable to amortization of debt discounts.

Net Operating Income/Loss 

We had a net (loss) of $(533,028) and $(502,284) for the three months ended December 31, 2021 and 2020, respectively. The increase in net (loss) income is attributable to expenses related to the warrants and options modifications.

LIQUIDITY AND CAPITAL RESOURCES 

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 $20,118,473 and $19,585,445 at December 31, 2021 and September 30, 2021, respectively, and had a net loss of $533,028 and $502,284 for the three months ended December 31, 2021 and December 31, 2020, respectively. 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.

Notes Payable

See Notes 4 of the unaudited consolidated financial statements filed with this report for information concerning our notes payable.

Analysis of Cash Flows 

During the three months ended December 31, 2021, our net cash flows provided by operations were $125,329 as compared to net cash flows used in operations of $242,423 for the three months ended December 31, 2020. The increase is primarily due to timing of working capital payments, and stock-based compensation expense during the three months ended December 31, 2021.

Cash flows used by investing activities were $80,786 for the three months ended December 31, 2021, consisting of payments received on notes receivable offset by additions to construction in progress. Cash flows provided by investing activities were $8,117 for the three months ended December 31, 2020, consisting of payments on notes receivable.

Cash flows provided by financing activities were $0 for the three months ended December 31, 2021. Cash flows provided by financing activities were $500,000 for the three months ended December 31, 2020, consisting of proceeds from note payable.

We do not have any firm commitments from any person to provide us with any additional capital.

OFF-BALANCE SHEET ARRANGEMENTS

As of December 31, 2021, we did not have any off-balance sheet arrangements.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our President and Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), as of the end of the period covered by this Quarterly Report on Form 10-Q.  Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were not effective for the same reasons that our internal control over financial reporting were not effective.

Internal Control over Financial Reporting

As indicated in our Form 10-K filed on December 6, 2021, our Principal Executive Officer and Principal Financial Officer concluded that our internal control over financial reporting was not effective as of September 30, 2021 at the reasonable assurance level, as a result of a material weaknesses primarily related to a lack of a sufficient number of personnel with appropriate training and experience in accounting principles generally accepted in the United States of America, or GAAP, limited or no segregation of duties, and lack of independent directors.

We are currently in the process of evaluating the steps necessary to remediate these material weaknesses.

Change in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the quarterly period ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within any company have been detected.

PART II OTHER INFORMATION

ITEM 6. EXHIBITS

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.