S-1 1 acan20180410_s1.htm FORM S-1 acan20180410_s1.htm
 

As filed with the Securities and Exchange Commission on ______, 2018

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM S-1

 

Registration Statement Under

THE SECURITIES ACT OF 1933

 

          AMERICANN, INC.          
(Exact name of registrant as specified in charter)

 

Delaware   000-54231   27-4336843

(State or other jurisdiction

of incorporation)

 

(Primary Standard Classi-

fication Code Number)

 

(IRS Employer

I.D. Number)

 

 

 

1550 Wewatta St.

Denver, CO 80202

(303) 862-9000

 

(Address, including zip code, and telephone number, including area code,

of registrant’s principal executive officers)

 

 

 

Timothy Keogh

1550 Wewatta St.
Denver, CO 80202

(303) 862-9000

 

(Name, address, including zip code, and telephone number,

including area code, of agent for service)

 

Copies of all communications, including all communications sent

to the agent for service, should be sent to:

 

William T. Hart, Esq.

Hart & Hart, LLC

1624 Washington Street

Denver, Colorado 80203     

303-839-0061

 

As soon as practicable after the effective date of this Registration Statement

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:

 

1

 

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: [x]

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 12b2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [  ] Smaller reporting company [X]
(Do not check if a smaller reporting company) Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act. [  ]

 

CALCULATION OF REGISTRATION FEE
                                 

Title of each

Class of

Securities

to be

Registered

 

Securities

to be

Registered

   

Proposed

Maximum

Offering

Price Per

Share (1)

   

Proposed

Maximum

Aggregate

Offering

Price

   

Amount of

Registration

Fee

 
                                 

Common Stock (2)

    3,833,333       $2.05       $7,858,333       $980  

 


 

(1)

Offering price computed in accordance with Rule 457.

(2)

Shares of common stock offered by selling shareholders.

 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of l933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

2

 

 

 

PROSPECTUS

AMERICANN, INC

 

Common Stock

 

By means of this prospectus, a number of our shareholders are offering to sell up to 3,833,333 shares of our common stock which they may acquire upon or the exercise of warrants or the conversion of notes.

 

Although we will receive proceeds if any of the warrants are exercised, we will not receive any proceeds from the sale of the common stock by the selling stockholders. We will pay for the expenses of this offering which are estimated to be $50,000.

 

Our common stock is traded on the over-the-counter market under the symbol ACAN. On April 10, 2018 the closing price for our common stock was $2.05.

 

As of the date of this prospectus there was no public market for our warrants, and we do not expect a market to develop in the future.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

These securities are speculative and involve a high degree of risk. For a description of certain important factors that should be considered by prospective investors, see "Risk Factors" beginning on page 5 of this Prospectus.

 

 

 

 

 

 

 

 

The date of this prospectus is April ___, 2018.

 

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PROSPECTUS SUMMARY

 

AmeriCann offers a comprehensive, turnkey package of services that includes consulting, design, construction and financing to approved and licensed marijuana operators throughout the United States. Our business plan is based on the anticipated growth of the regulated marijuana market in the United States.

 

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.

 

The expanding cannabis industry requires extensive real estate to meet the growing needs of the market for cannabis products. AmeriCann assists our Preferred Partners with the identification, design, permitting, acquisition, development and operation of scalable infrastructure to cultivate and to dispense medical cannabis in regulated markets.

 

As of April 6, 2018 we had 19,366,000 outstanding shares of common stock. The number of our outstanding shares does not include shares issuable upon the conversion of notes or the exercise of outstanding options and warrants. See the section of this prospectus captioned “Market For Our Common Stock” for more information concerning these securities.

 

The Offering

 

Between October 27, 2016 and November 7, 2016, we sold 2,000,000 units to investors in a private offering at a price of $1.00 per unit. Each unit consisted of one share of our common stock and one Series I warrant. Each Series I warrant allows the holder to purchase one share of our common stock at a price of $3.00 per share at any time on or before November 4, 2020.

 

On September 15, 2016, we borrowed $75,000 from three unrelated parties. The notes were repaid in December 2016. As additional consideration for the loans, we issued 75,000 Series II warrants and 75,000 Series III warrants to the lenders. Each Series II warrant allows the holder to purchase one share of our common stock at a price of $0.75 per share. Each Series III warrant allows the holder to purchase one share of our common stock at a price of $1.25 per share. The Series II and Series III warrants expire on September 15, 2020.

 

On December 29, 2017 we sold convertible notes in the principal amount of $800,000 to a group of private investors. The notes bear interest at 8% per year, are unsecured, and are due and payable on December 31, 2018. At the option of the note holders, the notes may be converted at any time into shares of our common stock at an initial conversion price of $1.50 per share.

 

The note holders also received Series VI warrants which entitle the note holders to purchase up to 533,333 shares of our common stock. The warrants are exercisable at a price of $1.50 per share and expire on October 17, 2022.

 

4

 

 

GVC Capital LLC acted as the placement agent for the December 2017 offering and received a cash commission of $64,000 plus Series VII warrants to purchase 106,667 shares of our common stock. The warrants are exercisable at a price of $1.50 per share and expire on December 29, 2022.

 

The purchase of the securities offered by this prospectus involves a high degree of risk. Risk factors include the lack of any relevant operating history, losses since we were incorporated, and the possible need us to sell shares of our common stock to raise capital. See “Risk Factors” section of this prospectus below for additional Risk Factors.

 

Forward-Looking Statements

 

This prospectus contains or incorporates by reference "forward-looking statements," as that term is used in federal securities laws, concerning our financial condition, results of operations and business. These statements include, among others:

 

 

statements concerning the benefits that we expect will result from our business activities; and

 

 

statements of our expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts.

 

You can find many of these statements by looking for words such as "believes," "expects," "anticipates," "estimates" or similar expressions used in this prospectus.

 

These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause our actual results to be materially different from any future results expressed or implied in those statements. Because the statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied. We caution you not to put undue reliance on these statements, which speak only as of the date of this prospectus. Further, the information contained in this prospectus, or incorporated herein by reference, is a statement of our present intention and is based on present facts and assumptions, and may change at any time.

 

RISK FACTORS

 

Investors should be aware that this offering involves certain risks, including those described below, which could adversely affect the value of our common stock. We do not make, nor have we authorized any other person to make, any representation about the future market value of our common stock. In addition to the other information contained in this prospectus, the following factors should be considered carefully in evaluating an investment in our securities.

 

We have a limited operating history, and may never be profitable. Since we have only limited operations and have an unproven business plan, it is difficult for potential investors to evaluate our business. There can be no assurance that we will be profitable or that the securities which may be sold in this offering will have any value.

 

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We need additional capital to implement our business plan. We need additional capital to construct the first phase of the MMCC project (approximately $6,000,000), as well as to offer our full range of planned services to the cannabis industry. However, we will not receive any proceeds from the sale of our common stock by the selling shareholders. We do not know what the terms of any future capital raising may be but any future sale of our equity securities will dilute the ownership of existing stockholders and could be at prices substantially below the market price of our common stock. Our failure to obtain the capital which we require may result in the slower implementation of our business plan.

 

We may be unable to acquire the properties that are critical to our proposed business. Our business plan involves the acquisition of properties which will be sold or leased to licensed marijuana growers and dispensary owners for their operations. There can be no assurance that we will be able to obtain the capital needed to purchase any properties.

 

Our proposed business is dependent on laws pertaining to the marijuana industry. Continued development of the marijuana industry is dependent upon continued legislative authorization of marijuana at the state level.  Any number of factors could slow or halt progress in this area.  Further, progress for the industry, while encouraging, is not assured.  While there may be ample public support for legislative action, numerous factors impact the legislative process.  Any one of these factors could slow or halt use of marijuana, which would negatively impact our proposed business.

 

As of the date of this prospectus, 29 states and the District of Columbia allow its citizens to use medical marijuana. Voters in the states of Colorado, Washington, Alaska, Oregon, Nevada, California, Massachusetts, Maine and the District of Columbia have approved ballot measures to legalize cannabis for adult use. However, the state laws are in conflict with the federal Controlled Substances Act, which makes marijuana use and possession illegal on a national level.

 

Further, and while we do not intend to harvest, distribute or sell cannabis, if we lease buildings to growers of marijuana we could be deemed to be participating in marijuana cultivation, which remains illegal under federal law, and exposes us to potential criminal liability, with the additional risk that our properties could be subject to civil forfeiture proceedings.

 

The marijuana industry faces strong opposition. It is believed by many that large well-funded businesses may have a strong economic opposition to the marijuana industry.  We believe that the pharmaceutical industry clearly does not want to cede control of any product that could generate significant revenue.  For example, medical marijuana will likely adversely impact the existing market for the current “marijuana pill” sold by mainstream pharmaceutical companies.  Further, the medical marijuana industry could face a material threat from the pharmaceutical industry, should marijuana displace other drugs or encroach upon the pharmaceutical industry’s products.  The pharmaceutical industry is well funded with a strong and experienced lobby that eclipses the funding of the medical marijuana movement.  Any inroads the pharmaceutical industry could make in halting or impeding the marijuana industry could have a detrimental impact on our proposed business.

 

6

 

 

Marijuana remains illegal under Federal law. Marijuana is a schedule-I controlled substance and is illegal under federal law.  Even in those states in which the use of marijuana has been legalized, its use remains a violation of federal law. Since federal law criminalizing the use of marijuana preempts state laws that legalize its use, strict enforcement of federal law regarding marijuana would likely result in our inability to proceed with our business plan.

 

The previous administration under President Obama had effectively stated that it was not an efficient use of resources to direct federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical cannabis. In this regard, the prior DOJ Deputy Attorney General of the Obama administration issued a memorandum (the “Cole Memo”) to all United States Attorneys providing updated guidance to federal prosecutors concerning cannabis enforcement under the Controlled Substances Act. The Cole Memo noted that the Department of Justice is committed to using its investigative and prosecutorial resources to address the most significant threats in the most effective, consistent, and rational way.

 

On January 4, 2018, the U.S. Attorney General Jeff Sessions issued the Sessions Memo stating that the Cole Memo was rescinded effectively immediately. In particular, Mr. Sessions stated that “prosecutors should follow the well-established principles that govern all federal prosecutions,” which require “federal prosecutors deciding which cases to prosecute to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.” Mr. Sessions went on to state in the memorandum that “previous nationwide guidance specific to marijuana is unnecessary and is rescinded, effective immediately.”

 

It is unclear at this time whether the Sessions Memo indicates that the Trump administration will strongly enforce the federal laws applicable to cannabis or what types of activities will be targeted for enforcement. While we do not currently harvest, distribute or sell cannabis, we may be irreparably harmed by a change in enforcement policies of the federal government depending on the nature of such change.

 

See the “Business – Government Regulation” section of this prospectus for more information.

 

Laws and regulations affecting the medical marijuana industry are constantly changing, which could detrimentally affect our proposed operations. Local, state and federal medical marijuana laws and regulations are broad in scope and subject to evolving interpretations, which could require us to incur substantial costs associated with compliance or alter our business plan. In addition, violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our operations. In addition, it is possible that regulations may be enacted in the future that will be directly applicable to our proposed business.   We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business.  

 

7

 

 

Persons that may rent properties from, or otherwise do business with us, may have difficulty accessing the service of banks, which may make it difficult to conduct business. As discussed above, the use of marijuana is illegal under federal law.  Therefore, most banks do not accept for deposit funds from the legal cannabis industry and therefore do not do business with the entities involved in the cannabis industry.  The inability of people that may rent properties from, or otherwise do business with us, to open accounts and otherwise use the services of banks may have a material adverse effect on our business operations since these entities will be required to pay us in cash or with money orders. Since the monthly rent or fees we may charge could be substantial, paying in cash or with money orders may be difficult.

 

We may have difficulty using bankruptcy courts due to our involvement in the legal cannabis industry. We have no current plans and no current need to seek bankruptcy protection. However, in the event we ever need to seek bankruptcy protection, we may have difficulty accessing bankruptcy courts considering our involvement in the legal cannabis industry. In September 2014, the U.S. Bankruptcy Court in Denver, Colorado, in the matter of In re Frank Arenas and Sarah Arenas, 14-11406-HRT (Bankr. D. Co. 2014), denied bankruptcy protection to the individuals in the business of growing and storing marijuana in a commercial building in Denver, Colorado. The building had been partially leased to a corporate entity that operated a marijuana dispensary. The U.S. Bankruptcy Court ruled that, although the activities of Mr. and Mrs. Arenas were legal under Colorado law, they were violating the federal Controlled Substances Act. The U.S. Bankruptcy Court denied protection to the debtors under both bankruptcy liquidation and reorganization because marijuana is illegal under federal law. Therefore, even though we are not in the business of growing, and storing or selling marijuana, in the event we ever need to seek protection under the bankruptcy laws, our involvement in the legal cannabis industry may prevent us from obtaining such relief.

 

Potential competitors could duplicate our business model. There is no aspect of our business which is protected by patents, copyrights, trademarks, or trade names. As a result, potential competitors could duplicate our business model with little effort.

 

We are dependent on our management team and the loss of any of these individuals would harm our business. Our future success depends largely upon the management experience, skill, and contacts of our officers and directors. The loss of the services of either of these officers, whether as a result of death, disability or otherwise, may have a material adverse effect upon our business.

 

The applicability of "penny stock rules" to broker-dealer sales of our common stock may have a negative effect on the liquidity and market price of our common stock. Trading in our shares is subject to the "penny stock rules" adopted pursuant to Rule 15g-9 of the Exchange Act, which apply to companies that are not listed on an exchange and whose common stock trades at less than $5.00 per share or which have a tangible net worth of less than $5,000,000, or $2,000,000 if they have been operating for three or more years. The penny stock rules impose additional sales practice requirements on broker-dealers which sell such securities to persons other than established customers and institutional accredited investors. For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. Consequently, the penny stock rules may affect the ability of broker-dealers to sell shares of common stock and may affect the ability of shareholders to sell their shares in the secondary market, as compliance with such rules may delay and/or preclude certain trading transactions. The rules could also have an adverse effect on the market price of our common stock.

 

8

 

 

These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for our common stock. Many brokers may be unwilling to engage in transactions in our common stock because of the added disclosure requirements, thereby making it more difficult for shareholders to dispose of their shares. You may also find it difficult to obtain accurate information about, and/or quotations as to the price of our common stock.

 

We may issue shares of preferred stock that would have a liquidation preference to our common stock. Our articles of incorporation currently authorize the issuance of 20,000,000 shares of our preferred stock. The board has the power to issue shares without shareholder approval, and such shares can be issued with such rights, preferences, and limitations as may be determined by our board of directors. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of any holders of preferred stock that may be issued in the future. We presently have no commitments or contracts to issue any shares of preferred stock. Authorized and unissued preferred stock could delay, discourage, hinder or preclude an unsolicited acquisition of our company, could make it less likely that shareholders receive a premium for their shares as a result of any such attempt, and could adversely affect the market prices of, and the voting and other rights, of the holders of outstanding shares of our common stock.

 

Our auditors have expressed doubt as to our ability to continue in business. The accompanying 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. We had an accumulated deficit of $8,676,825 and $5,904,931 at September 30, 2017 and 2016, respectively, and had net losses of $2,771,894 and $2,210,764 for the years ended September 30, 2017 and 2016, 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.

 

Market for OUR Common STOCK.

 

Our common stock is quoted on the OTCQX and OTC Bulletin Board under the trading symbol “ACAN”.  

 

Shown below is the range of high and low closing prices for our common stock as reported by the OTCQX or OTC Bulletin Board for the periods presented: 

 

Quarter Ended

 

High

   

Low

 
                 

December 31, 2015

  $ 0.74     $ 0.46  

March 31, 2016

  $ 0.55     $ 0.40  

June 30, 2016

  $ 1.21     $ 0.55  

September 30, 2016

  $ 1.16     $ 0.52  

 

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Quarter Ended

 

High

   

Low

 
                 

December 31, 2016

  $ 3.71     $ 2.89  

March 31, 2017

  $ 4.15     $ 4.00  

June 30, 2017

  $ 2.61     $ 2.55  

September 30, 2017

  $ 1.97     $ 1.82  
                 

December 31, 2017

  $ 4.90     $ 1.64  

March 31, 2018

  $ 5.10     $ 1.94  

 

Holders of our common stock are entitled to receive dividends as may be declared by the Board of Directors.  Our Board of Directors is not restricted from paying any dividends but is not obligated to declare a dividend.  No cash dividends have ever been declared and it is not anticipated that cash dividends will ever be paid.  We currently intend to retain any future earnings to finance future growth.  Any future determination to pay dividends will be at the discretion of our directors and will depend on our financial condition, results of operations, capital requirements and other factors the board of directors considers relevant.

 

Our Articles of Incorporation authorize the Board of Directors to issue up to 20,000,000 shares of preferred stock.  The provisions in the Articles of Incorporation relating to the preferred stock allow our directors to issue preferred stock with multiple votes per share and dividend rights, which would have priority over any dividends paid to the holders of our common stock.  The issuance of preferred stock with these rights may make the removal of management difficult even if the removal would be considered beneficial to shareholders generally, and will have the effect of limiting shareholder participation in certain transactions such as mergers or tender offers if these transactions are not favored by management.

 

As of April 10, 2018, we had approximately 175 shareholders of record and 19,366,000 outstanding shares of common stock.

 

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Other Shares Which May Be Issued

 

The following table lists additional shares of our common stock which may be issued as the result of the conversion of notes or the exercise of outstanding options or warrants:

 

   

Number of

Shares

   

Note

Reference

 
                 

Shares issuable upon exercise of Series I Warrants

    2,000,000    

A

 
                 

Shares issuable upon the exercise of Series II and Series III Warrants

    150,000    

B

 
                 

Shares issuable upon exercise or exchange of Series A Warrants sold in private offering

    1,186,500    

C

 
                 

Shares issuable upon exercise of options and warrants held by our current officers, a former officer and a related party

    2,466,667    

D

 
                 

Shares issuable upon exercise of options granted to third parties

    55,000    

E

 
                 

Shares issuable upon conversion of note held by Strategic Capital Partners

    800,000    

F

 
                 

Shares issuable upon exercise of warrants held by Massachusetts Medical Properties, LLC (Series IV)

    3,790,000    

G

 
                 

Shares issuable upon exercise of Series V warrants

    185,000    

H

 
                 

Shares issuable upon exercise of options granted pursuant to Stock Incentive Plan

    150,000    

I

 
                 

Shares issuable upon exercise of warrants granted in connection with construction loan

    660,000    

J

 
                 

Shares issuable upon conversion of loans

    78,400    

K

 
                 

Shares issuable upon conversion of loans

    533,333    

L

 
                 

Shares issuable upon exercise of warrants

    640,000    

L

 
                 

Shares issuable upon conversion of loans

    540,000      M  
                 

Shares issuable upon exercise of warrants

    540,000      M  

 

A.     Between October 27, 2016 and November 7, 2016 we sold 2,000,000 units at a price of $1.00 per unit. Each unit consisted of one share of our common stock and one Series I Warrant. Each Series I Warrant entitles the holder to purchase one share of our common stock at a price of $3.00 per share at any time on or before November 4, 2020.

 

B.     On September 15, 2016 we borrowed $75,000 from three unrelated parties. As additional consideration for the loans, we issued 75,000 Series II warrants and 75,000 Series III warrants to the lenders. Each Series II warrant allows the holder to purchase one share of our common stock at a price of $0.75 per share. Each Series III warrant allows the holder to purchase one share of our common stock at a price of $1.25 per share. The Series II and Series III warrants expire on September 15, 2020.

 

C.     In 2014 we sold 791,000 Units at a price of $3.00 per Unit. Each Unit consisted of one share of our common stock and one Series A Warrant. Each Series A Warrant entitles the holder to purchase one share of our common stock at a price of $8.00 per share. We intend to offer the holders of the Series A Warrants 1.5 shares of our common stock in exchange for each Series A Warrant. If all Series A Warrants are exchanged, the total shares outstanding will increase by 1,186,500. As of the date of this prospectus, no shares of common stock had been issued in exchange for the Series A Warrants.

 

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D.     The Company has issued warrants/options to the persons and upon the terms shown below:

 

Name

Date of

Issuance

 

Shares issuable

upon exercise of

warrants/options

   

Exercise

price

 

Expiration

date

                     

Former officer

3/19/14

    100,000     $ 8.00  

3/28/18

Former officer

3/19/14

    100,000     $ 12.00  

3/28/18

Strategic Capital Partners, LLC

9/09/14

    666,667     $ 8.00  

4/30/18

Strategic Capital Partners, LLC (1)

7/14/16

    800,000     $ 1.50  

6/30/20

Strategic Capital Partners, LLC (1)

7/14/16

    800,000     $ 3.00  

6/30/20

 

(1)

See “Management – Transactions with Related Parties” for information concerning the grant of these options.

 

Strategic Capital Partners is controlled by Benjamin J. Barton, an officer and director of the Company.

 

E.     Options are held by third parties, are exercisable at a price of $0.75 per share, and expire in 2018.

 

F.     The Note is in the principal amount of $1,000,000, bears interest 9.5% per year and matures on December 31, 2019. The Note can be converted at any time into shares of our common stock at a conversion price of $1.25 per share.

 

G.     In connection with the sale of the property to Massachusetts Medical Properties, LLC and the lease described in the “Business” section of this prospectus, we entered into an agreement with MMP pursuant to which we issued to MMP 100,000 shares of our common stock, and a warrant (Series IV) to purchase up to 3,640,000 shares of common stock at an exercise price of $1.00 per share. The warrants can be exercised at any time on or after October 17, 2018 and on or before October 17, 2020. MMP received warrants to purchase an additional 100,000 shares of our common stock in October 2017. These warrants are exercisable at any time on or before October 17, 2022 at a price of $1.50 per share. MMP received warrants to purchase an additional 50,000 shares of our common stock in February 2018. These warrants are exercisable at any time on or before October 17, 2022 at a price of $1.50 per share.

 

H.     During the three months ended June 30, 2017, we sold 185,000 Units at a price of $2.00 per Unit to a group of accredited investors. Each Unit consisted of one share of our common stock and one Series V Warrant. Each Series V Warrant allows the Holder to purchase one share of our common stock at a price of $5.00 per share at any time on or before May 18, 2021.

 

I.     Options can be exercised at any time on or before August 15, 2021 at a price of $2.50 per share.

 

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J.       Warrants are exercisable at any time on or before October 13, 2022 at a price of $1.50 per share.

 

K.      On October 5, 2017 we borrowed $128,000 from an unrelated third party. At any time after April 5, 2018 the lender may convert the unpaid principal amount of the loan into shares of our common stock. 

 

On November 13, 2017 we borrowed $68,000 from the same unrelated third party.  At any time after May 13, 2018 the lender may convert the unpaid principal amount of the loan into shares of our common stock. 

 

The number of shares to be issued upon conversion of the loans will be determined by dividing the amount of the loan to be converted by the Conversion Price. If the Market Price of our common stock is greater than or equal to $1.35, the Conversion Price will be the greater of the Variable Conversion Price, or $1.00.  If the Market Price of our common stock is less than $1.35, the Conversion Price is equal to the lesser of the Variable Conversion Price or $1.00 The “Variable Conversion Price” will be 65% of the Market Price.  “Market Price” is the average of the lowest two VWAP’s for our common stock during the fifteen trading day period ending on the latest complete trading day prior to the Conversion Date.  “VWAP” means the dollar volume-weighted average sale price of our common stock on any particular trading day.

 

Assuming a conversion price of $2.50 per share, we would issue 78,400 shares of our common stock if both loans were converted.

 

L.      On December 29, 2017 we sold convertible notes in the principal amount of $800,000 to a group of private investors. The notes bear interest at 8% per year, are unsecured, and are due and payable on December 31, 2018. At the option of the note holders, the notes may be converted at any time into shares of our common stock at an initial conversion price of $1.50 per share.

 

The note holders also received warrants (Series VI) which entitle the note holders to purchase up to 533,333 shares of our 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, plus warrants (Series VII) to purchase 106,667 shares of our common stock. The warrants are exercisable at a price of $1.50 per share and expire on December 29, 2022.

 

M.     On February 12, 2018 we sold convertible notes in the principal amount of $810,000 to a group of private investors. The notes bear interest at 8% per year, are unsecured, and are due and payable on December 31, 2018. At the option of the note holders, the notes may be converted at any time into shares of our common stock at an initial conversion price of $1.50 per share. The note holders also received warrants (Series VIII) which entitle the note holders to purchase up to 540,000 shares of our common stock. The warrants are exercisable at a price of $1.50 per share and expire on October 17, 2022.

 

We may sell additional shares of our common stock, warrants, convertible notes or other securities to raise additional capital. We have not yet determined the amount of securities which we may sell, or the price at which the securities may be sold. We do not have any commitments or arrangements from any person to purchase any of our securities and there can be no assurance that we will be successful in selling any additional securities.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

AND plan of operation

 

Results of Operations

 

Year ended September 30, 2017

 

Total Revenues

 

During the year ended September 30, 2017, we generated $40,000 in revenue, as compared to $60,000 for the year ended September 30, 2016. The reduction in revenues is due to the conclusion of the consulting agreement with 4900 Jackson, LLC in May 2017.

 

Advertising and Marketing Expenses

 

Advertising and marketing expenses were $10,712 for the year ended September 30, 2017, as compared to $21,312 for the year ended September 30, 2016. The decrease is due to fewer advertising and marketing activities, as the Company is shifting its focus to the planning and development of the first phase building of the Massachusetts Medical Cannabis Center.

 

Professional Fees

 

Professional fees were $415,173 for the year ended September 30, 2017, as compared to $571,141 for the year ended September 30, 2016. The decrease in professional fees is primarily due to the capitalization of consulting fees associated with the planning and development of the first phase building of the Massachusetts Medical Cannabis Center.

 

General and Administrative Expenses

 

General and administrative expenses were $1,412,314 for the year ended September 30, 2017, as compared to $583,739 for the year ended September 30, 2016.  The increase is attributable primarily to property taxes and lease expense associated with the land lease agreement that commenced in October 2016 and an increase in stock based compensation.

 

Provision for Doubtful Accounts

 

Provision for doubtful accounts was $0 for the year ended September 30, 2017, as compared to $13,229 for the year ended September 30, 2016.  The provision activity during the year ended September 30, 2016 represents additional reserves on accrued interest owed by WGP. As a result of the litigation with WGP, the Company did not recognize interest income on the note receivable from WGP during the year ended September 30, 2017, thus no provision was recorded during the year ended September 30, 2017.

 

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Interest Income

 

Interest income was $11,086 for the year ended September 30, 2017, as compared to $183,255 for the year ended September 30, 2016. The decrease is attributable to the full payoff of the note receivable from 4900 Jackson, LLC, in addition to no longer recognizing interest income on the note receivable from WGP.

 

Interest Expense

 

Interest expense was $345,284 for the year ended September 30, 2017, as compared to $272,659 for the year ended September 30, 2016. The increase is primarily attributable to increased interest rates and the amortization of debt discounts that are associated with the debt modifications that occurred in July 2016.

 

Loss on Extinguishment of Debt

 

Loss on extinguishment of debt was $991,939 for the year ended September 30, 2016, recognized as a result of the debt modifications discussed in Note 5 to the consolidated financial statements which are a part of this prospectus.  There were no similar charges for the year ended September 30, 2017.

 

Impairment of Long-Lived Assets

 

Impairment of long-lived assets was $639,497 for the year ended September 30, 2017, recognized in accordance with Accounting Standards Codification (“ASC”) Topic 360, Property, Plant, and Equipment, as a result of the purchase and sale agreement for the parcel of land in located in north central Denver, Colorado.  See Note 4, Land Held for Sale, to the consolidated financial statements which are a part of this prospectus.  There were no similar charges for the year ended September 30, 2016.

 

Net Loss

 

We had a net loss of $2,771,894 for the year ended September 30, 2017, as compared to a net loss of $2,210,764 for the year ended September 30, 2016. The increase in net loss is attributable to changes in revenues, operating expenses, interest income and expense, and impairment loss, each of which is described above. 

 

Three months ended December 31, 2017

 

Total Revenues

 

During the three months ended December 31, 2017 and 2016, we generated $0 and $15,000 in revenue, respectively. The decrease in revenues is due to the deferral of revenues from the CCI consulting agreement that occurred in fiscal 2017.

 

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Advertising and Marketing Expenses

 

Advertising and marketing expenses were $962 and $2,247 for the three months ended December 31, 2017 and 2016, respectively. The decrease is due fewer advertising and marketing activities, as the Company is shifting its focus to the planning and development of the first phase building of the Massachusetts Medical Cannabis Center.

 

Professional Fees  

 

Professional fees were $151,987 and $150,404 for the three months ended December 31, 2017 and 2016, respectively.

 

General and Administrative Expenses

 

General and administrative expenses were $434,862 and $288,433 for the three months ended December 31, 2017 and 2016, respectively. The increase is attributable primarily to stock based compensation associated with the warrant granted to our lessor, partially offset by higher licenses and fees in the quarter ended December 31, 2016 associated with the initial planning phases of certain of our developments.

 

Provision for doubtful accounts

 

Provision for doubtful accounts was $0 and $3,325 for the three months ended December 31, 2017 and 2016, respectively. The Company had previously recognized a provision for any accrued interest income associated with the amounts due from WGP. However, as a result of the favorable outcome of its arbitration, we ceased establishing new reserves for additional interest. We still maintain existing reserves until such time that collection is reasonably assured.

 

Interest Income

 

Interest income was $8,077 and $27,187 for the three months ended December 31, 2017 and 2016, respectively. The decrease is attributable to a decrease in the full payoff of the note receivable from 4900 Jackson, LLC. 

 

Interest Expense

 

Interest expense was $791,769 and $114,543 for the three months ended December 31, 2017 and 2016, respectively. The increase is primarily attributable to increased interest rates and the amortization of debt discounts that are associated with the convertible debt issuances that occurred in this quarter. 

 

Net Operating Loss 

 

We had a net loss of $(1,374,364) and $(516,765) for the three months ended December 31, 2017 and 2016, respectively. The increase in net loss is attributable to changes in revenues, operating expenses and interest income and expense, each of which is described above.

 

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Liquidity and Capital Resources

 

Loans

 

As of September 30, 2017, we had borrowed $1,978,683, inclusive of premium, from a Company controlled by Benjamin J. Barton, one of our officers and directors. The balance consists of two separate notes, as follows:

 

 

Convertible note of $1,000,000, net of premium of $184,017. Bears interest at 9.5% payable quarterly. The total outstanding principal balance and any accrued and unpaid interest is due on December 31, 2019. SCP has the option to convert all or any part of the principal amount into fully paid and non-assessable shares of our common stock at a conversion price of $1.25.

 

 

Secured note of $931,646, net of discount of $136,980. Bears interest at 8% payable quarterly. The total outstanding principal balance and any accrued and unpaid interest is due on December 31, 2019. The note is secured by our claims against WGP. 

 

On September 15, 2016, we borrowed $75,000 from three unrelated parties. The notes bore interest at 12% per year and have since been repaid. As additional consideration for the loans we issued 75,000 Series II warrants and 75,000 Series III warrants to the lenders. Each Series II warrant allows the holder to purchase one share of our common stock at a price of $0.75 per share. Each Series III warrant allows the holder to purchase one share of our common stock at a price of $1.25 per share. The Series II and Series III warrants expire on September 15, 2020. As of April 5, 2018, none of the Series II or III Warrants had been exercised.

 

On August 25, 2017, we borrowed $80,000 from a third party under a promissory note that provides financing of up to $150,000. The note bears interest at 12% and is due and payable on May 31, 2018.

 

Sale of Common Stock and Warrants

 

During March and April 2014, we sold 1,000,000 shares of our common stock to private investors at a price of $0.75 per share. Benjamin J. Barton, one of our officers and directors, purchased 400,000 shares as an investment.

 

During July 2014, we raised $2,373,000 through a private sale of 791,000 Units at a price of $3.00 per Unit. Each Unit consisted of one share of common stock and one warrant. Each warrant allows the holder to purchase one share of our common stock at a price of $8.00 per share anytime on or before April 30, 2018. Benjamin J. Barton purchased 666,667 Units for cash as an investment. We have offered the holders of the Series A Warrants 1.5 shares of common stock in exchange for each Series A Warrant. If all Series A Warrants are exchanged, the total shares outstanding will increase by 1,186,500. As of April 5, 2018, none of the Series A Warrants had been exercised and none of the Series A Warrants had been exchanged for shares of our common stock.

 

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On November 7, 2016, we sold 2,000,000 Units at a price of $1.00 per Unit. The Units were sold in a private offering to a group of accredited investors. Each Unit consisted of one share of our common stock and one Series I Warrant. Each Series I Warrant allows the Holder to purchase one share of our common stock at a price of $3.00 per share at any time on or before November 4, 2020.  The relative fair value of the warrants issued was approximately 43% of the proceeds received.  The offering provided us with $2,000,000 in gross proceeds and the potential for an additional $6,000,000 in proceeds with the exercise of the Series I Warrants. Stock issuance costs of $193,726 were netted against the proceeds from this placement. The proceeds from the placement will be utilized for the MMCC development, to pursue new opportunities in California, Pennsylvania, Florida and other states, and general corporate purposes. As of April 5, 2018, none of the Series I Warrants had been exercised.

 

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

 

During June 2017, we sold 185,000 Units at a price of $2.00 per Unit. The Units were sold in a private offering to a group of accredited investors. Each Unit consisted of one share of our common stock and one Series V Warrant. Each Series V Warrant allows the Holder to purchase one share of our common stock at a price of $5.00 per share at any time on or before May 18, 2021. The relative fair value of the warrants issued was approximately 48% of the proceeds received. The offering provided us with $370,000 in gross proceeds and the potential for an additional $925,000 in proceeds with the exercise of the Series V Warrants. As of April 5, 2018, none of the Series V Warrants had been exercised.

 

Equity line agreement

 

On December 12, 2017, we entered into an equity line agreement with Mountain States Capital, LLC (“MSC”) to provide funding for our operations. Under the equity line agreement, MSC agreed to provide us with up to $10,000,000 of funding through the purchase of shares of our common stock.

 

Construction Financing

 

On October 30, 2017 we secured $800,000 in financing from three unrelated parties (the “Lenders”) in the form of a loan. The primary use of the loan proceeds will be to prepare our Massachusetts Medical Cannabis Center (the “MMCC”) for the first phase of development, which will include a pad-ready site for Building 3 and the improvements to the entrance and roadways for the entire project. The remaining loan proceeds were used to pay lease payments, thru Nov 17, 2017, to Medical Massachusetts Properties, LLC, owner of the land on which the MMCC will be built, and for working capital.

 

The loan bears interest at 8% per year and is due and payable on April 30, 2018. At the option of the Lenders, all or any portion of the outstanding loan balance is convertible into shares of our common stock. The number of shares of our common stock which will be issued upon any conversion will be determined by dividing the amount to be converted by $1.50, which amount will be proportionately adjusted in the event of any stock split or capital reorganization. The loan may be prepaid at any time, without penalty on 5 days’ notice to the Lenders.

 

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As further consideration for the loan, we issued warrants to the Lenders which allow the Lenders to purchase up to 660,000 shares of our common stock. The warrants are exercisable at a price of $1.50 per share any time on or before October 30, 2022.

 

On December 4, 2017, $601,000 of the loan was repaid.

 

Convertible Loans

 

On October 5, 2017 we borrowed $128,000 from an unrelated third party.  Our net proceeds, after deduction for the lender’s legal and due diligence fees, were $125,000.  The loan bears interest at 12% per year and is due and payable on October 5, 2018.  Before April 6, 2018 we could prepay the loan by paying the lender the outstanding loan principal and accrued interest plus a premium of 35%.  On April 6, 2018 we prepaid this loan.

 

On November 13, 2017 we borrowed $68,000 from the same unrelated third party.  Our net proceeds, after deduction for the lender’s legal and due diligence fees, were $65,000.  The loan bears interest at 12% per year and is due and payable on November 13, 2018. At any time on or before May 13, 2018 we may prepay the loan by paying the Lender the outstanding loan principal and accrued interest plus premiums ranging from 15% to 35%.  After May 13, 2018, we may not prepay the loan without the consent of the lender.  At any time after May 13, 2018 the lender may convert the unpaid principal amount of the loan into shares of our common stock. 

  

The number of shares to be issued upon conversion of the loans will be determined by dividing the amount of the loan to be converted by the Conversion Price.   If the market price of our common stock is greater than or equal to $1.35, the Conversion Price will be the greater of the Variable Conversion Price, or $1.00.  If the market price of our common stock is less than $1.35, the Conversion Price is equal to the lesser of the Variable Conversion Price or $1.00 (subject, in each case, to equitable adjustments for stock splits, stock dividends rights offerings, recapitalizations, reclassifications, extraordinary distributions and similar events).  The “Variable Conversion Price” will be 65% of the market price.  “Market Price” is the average of the lowest two VWAP’s for our common stock during the fifteen trading day period ending on the latest complete trading day prior to the Conversion Date.  “VWAP” means the dollar volume-weighted average sale price of our common stock on any particular trading day.

 

On December 29, 2017 we sold convertible notes in the principal amount of $800,000 to a group of private investors. The notes bear interest at 8% per year, are unsecured, and are due and payable on December 31, 2018. At the option of the note holders, the notes may be converted at any time into shares of our common stock at an initial conversion price of $1.50 per share.

 

The note holders also received warrants (Series VI) which entitle the note holders to purchase up to 533,333 shares of our 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, plus warrants (Series VII) to purchase 106,667 shares of our common stock. The warrants are exercisable at a price of $1.50 per share and expire on December 29, 2022.

 

19

 

 

On February 12, 2018 we sold convertible notes in the principal amount of $810,000 to a group of private investors. The notes bear interest at 8% per year, are unsecured, and are due and payable on December 31, 2018. At the option of the note holders, the notes may be converted at any time into shares of our common stock at an initial conversion price of $1.50 per share. The note holders also received warrants (Series VIII) which entitle the note holders to purchase up to 540,000 shares of our common stock. The warrants are exercisable at a price of $1.50 per share and expire on October 17, 2022.

 

Contractual obligations

 

We lease land under an operating lease commencing October 17, 2016, for an initial term of fifty (50) years. We have the option to extend the term of the lease for four (4) additional ten (10) year periods. The lease is a triple net lease, which means that we pay 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 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. The lease expense was $506,765 for the year ended September 30, 2017. No such expense was incurred in the year ended September 30, 2016.  

 

We lease an automobile under an operating lease commencing October 4, 2014 for 39 months at $611 per month. The lease expense was $7,390 and $7,483 for the years ended September 30, 2017 and 2016, respectively.  

 

At September 30, 2017 the future rental payments required under our operating leases are as follows:

 

   

9/30/2017

 
         

2018

  $ 342,406  

2019

    341,496  

2020

    341,496  

2021

    341,496  

2022

    341,496  

Thereafter

    15,026,024  

Total

  $ 16,734,414  

 

Our future material capital commitments as of September 30, 2017 are:

 

Description

 

Amount

   

Due Date

 
                 

First phase of construction at MMCC (1)

  $ 2,600,000    

 

02/17/18  

Lease payments (MMCC)

  $ 342,406       (2)  

Repayment of convertible loan

  $ 128,000    

 

10/15/18  

Repayment of convertible loan

  $ 68,000    

 

11/13/18  

Repayment of construction loan

  $ 199,000    

 

03/30/18  

Repayment of loan

  $ 80,000    

 

03/31/18  

Repayment of convertible loan

  $ 800,000    

 

12/03/18  

 

(1) 

Construction will begin when funding is obtained.

 

(2)  

Due in monthly installments.

 

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Analysis of Cash Flows

 

During the year ended September 30, 2017, our cash flows used in operations were $1,747,948 as compared to net cash used in operations of $600,863 for the year ended September 30, 2016. This was primarily due to an increase in land lease expense associated with the commencement of the lease in October 2016, in addition to decreases in interest payable funded by the proceeds from our private equity offerings during the year ended September 30, 2017. 

 

Cash flows used in investing activities were $320,976 for the year ended September 30, 2017, consisting primarily of additions to construction in progress and advances made on notes receivable – related party, offset by payments received from notes receivable. Cash flows used in investing activities was $572,510 for the year ended September 30, 2016, consisting primarily of deposits on land and advances made on related party notes receivable, offset by payments received from notes receivable.

 

Cash flows provided by financing activities were $2,070,527 for the year ended September 30, 2017, consisting primarily of net proceeds from the issuance of common stock and proceeds from notes payable, partially offset by payments on notes payable.  Cash flows provided by financing activities was $972,044 for the year ended September 30, 2016, consisting of proceeds from notes payable and proceeds from notes payable – related party.

 

During the three months ended December 31, 2017, our net cash flows used in operations were $628,639 as compared to net cash flows used in operations of $786,520 for the three months ended December 31, 2016. The decrease is primarily due to the timing of working capital payments

 

Cash flows used in investing activities were $1,153 for the three months ended December 31, 2017, consisting of additions to construction in progress. Cash flows provided by investing activities were $6,238 for the three months ended December 31, 2016, consisting of advances made on notes receivable of $79,993, offset by $86,231 of payments received from notes receivable.

 

Cash flows provided by financing activities were $1,726,000 for the three months ended December 31, 2017, consisting of proceeds from notes payable. Cash flows provided by financing activities were $1,583,027 for the three months ended December 31, 2016, consisting of net proceeds from the issuance of common stock of $1,806,274, proceeds from notes payable of $24,657, offset by payments on notes payable to related parties of $20,000 and payments on notes payable of $227,904.

  

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In December 2017 we sold our property in Denver, Colorado, yielding proceeds of $1,608,451 which were used to pay down existing debt, which is reflected as a noncash financing and investing activity in our statement of cash flows for the quarter ended December 31, 2017.

 

Going concern

 

The Company’s financial statements included as part of this prospectus 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 $10,051,189 and $8,676,825 at December 31, 2017, and September 30, 2017, respectively, and had a net loss of $1,374,364 for the three months ended December 31, 2017. 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. Further, the amount due from WGP of $1,251,829 (before an allowance of $469,699) may not be collectible. The Company filed a Demand for Arbitration against WGP on April 7, 2017. On March 15, 2018, the arbitration panel issued its final award and awarded the Company $1,761,675. This award consisted of $1,045,000, plus interest at the rate of 18% per year from April 18, 2015 through March 15, 2018 ($550,000), the Company’s attorneys’ fees and costs ($113,865), and arbitration fees and expenses ($52,810). The American Arbitration Association will also return to the Company $32,562 which the Company paid to the AAA as deposits during the course of the arbitration proceeding. The arbitration award issued on March 15, 2018 is final and not subject to appeal. The Company has not collected on the award as of the date of this prospectus.

 

 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.

 

Trends

 

The factors that will most significantly affect our future operating results, liquidity and capital resources will be:

 

 

Government regulation of the marijuana industry;

 

 

Revision of Federal banking regulations for the marijuana industry; and

 

 

Legalization of the use of marijuana for medical or recreational use in other states.

 

Other than the foregoing, we do not know of any trends, events or uncertainties that have had, or are reasonably expected to have, a material impact on:

 

 

revenues or expenses;

 

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any material increase or decrease in liquidity; or

 

 

expected sources and uses of cash.

 

Recent Accounting Pronouncements

 

Recent accounting pronouncements which may be applicable to us are described in Note 1 to the September 30, 2017 Financial Statements included as part of this prospectus.

 

Significant Accounting Policies

 

Our significant accounting policies are set forth below. We have consistently applied these policies in all material respects. We do not believe that our operations to date have involved uncertainty of accounting treatment, subjective judgment, or estimates, to any significant degree, except as it pertains to our provision for doubtful accounts associated with amounts due from WGP described in the Notes to the Consolidated Financial Statements.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant estimates and assumptions made by management are valuation of equity instruments, deferred tax asset valuation and allowance and collectability of long-lived assets. Actual results could differ from those estimates as the current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions.  See Note 3 in the Notes to the Consolidated Financial Statements included as part of this prospectus for a discussion of our provision for doubtful accounts for amount amounts owed from WGP.

 

Cash and Cash Equivalents

 

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

 

Income Taxes

 

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

 

We expect to recognize the financial statement benefit of an uncertain tax position only after considering the probability that a tax authority would sustain the position in an examination. For tax positions meeting a "more-likely-than-not" threshold, the amount to be recognized in the consolidated financial statements will be the benefit expected to be realized upon settlement with the tax authority. For tax positions not meeting the threshold, no financial statement benefit is recognized. As of September 30, 2017, we had no uncertain tax positions. We recognize interest and penalties, if any, related to uncertain tax positions as general and administrative expenses. We currently have no federal or state tax examinations nor have we had any federal or state examinations since our inception. To date, we have not incurred any interest or tax penalties.

 

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For federal tax purposes, our 2015 through 2017 tax years remain open for examination by the tax authorities under the normal three-year statute of limitations.

 

Concentration of Credit Risks and Significant Customers

 

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash, notes receivables, deposits, accounts receivables and notes receivable. We place our cash with high credit quality financial institutions. As of September 30, 2017, we had outstanding notes receivable of $125,327 with Coastal Compassion Inc., and notes and other receivables in the amount of $1,250,014 with WGP (exclusive of provision for doubtful accounts of $469,699).  See Note 3 in the Notes to the Consolidated Financial Statements included as part of this prospectus for a discussion of our provision for doubtful accounts for amounts owed from WGP.

 

On March 15, 2018, the arbitration panel issued its final award and awarded the Company $1,761,675. This award consisted of $1,045,000, plus interest at the rate of 18% per year from April 18, 2015 through March 15, 2018 ($550,000), the Company’s attorneys’ fees and costs ($113,865), and arbitration fees and expenses ($52,810). The American Arbitration Association will also return to the Company $32,562 which the Company paid to the AAA as deposits during the course of the arbitration proceeding. The arbitration award issued on March 15, 2018 is final and not subject to appeal.

 

For the years ended September 30, 2017 and 2016, all of the Company’s revenue was earned from one customer, 4900 Jackson, LLC.  The Company did not earn any revenue during the three months ended December 31, 2017.

 

 

Financial Instruments and Fair Value of Financial Instruments

 

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

 

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

 

Level 1:

Observable inputs such as quoted market prices in active markets for identical assets or liabilities

 

Level 2:

Observable market-based inputs or unobservable inputs that are corroborated by market data

 

Level 3:

Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.

 

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

 

Derivative Liabilities

 

We evaluate stock options, stock warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under the relevant sections of ASC Topic 815-40, Derivative Instruments and Hedging: Contracts in Entity’s Own Equity. The result of this accounting treatment could be that the fair value of a financial instrument is classified as a derivative instrument and is marked-to-market at each consolidated balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the consolidated statement of operations as other income or other expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815-40 are reclassified to a liability account at the fair value of the instrument on the reclassification date. We determined that none of our financial instruments meet the criteria for derivative accounting as of September 30, 2017 and 2016.

 

Long-Lived Assets

 

Our long-lived assets consisted of property, equipment and real estate and are reviewed for impairment in accordance with the guidance of ASC Topic 360, Property, Plant, and Equipment, and ASC Topic 205, Presentation of Consolidated Financial Statements. We test for impairment losses on long-lived assets used in operations whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Impairment evaluations involve management's estimates on asset useful lives and future cash flows. Actual useful lives and cash flows could be different from those estimated by management which could have a material effect on our reporting results and financial positions. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. For the year ended September 30, 2017, we recognized impairment losses of $639,497 on our long-lived assets. There were no such charges for the year ended September 30, 2016.

 

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Property and Equipment

 

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

 

Construction in progress (CIP)

 

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

 

Capitalized Interest

 

The Company capitalizes interest to construction in progress made in connection with medical center cannabis construction that are not subject to current depreciation. Interest is capitalized only for the period that activities are in progress to bring the projects to their intended use. Capitalized interest was $28,697 and $0 for the years ended September 30, 2017, and 2016, respectively.

 

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

 

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

 

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

 

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Non-Cash Equity Transactions

 

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

 

Stock-Based Compensation

 

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

 

Related Parties

 

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

 

Revenue Recognition

 

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

 

Advertising Expense

 

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

 

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General and Administrative Expense

 

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

 

Loss per Share

 

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

 

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

 

Off-Balance Sheet Arrangements

 

As of April 5, 2018, we did not have any off-consolidated balance sheet arrangements.

 

BUSINESS

 

AmeriCann offers a comprehensive, turnkey package of services that includes consulting, design, construction and financing to approved and licensed marijuana operators throughout the United States. Our business plan is based on the anticipated growth of the regulated marijuana market in the United States.

 

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.

 

To support local businesses that seek to serve cannabis patients in their communities we initiated the AmeriCann Preferred Partner Program. Currently, we have one Preferred Partner in Massachusetts, which is Coastal Compassion, Inc. Through this program, we plan to provide an essential set of resources including advanced cultivation facilities, access to a team of experts and in certain cases, capital for our partner’s businesses. In addition, AmeriCann’s team has assisted applicants in obtaining cannabis licenses in competitive application processes in Massachusetts and Illinois. This support is designed to assist our Preferred Partners in newly regulated markets.

 

AmeriCann plans to lease facilities to its Preferred Partners that will be designed with AmeriCann’s propriety cultivation and processing system called “Cannopy.” AmeriCann developed Cannopy with experts from traditional horticulture, lean manufacturing, regulatory compliance and cannabis cultivation. Cannopy includes automation throughout the production life-cycle, customized workflow processes, monitoring and controls, and top-line security systems. Cannopy empowers Preferred Partners to consistently produce medical marijuana for patients at the lowest cost in the most efficient, compliant manner. We provide initial and on-going training, policies, practices and procedures to operate the state-of-the-art facilities.

 

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The expanding cannabis industry requires extensive real estate to meet the growing needs of the market for cannabis products. AmeriCann assists our Preferred Partners with the identification, design, permitting, acquisition, development and operation of scalable infrastructure to cultivate and to dispense medical cannabis in regulated markets.

 

Company History

 

AmeriCann, Inc. was organized under the laws of the State of Delaware on June 25, 2010.

 

On January 17, 2014, Strategic Capital Partners, LLC (“SCP”) a firm controlled by Benjamin J. Barton, one of our officers and directors, acquired 14,950,000 shares of our outstanding common stock from a group of our shareholders.

 

On February 21, 2014, the Company’s board of  directors declared a stock dividend in the amount of four shares of common stock for each issued and outstanding share of common stock. On February 24, 2014, SCP returned 65,750,000 shares of our common stock to us. These shares were cancelled and returned to the status of authorized and unissued shares.

 

Monaco Street Property

 

On July 31, 2014, we closed on an all cash purchase of a five-acre parcel of land located in north central Denver, Colorado. The total purchase price for the property was $2,250,000.  On December 4, 2017, we sold the parcel of land for $1,760,000 to EEN Real Estate, Inc.  An impairment loss of $639,497 was recognized for the year ended September 30, 2017 to adjust the carrying value to $1,611,312, net of estimated selling costs.

 

Massachusetts Medical 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 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 to Registered Marijuana Dispensaries under the Massachusetts Medical Marijuana Program. Additional plans for the MMCC may include a testing laboratory, a research facility, a training center, an infused product production facility and corporate offices. 

 

On December 8, 2015, The Town of Freetown Planning Board unanimously approved our site plan application for the MMCC.  The site plan application requested 977,000 square feet of infrastructure for medical marijuana cultivation, processing, testing and associated administration in Freetown's Industrial Park. 

 

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On March 29, 2016, the Department of Public Health (“DPH”) for the Commonwealth of Massachusetts approved our consulting agreement and development agreement relating to the MMCC's first tenant and Preferred Partner, Coastal Compassion, Inc.

 

On April 7, 2016, we signed agreements with Coastal Compassion Inc. (“CCI”). CCI is one of a limited number of non-profit organizations that has received a provisional or final registration to cultivate, process and sell medical cannabis by the Massachusetts Department of Public Health. CCI has agreed to become the initial tenant in our planned MMCC. Tim Keogh, our Chief Executive Officer, is a Board Member of CCI.

 

Pursuant to the agreements, we agreed to provide CCI with financing of up to $2.5 million for a five-year term at 18% interest per year for construction and working capital required for CCI’s approved dispensary and cultivation center in Fairhaven, MA. For a three- year period beginning April 1, 2016, we agreed to consult with CCI in the design, construction and operation of the Fairhaven facility. CCI will owe us $10,000 each month for these consulting services, but is not required to pay until six months after generating certain revenues. Although the DPH has approved our agreement with CCI relating to the development and lease terms of the MMCC, the actual lease agreement with CCI has not been finalized or approved by the DPH. We will need to secure significant capital to provide the financing to CCI.

 

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. The Company plans to develop the property as the MMCC. Plans for the MMCC include the construction of sustainable greenhouse cultivation, processing, and infused product facilities that will be leased or sold to Registered Marijuana Dispensaries under the Massachusetts Medical Marijuana Program.

 

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

 

The lease payments are 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).

 

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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 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.

 

Under the terms of the lease, the Company had six 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 month period, the Company had an additional six 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 months from October 17, 2016, the lease would terminate. In October 2017 the lease 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 the Company’s common stock at an exercise price of $1.50 per share. The warrants can be exercised at any time on or before October 17, 2022. On February 16, 2018, the lease was amended again to provide that the Company will have until 18 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 50,000 shares of the Company’s common stock at an exercise price of $1.50 per share. The warrants can be exercised at any time on or before October 17, 2022.

 

B Corp Certification

 

We received B Corp certification in June 2016. This certification is an acknowledgment of our commitment to social and environmental ethics, transparency and accountability.

 

We join over 1,700 Certified B corporations globally, including 71 others in Colorado, that have met the rigorous standards that measure a company’s impact on its employees, suppliers, community, and the environment. Notable B corporations include Ben & Jerry’s, Patagonia, Warby Parker, and Etsy, Inc.

 

The B Corp certification was granted by B Lab, a nonprofit organization that serves a global movement of people using business as a force for good. Its vision is that one day all companies will compete to be best for the world and that society will enjoy a more shared and durable prosperity.

 

B Lab promotes robust standards that can be used by policymakers, investors and the general public to evaluate companies and their business practices. B Corp certification is to business what Fair Trade certification is to coffee or USDA Organic certification is to milk.

 

We successfully completed a rigorous application and review process in obtaining this prestigious certification.

 

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We believe that this certification, and its endorsement of our environmental standards, community focus and ethics, will provide us with a competitive advantage over potential competitors that lack this accreditation.

 

Concurrent with receiving B Corp certification, we committed to become a Public Benefit Corporation within two years. If we do not accomplish this, we may lose our B Corp certification.

 

Market Conditions

 

Marijuana sales in North America reached $6.73 billion in 2016, reflecting 34% growth over 2015 ($5.04 billion), according to ArcView Market Research/BDS Analytics. The research firm projects sales to jump to $21.6 billion by 2021, representing a 26% compound annual growth rate (CAGR).

 

 Adult-Use marijuana is now legal in seven states and the District of Columbia, and medical marijuana is legal in 29 states.

 

While the industry is growing rapidly, the cannabis industry faces four major obstacles that challenge its growth and profitability. First, the cultivation of cannabis is a very capital-intensive enterprise. Many cannabis entrepreneurs do not have access to the capital required to build the infrastructure required to meet growing demand and sales projections. Traditional sources of financing, such as banks, are not available currently to cannabis producers and retailers. Second, there is a significant shortage of knowledge related to virtually all areas of the cannabis business. When new states are added to the list of regulated cannabis markets, there will be a scarcity of experience and expertise to serve the needs of growers and retailers in these states. Third, the majority of states do not allow access to medical cannabis for its patients. This presents an obstacle to the medical cannabis industry and requires financial resources and dedicated advocacy to change regulations on the state level. Fourth, as explained below, marijuana is illegal under federal law.

 

Government Regulation

 

Marijuana is a Schedule-I controlled substance and is illegal under federal law.  Even in those states in which the use of marijuana has been legalized, its use remains a violation of federal law.

 

A Schedule I controlled substance is defined as a substance that has no currently accepted medical use in the United States, a lack of safety for use under medical supervision and a high potential for abuse.  However, the Department of Justice defines Schedule 1 controlled substances as “the most dangerous drugs of all the drug schedules with potentially severe psychological or physical dependence.”  If the federal government decides to enforce the Controlled Substances Act in Colorado with respect to marijuana, persons that are charged with distributing, possessing with intent to distribute, or growing marijuana could be subject to fines and terms of imprisonment, the maximum being life imprisonment and a $50 million fine.

 

As of April 5, 2018, 29 states and the District of Columbia allow their citizens to use Medical Marijuana.  Additionally, 7 states and the District of Columbia have legalized cannabis for recreational use by adults.  However, the state laws are in conflict with the federal Controlled Substances Act, which makes marijuana use and possession illegal on a national level.

 

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The previous administration under President Obama had effectively stated that it was not an efficient use of resources to direct federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical cannabis. In this regard, the prior DOJ Deputy Attorney General of the Obama administration issued a memorandum (the “Cole Memo”) to all United States Attorneys providing updated guidance to federal prosecutors concerning cannabis enforcement under the CSA.

 

The Cole Memo noted that the Department of Justice is committed to using its investigative and prosecutorial resources to address the most significant threats in the most effective, consistent, and rational way. In furtherance of those objectives, the Cole Memo provided guidance to Department of Justice attorneys and law enforcement to focus their enforcement resources on persons or organizations whose conduct interferes with any one or more of the following in preventing:

 

 

the distribution of cannabis to minors;

 

 

revenue from the sale of cannabis from going to criminal enterprises, gangs and cartels;

 

 

the diversion of cannabis from states where it is legal under state law in some for to other states;

 

 

state-authorized cannabis activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;

 

 

violence and the use of firearms in the cultivation and distribution of cannabis;

 

 

drugged driving and the exacerbation of other adverse public health consequences associated with cannabis use;

 

 

the growing of cannabis on public lands and the attendant public safety and environmental dangers posed by cannabis production on public lands; and

 

 

cannabis possession or use on federal property.

 

On January 4, 2018, the U.S. Attorney General Jeff Sessions issued the Sessions Memo stating that the Cole Memo was rescinded effectively immediately. In particular, Mr. Sessions stated that “prosecutors should follow the well-established principles that govern all federal prosecutions,” which require “federal prosecutors deciding which cases to prosecute to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.” Mr. Sessions went on to state in the memorandum that “previous nationwide guidance specific to marijuana is unnecessary and is rescinded, effective immediately.”

 

It is unclear at this time whether the Sessions Memo indicates that the Trump administration will strongly enforce the federal laws applicable to cannabis or what types of activities will be targeted for enforcement.

 

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However, on March 30, 2018 President Trump signed a $1.3 trillion budget bill that includes a provision that prevents the Justice Department, including the Drug Enforcement Administration, from using funds to arrest or prosecute patients, caregivers and businesses that are acting in compliance with state medical marijuana laws. This provision, known as the Rohrabacher-Blumenauer Amendment, prohibits the Justice Department from using federal funds to interfere with state medical marijuana programs.

 

Competition

 

Currently, there are a number of other companies that are involved in the marijuana industry, many of which we consider to be our competition. Many of these companies provide services similar to those which we provide or plan to provide.  We expect that other companies will recognize the value of serving the marijuana industry and become our competitors.

 

General

 

Our offices are located at 1550 Wewatta St., Denver, CO 80202. We lease this space on a month-to-month basis at a rate of $1,845 per month.

 

As of April 5, 2018, we had four full time employees, that being Timothy Keogh, our Chief Executive Officer, Benjamin Barton, Chief Financial Officer, Brian Corr, Director of Horticultural Science and Operations, and Jane Roach, our Office Manager.  As of September 30, 2017, Mr. Keogh was spending approximately 90% of his time on our business, Mr. Barton was spending approximately 95% of his time on our business, Brian Corr was spending approximately 50% of his time on our business, and Jane Roach was spending approximately 100% of her time on our business. 

 

MANAGEMENT

 

Name

Age

Position

 

 

 

Timothy Keogh

38

Chief Executive Officer and a Director

Benjamin J. Barton

54

Chief Financial and Accounting Officer and a Director

  

The following is a brief summary of the background of each officer and director including their principal occupation during the five preceding years.  All directors will serve until their successors are elected and qualified or until they are removed.

 

Timothy Keogh was appointed our Chief Executive Officer and a director on March 25, 2014. As our Chief Executive Officer, Mr. Keogh has developed sustainable practices and traditional horticultural approaches to the production of medical cannabis to benefit patients in regulated markets. Prior to joining AmeriCann, Mr. Keogh was the Chief Executive Officer and a director of Coastal Compassion, Inc., a non-profit corporation that has entered the medical marijuana business in Massachusetts. This effort began in September of 2012 and was formalized under Massachusetts G.L. Chapter 180 in August of 2013.  Under the direction of Mr. Keogh, Coastal Compassion, Inc. received 1 a limited number of provisionally approved licenses in Massachusetts.

 

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Between November 2010 and November 2013 Mr. Keogh owned and managed Dock Promotions, LLC, a company which provided consulting services to waterfront developments and marinas in the areas of design, construction, and operations.   Between 2003 and 2010, Mr. Keogh was the Director of Business Services for Marina Management Services, Inc., a corporation which provided management and consulting solutions to waterfront developments, marinas and boatyards throughout the Americas and the Caribbean. 

 

Mr. Keogh is an advisory board member of the Rhode Island Patient Advocacy Coalition, and an active member and invited speaker for the National Cannabis Industry Association.  Mr. Keogh holds a Bachelor of Science in Business Administration from Mount St. Mary’s College.

 

 Ben Barton was appointed a director on January 14, 2014 and Chief Financial Officer on January 22, 2014. Since 1986, Mr. Barton has been active in all aspects of venture capital and public stock offerings. Since 2005, Mr. Barton has been the Managing Director of Strategic Capital Partners, LLC, a private investment company specializing in emerging companies. Mr. Barton was one of the founders of Synergy Resources Corporation, an energy company that trades on the NYSE. Prior to earning an MBA in Finance from UCLA, Mr. Barton received his Bachelor of Science degree in Political Science from Arizona State University.

 

See “Market for Our Common Stock” for information concerning options granted to Mr. Keogh.

 

Our directors serve until the next annual meeting of our shareholders and until their successors have been duly elected and qualified.  Our officers serve at the discretion of our directors. 

 

We believe our directors are qualified to act as such for the following reasons:

 

Timothy Keogh – experience in marijuana industry

Benjamin J. Barton – experience in the capital markets

 

Timothy Keogh and Benjamin J. Barton are not independent as that term is defined in Section 803 of the NYSE MKT Company Guide.

 

We do not have a financial expert as that term is defined by the Securities and Exchange Commission.

 

Our Board of Directors does not have standing audit, nominating or compensation committees, committees performing similar functions, or charters for such committees. Instead, the functions that might be delegated to such committees are carried out by our Board of Directors, to the extent required. Our Board of Directors believes that the cost of associated with such committees, has not been justified under our current circumstances.

 

Given our limited operations to date, our Board of Directors believes that its current members have sufficient knowledge and experience to fulfill the duties and obligations of an audit committee. None of the current Board members is an “audit committee financial expert” within the meaning of the rules and regulations of the Securities and Exchange Commission. The Board has determined that each of its members is able to read and understand fundamental financial statements and has substantial business experience that results in that member’s financial sophistication.

 

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Our Board of Directors does not have a “leadership structure” since each board member is free to introduce any resolution at any meeting of our directors and is entitled to one vote at any meeting.

 

Holders of our common stock may send written communications to our entire board of directors, or to one or more board members, by addressing the communication to “the Board of Directors” or to one or more directors, specifying the director or directors by name, and sending the communication to our offices in Denver, Colorado.  Communications addressed to the Board of Directors as whole will be delivered to each board member.  Communications addressed to a specific director (or directors) will be delivered to the director (or directors) specified.

 

Security holder communications not sent to the Board of Directors as a whole or to specified board members will be relayed to board members.

 

During the years ended September 30, 2017 and 2016 we did not compensate any person for serving as a director.

 

Executive Compensation

 

During the years ended September 30, 2017 and 2016 we paid the following compensation to our officers:

 

Name

Year

 

Salary

   

Bonus

   

Options

   

Total

 
                                   

Timothy Keogh

2017

  $ 144,000       -       -     $ 144,000  

Chief Executive Officer

2016

  $ 144,000       -       -     $ 144,000  

Benjamin J. Barton

2017

    -       -       -       -  

Chief Financial Officer

2016

    -       -       -       -  

 

The following shows the amounts we expect to pay to our officers during the year ending September 30, 2018 and the amount of time these persons expect to devote to us.

 

Name

 

Projected

Compensation

   

Percent of time to be Devoted

to the Company’s Business

 
                 

Timothy Keogh

  $ 144,000       90 %

Benjamin J. Barton

    -       95 %

 

Our executive officer is compensated through the following three components:

 

 

base salary;

 

 

long-term incentives (stock options and/or grants of stock); and

 

 

benefits.

 

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These components provide a balanced mix of base compensation and compensation that is contingent upon the executive officer’s individual performance. A goal of the compensation program is to provide executive officers with a reasonable level of security through base salary and benefits. We want to ensure that our compensation program is appropriately designed to encourage executive officer retention and motivation to create shareholder value. Salaries generally have been targeted to be competitive when compared to the salary levels of persons holding similar positions in other publicly traded companies of comparable size. The executive officer’s responsibilities, experience, expertise and individual performance are considered.

 

During the year ended September 30, 2017, none of our directors was also an executive officer of another entity, which had one of our executive officers serving as a director of such entity or as a member of the compensation committee of such entity.

 

On August 18, 2017, we adopted a Stock Incentive Plan that provides for the grant of Incentive Stock Options, Non-Qualified Stock Options or Stock Bonuses to persons who are our employees, employees of our subsidiaries, or our directors, officers, or consultants. Under the plan, we may grant up to 1,500,000 options, each to purchase one share of common stock, subject to an exercise price and vesting schedule to be established by the board of directors at the time of the grant, or up to 1,500,000 shares of common stock as stock bonuses. On August 18, 2017, we awarded 150,000 options to four consultants at an exercise price of $2.50 per share under the plan. The options vested immediately and can be exercised at any time on or before August 15, 2021.  As of April 5, 2018, no options have been exercised.

 

Transactions With Related Parties

 

During March and April 2014, we sold 1,000,000 shares of our common stock to private investors at a price of $0.75 per share. Benjamin J. Barton, one of our officers and directors, purchased 400,000 of these shares.

 

During July 2014, we raised $2,373,000 through a private sale of 791,000 Units at a price of $3.00 per Unit. Each Unit consisted of one share of common stock and one warrant. Each warrant allows the holder to purchase one share of our common stock at a price of $8.00 per share anytime on or before April 30, 2018.  Mr. Barton purchased 666,667 of these Units for cash.

 

As of September 30, 2015, the Company had borrowed $1,682,849 from SCP a Company controlled by Mr. Barton. Through June 20, 2016, we borrowed an additional $227,500 from SCP, and on July 14, 2016, SCP assumed our note payable to an unrelated third party of $521,297. Simultaneously, we modified the note payable to SCP. Principal and interest of $500,000 was converted into 400,000 shares of our common stock. In addition, 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. The remaining $1,931,646 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 with the first interest payment due on September 30, 2016. The Note can be converted at any time 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. The second note, in the principal amount of $931,646, bears interest at 8% per year and matures on December 31, 2019. Interest is payable quarterly, with the first interest payment due on September 30, 2016. The note is not convertible into shares of our common stock, and is secured by a second lien on our property in Denver, Colorado and a first lien on all amounts due to us by Wellness Group Pharms. Any payments received from the sale, lease or commercialization of the property in Denver, and any amounts received from Wellness Group Pharms, will be applied to the principal amount of the Note. Otherwise, all unpaid principal and interest will be due on December 31, 2019. The Company evaluated the debt modification and convertible debt issued in accordance with ASC 470, Debt, and recorded a loss on extinguishment of debt of $901,939, debt discount on secured notes payable – related party of $211,578, and a debt premium on convertible debt of $284,229.

 

37

 

 

In a separate transaction, we borrowed an additional $20,000 from SCP.

 

As of December 31, 2017, the Company owed SCP 1,973,342, inclusive of premium of $41,696.

 

On April 7, 2016, we signed agreements with Coastal Compassion Inc. (“CCI”). CCI is one of a limited number of non-profit organizations that has received a provisional or final registration to cultivate, process and sell medical cannabis by the Massachusetts Department of Public Health. CCI has agreed to become the initial tenant in our planned MMCC. Tim Keogh, our Chief Executive Officer, is a Board Member of CCI.

 

Pursuant to the agreements, we agreed to provide CCI with financing of up to $2.5 million for a five-year term at 18% interest per year for construction and working capital required for CCI’s approved dispensary and cultivation center in Fairhaven, MA. For a three-year period beginning April 1, 2016, we agreed to consult with CCI in the design, construction and operation of the Fairhaven facility. CCI will pay us $10,000 each month for these consulting services. Although the DPH has approved our agreement with CCI relating to the development and lease terms of the MMCC, the actual lease agreement with CCI has not been finalized or approved by the DPH. We will need to secure significant capital to provide the financing to CCI.

 

 As of December 31, 2017, we had provided financing to CCI of $131,589, which includes construction and working capital advances of $119,635, and accrued interest of $11,954.

 

PRINCIPAL SHAREHOLDERS

 

The following table shows the ownership, as of the date of this prospectus, of those persons owning beneficially 5% or more of our common stock and the number and percentage of outstanding shares owned by each of our directors and officers and by all officers and directors as a group.  Each owner has sole voting and investment power over their shares of common stock.

 

Name

 

Shares Owned

   

Percent of

Outstanding Shares

 
                 

Timothy Keogh

    1,200,000       6.2%  

Benjamin J. Barton

    --       --  

Strategic Capital Partners, LLC (1)

    8,966,667       46.3%  

All officers and directors as a Group (2 persons)

    10,166,667       52.5%  

 

(1)

Strategic Capital Partners, LLC is controlled by Mr. Barton.

  

38

 

 

See the section of the prospectus captioned “Market For Our Common Stock” for information concerning options and warrants held by our officers, directors and affiliates.

 

SELLING SHAREHOLDERS

 

The persons listed in the following table plan to offer the shares shown opposite their respective names by means of this prospectus. The owners of the shares to be sold by means of this prospectus are referred to as the “selling shareholders”. The selling shareholders acquired their shares in the transactions described below.

 

Private Offering. Between October 27, 2016 and November 7, 2016 we sold 2,000,000 units to a group of investors in a private offering at a price of $1.00 per unit. Each unit consisted of one share of our common stock and one Series I warrant. Each Series I Warrant entitles the holder to purchase one share of our common stock at a price of $3.00 per share at any time on or before November 4, 2020. By means of this prospectus we are offering 2,000,000 shares of our common stock which are issuable upon the exercise of the Series I warrants.

 

Convertible Notes. On September 15, 2016, we borrowed $75,000 from three unrelated parties. The notes were repaid in December 2016. As additional consideration for the loans we issued 75,000 Series II warrants and 75,000 Series III warrants to the lenders. Each Series II warrant allows the holder to purchase one share of our common stock at a price of $0.75 per share. Each Series III warrant allows the holder to purchase one share of our common stock at a price of $1.25 per share. The Series II and Series III warrants expire on December 15, 2020.

 

On December 29, 2017 we sold convertible notes in the principal amount of $800,000 to a group of accredited investors. The notes bear interest at 8% per year, are unsecured, and are due and payable on December 31, 2018. At the option of the note holders, the notes may be converted at any time into shares of our common stock at an initial conversion price of $1.50 per share.

 

The note holders also received Series VI warrants which entitle the note holders to purchase up to 533,333 shares of our common stock. The warrants are exercisable at a price of $1.50 per share and expire on October 17, 2022.

 

GVC Capital LLC acted as the placement agent for the offering and received a cash commission plus Series VII 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. Subsequent to December 29, 2017, GVC Capital assigned a portion of its warrants to registered representatives of GVC Capital.

 

39

 

 

We will not receive any proceeds from the sale of the securities by the selling shareholders. We will pay all costs of registering the securities offered by the selling shareholders. These costs, based upon the time related to preparing this section of the prospectus, are estimated to be $2,000. The selling shareholders will pay all sales commissions and other costs of the sale of the securities offered by them.

 

Name of      

Shares Issuable Upon

Exercise of Warrants

 

Shares

Issuable

Upon

Conversion

 

Shares

to be Sold

in this

   

Share

Ownership

after

 

Selling Shareholder

 

Shares Owned

 

Series

 

Warrants

 

of Notes

 

Offering

   

Offering

 
                                     

Angyalfy Family Trust

    50,000  

I

    50,000         50,000       50,000  

BCS Capital, LLC

    55,000  

I

    55,000         55,000       55,000  

Vicki D.E. Barone

    27,100  

I

    50,000         50,000       27,100  

Margaret Bathgate

    --  

I

    100,000         100,000          

The Gary S. Berlin Trust

    20,000  

I

    20,000         20,000       20,000  

Michael E. Donnelly

    --  

I

    25,000         25,000          

Duane L. Femrite Revocable Family Trust

    25,000  

I

    25,000         25,000       25,000  

James Greenwell

    --  

I

    15,000         15,000          

David Gregarek

    --  

I

    25,000         25,000          
         

II

    25,000         25,000          

GKG Investments, LLC

    15,806  

I

    75,000         75,000       15,806  
         

III

    25,000         25,000          

Genuine Partners

    --  

I

    25,000         25,000          
         

II

    25,000         25,000          
         

III

    25,000         25,000          

Angyalfy Family Trust

    50,000  

I

    50,000         50,000       50,000  

BCS Capital, LLC

    55,000  

I

    55,000         55,000       55,000  

Vicki D.E. Barone

    27,100  

I

    50,000         50,000       27,100  

Margaret Bathgate

    --  

I

    100,000         100,000          

The Gary S. Berlin Trust

    20,000  

I

    20,000         20,000       20,000  

Michael E. Donnelly

    --  

I

    25,000         25,000          

Duane L. Femrite Revocable Family Trust

    25,000  

I

    25,000         25,000       25,000  

James Greenwell

    --  

I

    15,000         15,000          

David Gregarek

    --  

I

    25,000         25,000          
         

II

    25,000         25,000          

GKG Investments, LLC

    15,806  

I

    75,000         75,000       15,806  
         

III

    25,000         25,000          

Genuine Partners

    --  

I

    25,000         25,000          
         

II

    25,000         25,000          
         

III

    25,000         25,000          

David and Stephanie Kenkel

    55,000  

I

    55,000         55,000       55,000  

Grace M. Kenkel Rev. Trust

    60,000  

I

    60,000         60,000       60,000  

John B. Kenkel Revocable Trust

    35,000  

I

    35,000         35,000       35,000  

Jon B. Kruljac

    --  

I

    75,000         75,000          

Lang Family Revocable Living Trust

    10,000  

I

    10,000         10,000       10,000  

 

40

 

 

Name of

       

Shares Issuable Upon

Exercise of Warrants

   

Shares

Issuable

Upon

Conversion

   

Shares

to be Sold

in this

   

Share

Ownership

after

 

Selling Shareholder

 

Shares Owned

 

Series

 

Warrants

   

of Notes

   

Offering

   

Offering

 
                                           

Hayden IR, LLC

    8,000  

I

    8,000               8,000       8,000  

Wilbert L. Miles

    23,000  

I

    15,000               15,000       23,000  

William D. Moreland

    --  

I

    500,000               500,000          

Brian J. Morgan

    306,000  

I

    200,000               200,000       306,000  

David R. Morgan

    --  

I

    100,000               100,000          

Rajnikant N. Patel

    --  

I

    25,000               25,000          

Walter R. Pedigo

    15,000  

I

    15,000               15,000       15,000  

Kathy Pudelko

    --  

I

    25,000               25,000          

George Resta Living Trust

    23,000  

I

    50,000               50,000       23,000  

Kevin J. Shields

    --  

I

    100,000               100,000          

Victor Sibilla

    10,000  

I

    10,000               10,000       10,000  

Thomas H. Smith

    --  

I

    25,000               25,000          

Alva Terry Staples

    --  

I

    25,000               25,000          

Tysadco Partners

    27,000  

I

    27,000               27,000       27,000  

Rob Ware

    --  

I

    25,000               25,000          

Ian Whitmore

    40,000  

I

    40,000               40,000       40,000  

Cinnamon Wing

    10,000  

I

    10,000               10,000       10,000  

Thomas D. Wolf

    10,000  

I

    10,000               10,000       10,000  

Sara Yassin

    30,000  

I

    50,000               50,000       30,000  

Robert J. Zappa

    --  

I

    10,000               10,000          

Alan Budd Zuckerman

    --  

I

    25,000               25,000          

Jon Kruljac

    --  

VI

    20,000       20,000       40,000          

William Moreland

    --  

VI

    333,333       333,333       666,666          

Michael E. Donnelly

    --  

VI

    30,000       30,000       60,000          

David Morgan

    --  

VI

    50,000       50,000       100,000          

Margaret Bathgate

    --  

VI

    100,000       100,000       200,000          

Michael E. Donnelly

    --  

VII

    45,000               45,000          

Steven M. Bathgate

    --  

VII

    30,000               30,000          

Vicki D.E. Barone

    --  

VII

    10,333               10,333          

GVC Capital LLC

    --  

VII

    21,334               21,334          

 

Upon the completion of this offering, and assuming all shares offered by the selling shareholders are sold, none of the selling shareholders, with the exception of Timothy Keogh, will own more than 1% of our common stock.

 

41

 

 

The controlling persons of the non-individual selling shareholders are:

 

Name of Shareholder

Controlling Person

 

 

Angyalfy Family Trust

William B. Angyalfy

BCS Capital, LLC

Katherine Barton

Gary S. Berlin Trust

Gary S. Berlin

Duane L. Femrite Revocable Family Trust

Duane L. Femrite

GKG Investments, LLC

Matt Gregarek

Genuine Partners

Tim Jay Brasel

Grace M. Kenkel Revocable Trust

David Kenkel

John B. Kenkel Revocable Trust

David Kenkel

Lang Family Revocable Living Trust

Lanny R. and Carol V. Lang

Hayden IR, LLC

Brett Maas

George Resta Living Trust

George Resta

Tysadco Partners

Glenn Levit

GVC Capital LLC

Vicki D.E. Barone

 

We have entered into an Investment Agreement with Mountain States Capital, LLC whereby Mountain States has agreed to provide us with up to $10,000,000 of funding through the purchase of shares of our common stock. William D. Moreland controls Mountains States Capital.

 

With the exception of Mr. Moreland, no selling shareholder has, or had, any material relationship with us or our officers or directors.

 

Margaret Bathgate is the wife of Steven Bathgate. Steven Bathgate, Michael Donnelly and Vicki Edwards-Barone are affiliated with GVC Capital, LLC. John B. Kruljac is affiliated with G Select, LLC. Victor Sibilla is affiliated with West Park Capital, Inc. GVC Capital, West Park Capital and G Select, LLC are securities brokers. These selling shareholders purchased their securities from us in the ordinary course of business and at the time of the purchase of these securities these selling shareholders had no agreements or understandings, directly or indirectly, with any person to distribute these securities. To our knowledge, no other selling shareholder is affiliated with a securities broker.

 

The shares of common stock to be sold by the selling shareholders may be sold by means of this prospectus from time to time as market conditions permit.

 

The shares of common stock may be sold by one or more of the following methods, without limitation:

 

 

a block trade in which a broker or dealer so engaged will attempt to sell the securities as agent but may position and resell a portion of the block as principal to facilitate the transaction;

 

 

purchases by a broker or dealer as principal and resale by such broker or dealer for its account pursuant to this prospectus;

 

 

ordinary brokerage transactions and transactions in which the broker solicits purchasers; and

 

 

face-to-face transactions between sellers and purchasers without a broker/dealer.

 

In completing sales, brokers or dealers engaged by the selling shareholders may arrange for other brokers or dealers to participate. Brokers or dealers may receive commissions or discounts from selling shareholders in amounts to be negotiated. As to any particular broker-dealer, this compensation might be in excess of customary commissions. Neither we nor the selling stockholders can presently estimate the amount of such compensation. Notwithstanding the above, no FINRA member will charge commissions that exceed 8% of the total proceeds from the sale.

 

42

 

 

The selling shareholders and any broker/dealers who act in connection with the sale of their securities may be deemed to be "underwriters" within the meaning of §2(11) of the Securities Acts of 1933, and any commissions received by them and any profit on any resale of the securities as principal might be deemed to be underwriting discounts and commissions under the Securities Act.

 

If any selling shareholder enters into an agreement to sell his or her securities to a broker-dealer as principal, and the broker-dealer is acting as an underwriter, we will file a post-effective amendment to the registration statement, of which this prospectus is a part, identifying the broker-dealer, providing required information concerning the plan of distribution, and otherwise revising the disclosures in this prospectus as needed. We will also file the agreement between the selling shareholder and the broker-dealer as an exhibit to the post-effective amendment to the registration statement.

 

 The selling shareholders may also sell their shares pursuant to Rule 144 under the Securities Act of 1933.

 

We have advised the selling shareholders that they, and any securities broker/dealers or others who sell the common stock or warrants on behalf of the selling shareholders, may be deemed to be statutory underwriters and will be subject to the prospectus delivery requirements under the Securities Act of 1933. We have also advised each selling shareholder that in the event of a "distribution" of the securities owned by the selling shareholder, the selling shareholder, any "affiliated purchasers", and any broker/dealer or other person who participates in the distribution may be subject to Rule 102 of Regulation M under the Securities Exchange Act of 1934 ("1934 Act") until their participation in that distribution is completed. Rule 102 makes it unlawful for any person who is participating in a distribution to bid for or purchase securities of the same class as is the subject of the distribution. A "distribution" is defined in Rule 102 as an offering of securities "that is distinguished from ordinary trading transactions by the magnitude of the offering and the presence of special selling efforts and selling methods". We have also advised the selling shareholders that Rule 101 of Regulation M under the 1934 Act prohibits any "stabilizing bid" or "stabilizing purchase" for the purpose of pegging, fixing or stabilizing the price of the common stock in connection with this offering.

 

DESCRIPTION OF SECURITIES

 

Common Stock

 

We are authorized to issue 100,000,000 shares of common stock. Holders of our common stock are each entitled to cast one vote for each share held of record on all matters presented to the shareholders. Cumulative voting is not allowed; hence, the holders of a majority of our outstanding common shares can elect all directors.

 

Holders of our common stock are entitled to receive such dividends as may be declared by our Board of Directors out of funds legally available and, in the event of liquidation, to share pro rata in any distribution of our assets after payment of liabilities. Our Board of Directors is not obligated to declare a dividend. It is not anticipated that dividends will be paid in the foreseeable future.

 

43

 

 

Holders of our common stock do not have preemptive rights to subscribe to additional shares if issued. There are no conversion, redemption, sinking fund or similar provisions regarding the common stock. All outstanding shares of common stock are fully paid and non-assessable.

 

Preferred Stock

 

We are authorized to issue 20,000,000 shares of preferred stock. Shares of preferred stock may be issued from time to time in one or more series as may be determined by our Board of Directors. The voting powers and preferences, the relative rights of each such series and the qualifications, limitations and restrictions of each series will be established by the Board of Directors. Our directors may issue preferred stock with multiple votes per share and dividend rights which would have priority over any dividends paid with respect to the holders of our common stock. The issuance of preferred stock with these rights may make the removal of management difficult even if the removal would be considered beneficial to shareholders generally, and will have the effect of limiting shareholder participation in transactions such as mergers or tender offers if these transactions are not favored by our management. As of the date of this prospectus, we had not issued any shares of preferred stock.

 

Options and Warrants

 

See the “Market For Our Common Stock” section of this prospectus for information concerning our outstanding options and warrants.

 

Transfer Agent

 

Island Stock Transfer, Inc.

15500 Roosevelt Boulevard, Suite 301

Clearwater, FL 33760

(727) 289-0010

 

LEGAL PROCEEDINGS

 

Beginning September 21, 2014, we entered into a series of agreements with Wellness Group Pharms, LLC (“WGP”), an entity that was pursuing licenses to operate marijuana cultivation facilities under the Illinois Compassionate Use of Medical Cannabis Pilot Program Act.  On February 2, 2015 WGP was granted a license to operate a cultivation facility. As amended, these agreements provided, among other things, that we were to provide working capital advances to WGP, with any advances accruing interest at a rate of 18% per annum. 

 

Between February 2015 and April 2015, we made working capital advances to WGP totaling $673,294.  We also funded costs totaling $332,357 to begin construction of WGP’s cultivation facility.  Due to WGP’s failure to comply with the terms of these agreements, and repeated lack of good faith and fair dealing, we terminated the agreements with WGP.  

 

44

 

 

On April 7, 2017 we filed an arbitration claim against WGP. The arbitration hearing commenced on January 8, 2018 and concluded on January 10, 2018.

 

On March 15, 2018, the arbitration panel issued its final award and awarded us $1,761,675. This award consisted of $1,045,000, plus interest at the rate of 18% per year from April 18, 2015 through March 15, 2018 ($550,000), our attorneys’ fees and costs ($113,865), and arbitration fees and expenses ($52,810). The American Arbitration Association will also return to us $32,562 which we paid to the AAA as deposits during the course of the arbitration proceeding. The arbitration award issued on March 15, 2018 is final and not subject to appeal or counterclaim.

 

We are not involved in any legal proceedings and we do not know of any legal proceedings which are threatened or contemplated. 

 

INDEMNIFICATION

 

Our Bylaws authorize indemnification of a director, officer, employee or agent against expenses incurred by him in connection with any action, suit, or proceeding to which he is named a party by reason of his having acted or served in such capacity, except for liabilities arising from his own misconduct or negligence in performance of his duty. In addition, even a director, officer, employee, or agent found liable for misconduct or negligence in the performance of his duty may obtain such indemnification if, in view of all the circumstances in the case, a court of competent jurisdiction determines such person is fairly and reasonably entitled to indemnification. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers, or controlling persons pursuant to these provisions, we have been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is therefore unenforceable.

 

AVAILABLE INFORMATION

 

We have filed with the Securities and Exchange Commission a Registration Statement on Form S-1 (together with all amendments and exhibits) under the Securities Act of 1933, as amended, with respect to the securities offered by this prospectus. This prospectus does not contain all of the information in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Securities and Exchange Commission. For further information, reference is made to the Registration Statement which may be read and copied at the Commission’s Public Reference Room.

 

We are subject to the requirements of the Securities Exchange Act of l934 and are required to file reports and other information with the Securities and Exchange Commission. Copies of any such reports and other information (which includes our financial statements) filed by us can be read and copied at the Commission's Public Reference Room.

 

The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Public Reference Room is located at 100 F. Street, N.E., Washington, D.C. 20549.

 

45

 

 

Our Registration Statement and all reports and other information we file with the Securities and Exchange Commission are available at www.sec.gov, the website of the Securities and Exchange Commission.

 

46

 

 

AMERICANN, INC.

 

FINANCIAL STATEMENTS

 

YEARS ENDED SEPTEMBER 30, 2017 AND 2016

 

AUDITED

 

 

 

Report of Independent Registered Public Accounting Firm

F-1

Consolidated Balance Sheets

F-2

Consolidated Statements of Operations

F-3

Consolidated Statements of Changes in Stockholders' Equity

F-4

Consolidated Statements of Cash Flows

F-5

Notes to the Consolidated Financial Statements

F-6

 

 

 

 

 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of 

AmeriCann, Inc.

Denver, CO

 

We have audited the accompanying consolidated balance sheets of AmeriCann, Inc. and its subsidiary (the “Company”) as of September 30, 2017 and 2016, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AmeriCann, Inc. and its subsidiary as of September 30, 2017 and 2016, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company suffered recurring losses from operations and has an accumulated deficit. These conditions raise significant doubt about the Company’s ability to continue as a going concern. Management’s plans in this regard are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ MaloneBailey, LLP

www.malonebailey.com

Houston, Texas

December 1, 2017

 

F-1

 

 

 

AMERICANN, INC.

CONSOLIDATED BALANCE SHEETS

 

 

 

September 30, 2017

 

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,627

 

 

$

24

 

Interest receivable

 

 

-

 

 

 

2,521

 

Current portion of prepaid land lease

 

 

57,959

 

 

 

-

 

Prepaid expenses and other current assets

 

 

5,000

 

 

 

11,726

 

Note receivable

 

 

-

 

 

 

247,378

 

Total current assets

 

 

64,586

 

 

 

261,649

 

 

 

 

 

 

 

 

 

 

Land held for sale

 

 

1,611,312

 

 

 

2,250,809

 

Construction in progress

 

 

680,028

 

 

 

-

 

Furniture and equipment (net of depreciation of $3,704 and $2,581)

 

 

4,153

 

 

 

5,276

 

Website development costs (net of amortization of $28,820 and $14,986)

 

 

12,680

 

 

 

26,514

 

Notes and other receivables (net of allowance of $469,699)

 

 

780,315

 

 

 

780,315

 

Note receivable - related party

 

 

125,327

 

 

 

57,693

 

Prepaid land lease and related deposits, net of current portion

 

 

2,782,047

 

 

 

925,000

 

Security deposit

 

 

3,110

 

 

 

3,110

 

Total assets

 

$

6,063,558

 

 

$

4,310,366

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

624,623

 

 

$

385,380

 

Interest payable (including $84,998 and $109,825 to related parties)

 

 

86,253

 

 

 

118,749

 

Other payables

 

 

19,699

 

 

 

14,927

 

Notes payable (net of discount of $0 and $35,250)

 

 

1,070,000

 

 

 

1,157,997

 

Total current liabilities

 

 

1,800,575

 

 

 

1,677,053

 

 

 

 

 

 

 

 

 

 

Notes payable - related party (inclusive of premium of $47,037 and $72,651)

 

 

1,978,683

 

 

 

2,024,297

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

3,779,258

 

 

 

3,701,350

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies - see Note 10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value; 20,000,000 shares authorized; no shares issued and outstanding

 

 

-

 

 

 

-

 

Common stock, $0.0001 par value; 100,000,000 shares authorized; 19,366,000 and 17,031,000 shares issued and outstanding as of September 30, 2017 and 2016, respectively

 

 

1,937

 

 

 

1,703

 

Additional paid in capital

 

 

10,959,188

 

 

 

6,512,244

 

Accumulated deficit

 

 

(8,676,825

)

 

 

(5,904,931

)

Total stockholders' equity

 

 

2,284,300

 

 

 

609,016

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$

6,063,558

 

 

$

4,310,366

 

 

See accompanying notes to consolidated financial statements.

 

F-2

 

 

 

AMERICANN, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

Year Ended September 30,

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

Consulting fees

 

$

40,000

 

 

$

60,000

 

Total revenues

 

 

40,000

 

 

 

60,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Advertising and marketing

 

 

10,712

 

 

 

21,312

 

Professional fees

 

 

415,173

 

 

 

571,141

 

General and administrative expenses

 

 

1,412,314

 

 

 

583,739

 

Provision for doubtful accounts

 

 

-

 

 

 

13,229

 

Impairment of long-lived assets

 

 

639,497

 

 

 

-

 

Total operating expenses

 

 

2,477,696

 

 

 

1,189,421

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(2,437,696

)

 

 

(1,129,421

)

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

11,086

 

 

 

183,255

 

Interest expense

 

 

(201,367

)

 

 

(162,834

)

Loss on extinguishment of debt

 

 

-

 

 

 

(991,939

)

Interest expense - related party

 

 

(143,917

)

 

 

(109,825

)

Total other income (expense)

 

 

(334,198

)

 

 

(1,081,343

)

 

 

 

 

 

 

 

 

 

Net loss

 

$

(2,771,894

)

 

$

(2,210,764

)

 

 

 

 

 

 

 

 

 

Basic and diluted loss per common share

 

$

(0.15

)

 

$

(0.13

)

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

19,007,371

 

 

 

17,031,000

 

 

See accompanying notes to consolidated financial statements. 

 

F-3

 

 

 

AMERICANN, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Paid In

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, September 30, 2015

 

 

-

 

 

$

-

 

 

 

16,631,000

 

 

$

1,663

 

 

$

5,007,497

 

 

$

(3,694,167

)

 

$

1,314,993

 

Stock-based compensation expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

131,075

 

 

 

-

 

 

 

131,075

 

Stock option expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9,173

 

 

 

-

 

 

 

9,173

 

Stock issued for debt modification

 

 

-

 

 

 

-

 

 

 

400,000

 

 

 

40

 

 

 

1,364,499

 

 

 

-

 

 

 

1,364,539

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,210,764

)

 

 

(2,210,764

)

Balances, September 30, 2016

 

 

-

 

 

$

-

 

 

 

17,031,000

 

 

$

1,703

 

 

$

6,512,244

 

 

$

(5,904,931

)

 

$

609,016

 

Stock-based compensation expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

37,450

 

 

 

-

 

 

 

37,450

 

Shares and warrants issued to lessor

 

 

-

 

 

 

-

 

 

 

100,000

 

 

 

10

 

 

 

1,972,956

 

 

 

-

 

 

 

1,972,966

 

Stock option expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

222,988

 

 

 

-

 

 

 

222,988

 

Stock issued for options exercised

 

 

-

 

 

 

-

 

 

 

50,000

 

 

 

5

 

 

 

37,495

 

 

 

-

 

 

 

37,500

 

Stock issued for cash, net

 

 

-

 

 

 

-

 

 

 

2,185,000

 

 

 

219

 

 

 

2,176,055

 

 

 

-

 

 

 

2,176,274

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,771,894

)

 

 

(2,771,894

)

Balances, September 30, 2017

 

 

-

 

 

$

-

 

 

 

19,366,000

 

 

$

1,937

 

 

$

10,959,188

 

 

$

(8,676,825

)

 

$

2,284,300

 

 

See accompanying notes to consolidated financial statements.

 

F-4

 

 

 

AMERICANN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Year Ended September 30,

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(2,771,894

)

 

$

(2,210,764

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

14,957

 

 

 

14,956

 

Provision for doubtful accounts

 

 

-

 

 

 

13,229

 

Stock based compensation and option expense

 

 

260,438

 

 

 

140,249

 

Loss on extinguishment of debt

 

 

-

 

 

 

991,939

 

Impairment of long-lived assets

 

 

639,497

 

 

 

-

 

Amortization of equity instruments issued to lessor

 

 

39,456

 

 

 

-

 

Amortization of debt discount/(premium)

 

 

9,636

 

 

 

-

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Interest receivable

 

 

2,521

 

 

 

3,454

 

Bank overdraft

 

 

10,616

 

 

 

-

 

Prepaid expenses

 

 

25,230

 

 

 

24,032

 

Accounts payable and accrued expenses

 

 

49,319

 

 

 

300,082

 

Interest payable

 

 

(7,669

)

 

 

8,924

 

Interest payable - related party

 

 

(24,827

)

 

 

109,825

 

Other payables

 

 

4,772

 

 

 

3,211

 

Net cash flows used in operations

 

 

(1,747,948

)

 

 

(600,863

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Additions to construction in progress

 

 

(500,720

)

 

 

-

 

Deposit on land

 

 

-

 

 

 

(725,000

)

Payments received on notes receivable

 

 

247,378

 

 

 

338,927

 

Advances made on notes receivable - related party

 

 

(67,634

)

 

 

(57,693

)

Advances made on notes receivable

 

 

-

 

 

 

(128,744

)

Net cash flows used in investing activities

 

 

(320,976

)

 

 

(572,510

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Common stock issued for cash, net

 

 

2,176,274

 

 

 

-

 

Proceeds from exercise of stock options

 

 

37,500

 

 

 

-

 

Proceeds from note payable

 

 

104,657

 

 

 

724,544

 

Proceeds from note payable - related party

 

 

-

 

 

 

247,500

 

Payments on note payable - related party

 

 

(20,000

)

 

 

-

 

Payments on notes payable

 

 

(227,904

)

 

 

-

 

Net cash flows provided by financing activities

 

 

2,070,527

 

 

 

972,044

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

1,603

 

 

 

(201,329

)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

24

 

 

 

201,353

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

1,627

 

 

$

24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplementary Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for interest (including $194,358 to related parties)

 

$

396,841

 

 

$

151,925

 

Cash paid for income taxes

 

$

-

 

 

$

-

 

 

 

 

 

 

 

 

 

 

Non-Cash Investing and Financing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares and warrants issued to lessor as consideration for land lease

 

 

1,972,966

 

 

 

-

 

Construction in progress expenditures incurred but not yet paid

 

 

179,308

 

 

 

-

 

Common stock issued for related party debt settlement

 

 

-

 

 

 

500,000

 

Debt discount on new debt

 

 

-

 

 

 

35,250

 

Reclass note payable to related party (3rd party debt was released and assumed by related party)

 

 

-

 

 

 

521,297

 

Debt discount/premium due to debt modification

 

 

-

 

 

 

72,651

 

Warrants issued with debt modification

 

 

-

 

 

 

756,637

 

 

See accompanying notes to consolidated financial statements. 

 

F-5

 

 

AMERICANN, INC.

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

NOTE 1.     DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

 

Description of Business

 

AmeriCann, Inc. ("the Company", “we”, “our”, or "the Issuer") was organized under the laws of the State of Delaware on June 25, 2010.

 

On January 17, 2014, a privately held limited liability company acquired approximately 93% of the Company's outstanding shares of common stock from several of the Company's shareholders which resulted in a change in control of the Company.

 

The Company's new business plan is to offer a comprehensive, turnkey package of services that includes consulting, design, construction and financing to approved and licensed marijuana operators throughout the United States. The Company's business plan is based on the anticipated growth of the regulated marijuana market in the United States.

 

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

 

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

 

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

 

Summary of Significant Accounting Policies

 

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

 

Principles of Consolidation

 

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

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant estimates and assumptions made by management are valuation of equity instruments, deferred tax asset valuation and allowance and collectability of long-lived assets. Actual results could differ from those estimates as the current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions.  See Note 3 for a discussion of our provision for doubtful accounts for amount amounts owed from WGP.

 

Cash and Cash Equivalents

 

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

 

Income Taxes

 

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

 

We expect to recognize the financial statement benefit of an uncertain tax position only after considering the probability that a tax authority would sustain the position in an examination. For tax positions meeting a "more-likely-than-not" threshold, the amount to be recognized in the consolidated financial statements will be the benefit expected to be realized upon settlement with the tax authority. For tax positions not meeting the threshold, no financial statement benefit is recognized. As of September 30, 2017, we had no uncertain tax positions. We recognize interest and penalties, if any, related to uncertain tax positions as general and administrative expenses. We currently have no federal or state tax examinations nor have we had any federal or state examinations since our inception. To date, we have not incurred any interest or tax penalties.

 

F-6

 

 

Concentration of Credit Risks and Significant Customers

 

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash, notes receivables, deposits, accounts receivables and notes receivable. We place our cash with high credit quality financial institutions. As of September 30, 2017, we had outstanding notes receivable of $125,327 with Coastal Compassion Inc., and a note and a receivable in the amount of $1,250,014 with WGP (exclusive of provision for doubtful accounts of $469,699).  See Note 3 for a discussion of our provision for doubtful accounts for amounts owed from WGP.

 

For the years ended September 30, 2017 and 2016, all of the Company’s revenue was earned from one customer, 4900 Jackson, LLC.

 

Financial Instruments and Fair Value of Financial Instruments

 

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

 

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

 

 

Level 1:

Observable inputs such as quoted market prices in active markets for identical assets or liabilities

 

Level 2:

Observable market-based inputs or unobservable inputs that are corroborated by market data

 

Level 3:

Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.

 

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

 

Derivative Liabilities

 

We evaluate stock options, stock warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under the relevant sections of ASC Topic 815-40, Derivative Instruments and Hedging: Contracts in Entity’s Own Equity. The result of this accounting treatment could be that the fair value of a financial instrument is classified as a derivative instrument and is marked-to-market at each consolidated balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the consolidated statement of operations as other income or other expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815-40 are reclassified to a liability account at the fair value of the instrument on the reclassification date. We determined that none of our financial instruments meet the criteria for derivative accounting as of September 30, 2017 and 2016.

 

Long-Lived Assets

 

Our long-lived assets consisted of property, equipment and real estate and are reviewed for impairment in accordance with the guidance of the Topic ASC Topic 360, Property, Plant, and Equipment, and ASC Topic 205, Presentation of Consolidated Financial Statements. We test for impairment losses on long-lived assets used in operations whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Impairment evaluations involve management's estimates on asset useful lives and future cash flows. Actual useful lives and cash flows could be different from those estimated by management which could have a material effect on our reporting results and financial positions. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. For the year ended September 30, 2017, we recognized impairment losses of $639,497 on our long-lived assets. There were no such charges for the year ended September 30, 2016.

 

F-7

 

 

Property and Equipment

 

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

 

Construction in progress (CIP)

 

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

 

Capitalized Interest

 

The Company capitalizes interest to construction in progress made in connection with medical center cannabis construction that are not subject to current depreciation. Interest is capitalized only for the period that activities are in progress to bring the projects to their intended use. Capitalized interest was $28,697 and $0 for the years ended September 30, 2017, and 2016, respectively.

 

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

 

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

 

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

 

Non-Cash Equity Transactions

 

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

 

Stock-Based Compensation

 

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

 

Related Parties

 

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

 

F-8

 

 

Revenue Recognition

 

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

 

Advertising Expense

 

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

 

General and Administrative Expense

 

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

 

Loss per Share

 

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

 

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

 

Recently Adopted Accounting Pronouncements

 

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

 

Recently Issued Accounting Pronouncements

 

Between May 2014 and December 2016, the FASB issued several Accounting Standards Updates ASU on Revenue from Contracts with Customers (Topic 606). These updates will supersede nearly all existing revenue recognition guidance under current U.S. generally accepted accounting principles (GAAP). The core principle is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. A five-step process has been defined to achieve this core principle, and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standards are effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standards in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting the standards recognized at the date of adoption (which includes additional footnote disclosures). The Company is currently evaluating the impact of its pending adoption of these standards on its consolidated financial statements and has not yet determined the method by which it will adopt the standard in fiscal 2018.

  

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to provide guidance on recognizing lease assets and lease liabilities on the consolidated balance sheet and disclosing key information about leasing arrangements, specifically differentiating between different types of leases.  The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from all leases. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous GAAP. There continues to be a differentiation between finance leases and operating leases. However, the principal difference from previous guidance is that the lease assets and lease liabilities arising from operating leases should be recognized in the consolidated balance sheet.   The accounting applied by a lessor is largely unchanged from that applied under previous GAAP.  The amendments will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted.  In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. An entity that elects to apply the practical expedients will, in effect, continue to account for leases that commence before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP.  The Company is currently evaluating the impact of these amendments on its consolidated financial statements.

 

F-9

 

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, to reduce complexity in accounting standards involving several aspects of the accounting for employee share-based payment transactions, including (1) the income tax consequences, (2) classification of awards as either equity or liabilities, and (3) classification on the statement of cash flows. The amendments will be effective for consolidated financial statements issued for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and early adoption is permitted.  Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition method, amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively, amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively, and amendments related to the presentation of excess tax benefits on the statement of cash flows can be applied using either a prospective transition method or a retrospective transition method. The Company is currently evaluating the impact of these amendments on its consolidated financial statements.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows.  The amendments should be applied using a retrospective transition method, and are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact of these amendments on its consolidated financial statements.

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force), to provide guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flow.  The amendments should be applied using a retrospective transition method, and are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not expect this amendment to have a significant impact on its consolidated 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 consolidated financial statements of a registrant when such standards are adopted in a future period.  Specifically, 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 is currently evaluating the impact of these amendments on its consolidated financial statements.

 

In March 2017, the FASB issued ASU No. 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, to amend the amortization period for certain purchased callable debt securities held at a premium. The ASU shortens the amortization period for the premium to the earliest call date. Under current Generally Accepted Accounting Principles (“GAAP”), entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. The amendments should be applied on a modified retrospective basis, and are effective for fiscal years beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period.  The Company is currently evaluating the impact of this amendment on its consolidated financial statements.

 

In February 2017, the FASB issued ASU No. 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, to clarify the scope of Subtopic 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets, and to add guidance for partial sales of nonfinancial assets. Subtopic 610-20, which was issued in May 2014 as a part of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. The amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, which is the same time as the amendments in ASU No. 2014-09, and early adoption is permitted. The Company is currently evaluating the impact of this amendment on its consolidated 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 Topic 718. The amendments are effective for fiscal years beginning after December 15, 2017, and should be applied prospectively to an award modified on or after the adoption date. Early adoption is permitted, including adoption in an interim period.  The Company does not expect this amendment to have a material impact on its consolidated financial statements.

 

F-10

 

 

In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The ASU was issued to address the complexity associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics of liabilities and equity.  The ASU, among other things, eliminates the need to consider the effects of down round features when analyzing convertible debt, warrants and other financing instruments.  As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The amendments are effective for fiscal years beginning after December 15, 2018, and should be applied retrospectively. Early adoption is permitted, including adoption in an interim period.  The Company plans to early adopt the ASU, and is currently evaluating implementation date and the impact of this amendment on its consolidated financial statements.

 

 

NOTE 2.     GOING CONCERN

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. The Company had an accumulated deficit of $8,676,825 and $5,904,931 at September 30, 2017 and 2016, respectively, had a net loss of $2,771,894 for the year ended September 30, 2017 and a working capital deficit of $1,735,989. Further, the amount due from WGP of $1,250,014 (before an allowance of $469,699) may not be collectible. These matters, among others, raise substantial doubt about the Company’s ability to continue as a going concern. While the Company is attempting to increase operations and generate additional revenues, the Company's cash position may not be significant enough to support the Company's daily operations. Management intends to raise additional funds through the sale of its securities. The Company filed a Demand for Arbitration against WGP on April 7, 2017. The arbitration hearing is scheduled to occur on January 8, 2018.

 

To date, the Company has funded its operations primarily by way of the sale of equity securities, convertible note financing, short term financing from private parties, and advances from related parties. The Company currently needs to raise additional capital in order to fund operations, maintain the land lease agreement, as well as to make payments on existing liabilities.  The Company is continuing to raise capital, as it did during the year ended September 30, 2017, in order to continue the Company’s business operations.  The Company currently requires approximately $7 million to properly fund is business plan over the next twelve months.  On September 1, 2017, the Company entered into an 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. MSC has the option to increase the equity line agreement for a total of $20,000,000.  On October 5, 2017, the Company entered into an agreement to sell the parcel of land in Denver, Colorado for $1,760,000.  On  October 30, 2017 the Company secured $800,000 in financing from three unrelated parties in the form of a loan. There can be no assurance that the Company’s management will be successful in its planned efforts, and a failure to do so may lead to the Company being unable to continue its operations. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

F-11

 

 

 

NOTE 3.     NOTES RECEIVABLE

 

Notes and Other Receivables consisted of the following: 

 

 

 

September 30,
2017

 

 

September 30,

2016

 

 

 

 

 

 

 

 

 

 

Note receivable from 4900 Jackson, LLC, a licensed dispensary, interest rate of 12.0%; monthly principal and interest payments of $50,000, with a balloon payment of $182,531 due on May 1, 2017; collateralized by the borrower's assets.

 

$

-

 

 

$

247,378

 

 

 

 

 

 

 

 

 

 

Notes and other receivables from WGP, a licensed medical marijuana cultivator; $673,294 note secured by real and personal property of the borrower, interest rate of 18.0%; accrued consulting fees of $40,000, construction advances of $332,357 and accrued interest of $204,363. Net of reserves of $469,699. All amounts are due and payable immediately.

 

 

780,315

 

 

 

780,315

 

 

 

 

 

 

 

 

 

 

Related party note receivable from CCI, a non-profit corporation, financing of up to $2.5 million through April 2021, interest rate of 18.0%; monthly principal and interest payments commencing the sixth month after CCI begins to generate sales; construction and working capital advances of $119,635, and accrued interest of $5,692; unsecured.

 

 

125,327

 

 

 

57,693

 

 

 

 

905,642

 

 

 

1,085,386

 

Less: Current portion

 

 

-

 

 

 

247,378

 

 

 

$

905,642

 

 

$

838,008

 

 

The notes and other receivables from WGP are classified as long term due to ongoing disputes between the Company and WGP. We filed a Demand for Arbitration against WGP on April 7, 2017. The arbitration hearing is scheduled to begin on January 8, 2018.

 

 

NOTE 4. LAND HELD FOR SALE

 

On July 31, 2014, we closed on an all cash purchase of a five-acre parcel of land located in north central Denver, Colorado. The total purchase price for the property was $2,250,000.  The property is currently zoned for cannabis cultivation and processing by the City and County of Denver. This property serves as collateral for a $990,000 loan which is due and payable on March 15, 2018.  See Note 5 for a discussion regarding the note payable. On October 5, 2017, we entered into a purchase and sale agreement to sell the parcel of land for $1,760,000 to EEN Real Estate, Inc.  An impairment loss of $639,497 was recognized for the year ended September 30, 2017 to adjust the carrying value to $1,611,312, net of estimated selling costs.  The property is reported in the Company’s consolidated balance sheet at September 30, 2017 as Land Held for Sale of $1,611,312.

 

 

NOTE 5.     NOTES PAYABLE

 

Unrelated

 

On September 15, 2015, a potential buyer loaned the Company $900,000. The loan bears interest at 12% per year and was due and payable on March 16, 2016. The Company used $650,000 of the proceeds to repay an existing loan that was secured by the land that is classified as held for sale. On April 6, 2016, the loan was modified to increase the principal balance to $990,000, increase the interest rate to 18% per year, and extend the due date to March 15, 2017. We considered ASC Topic 470-50, Debt Modifications and Extinguishments, and determined that the modification was an extinguishment and therefore, recognized a loss on the extinguishment of the original debt of $90,000 in the year ended September 30, 2016. On March 15, 2017, the maturity date of the loan was extended to March 15, 2018, and the interest rate remained the same at 18% per year. We may repay the loan at any time without penalty. Interest expense was $188,100 and $150,497 for the years ended September 30, 2017 and 2016, respectively.

 

As of September 30, 2016, we had borrowed $203,247 from various unrelated parties. The interest rates on these notes ranged from 8% to 18%, due dates ranged from December 14, 2016, through January 15, 2017, and $75,000 was convertible into the Company’s common stock at a conversion price of $0.75. In addition to the notes, we issued warrants to purchase 75,000 shares of our common stock, exercisable at a price of $0.75 per share, and warrants to purchase an additional 75,000 shares of common stock, exercisable at a price of $1.25 per share. Both sets of warrants expire on September 15, 2020. We allocated the new proceeds to the warrants, stock options, and the convertible debt based on their relative fair values, as determined by the Black Scholes option pricing model. Based on the Black Scholes option pricing model, $35,250 was allocated to the warrants which are reflected in additional paid-in-capital and $35,250 was allocated to a debt discount. The debt discount was amortized on a straight-line basis over the term of the note. During the year ended September 30, 2017, we received advances of $24,657 and made payments of $227,904. At September 30, 2017, accrued interest on this note payable was $0. At September 30, 2017, there was no outstanding principal or interest, and no unamortized debt discount due to the full payment of the notes. Interest expense was $4,267 and $12,337 for the years ended September 30, 2017 and 2016, respectively.

 

F-12

 

 

On August 25, 2017, we entered into a Promissory Note with an unrelated party that provides financing of up to $150,000. The note bears interest at 12% and is due and payable on May 31, 2018. As of September 30, 2017, we had borrowed $80,000. At September 30, 2017, accrued interest on this note payable was $1,255. Interest expense was $1,255 and $0 for the years ended September 30, 2017 and 2016, 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 $1,931,646 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. At September 30, 2017, accrued interest on this note payable was $47,630.

 

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 $931,646, 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. The note is secured by a second lien on our property in Denver, Colorado and 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. At September 30, 2017, accrued interest on this note payable was $37,368.

 

The Company analyzed the modification of the note under ASC Topic 470, Debt, and concluded that the modification was an extinguishment and therefore, recognized a loss on the extinguishment of the original debt of $901,939 in the year ended September 30, 2016.

 

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. See Note 9 for additional information on the warrants. We allocated the relative fair values to the warrants, stock options, and convertible debt, as determined by the Black Scholes option pricing model. Based on the Black Scholes option pricing model, a net debt premium of $72,651 was allocated to the warrants which are reflected in additional paid-in-capital. The debt premium is being amortized on a straight-line basis over the term of the notes.

 

At September 30, 2017, the outstanding principal on these notes was $1,978,683, and the unamortized debt premium was $47,037. Amortization of debt premium was $25,614 and $0 for the year ended September 30, 2017 and 2016, respectively.

 

 

NOTE 6.     RELATED PARTY TRANSACTIONS

 

Strategic Capital Partners. At September 30, 2017 and 2016, we had outstanding notes payable to SCP, of $1,978,683 and $2,024,297, respectively. On July 14, 2016, $500,000 of the amount owed to SCP was converted into 400,000 shares of our common stock, and the remaining $1,931,646 owed to SCP was divided into two promissory notes. See Notes 5 and 9.

 

Interest expense was $143,917 and $109,825 for the years ended September 30, 2017 and 2016, respectively. Interest payable – related party of $84,998 and $109,825 was included in the accompanying consolidated balance sheets at  September 30, 2017 and September 30, 2016, respectively.  During 2017, the Company made interest payments of $194,358, principal payments of $20,000, and received no advances. During 2016, the Company received advances of $247,500 and made no payments.

 

F-13

 

 

Coastal Compassion. On April 7, 2016, we signed agreements with Coastal Compassion Inc. (“CCI”). CCI is one of a limited number of non-profit organizations that has received a provisional or final registration to cultivate, process and sell medical cannabis by the Massachusetts Department of Public Health. CCI has agreed to become the initial tenant in our planned MMCC. Tim Keogh, our Chief Executive Officer, is a Board Member of CCI.

 

Pursuant to the agreements, we agreed to provide CCI with financing of up to $2.5 million for a five-year term at 18% interest per year for construction and working capital required for CCI’s approved dispensary and cultivation center in Fairhaven, MA. For a three- year period beginning April 1, 2016, we agreed to consult with CCI in the design, construction and operation of the Fairhaven facility. CCI will owe us $10,000 each month for these consulting services, but is not required to pay until six months after generating certain revenues. Although the DPH has approved our agreement with CCI relating to the development and lease terms of the MMCC, the actual lease agreement with CCI has not been finalized or approved by the DPH. We will need to secure significant capital to provide the financing to CCI.

 

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

 

 

NOTE 7.     EARNINGS PER SHARE

 

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

 

 

 

Year Ended September 30,

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(2,771,894

)

 

$

(2,210,764

)

 

 

 

 

 

 

 

 

 

Basic weighted average outstanding shares of common stock

 

 

19,007,371

 

 

 

17,031,000

 

Dilutive effects of common share equivalents

 

 

-

 

 

 

-

 

Dilutive weighted average outstanding shares of common stock

 

 

19,007,371

 

 

 

17,031,000

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share of common stock

 

$

(0.15

)

 

$

(0.13

)

 

 

As of September 30, 2017, we have excluded 1,305,000 of stock options and 10,166,000 of warrants from the computation of diluted net loss per share since the effects are anti-dilutive. As of September 30, 2016, we have excluded 1,205,000 of stock options and 4,341,000 of warrants from the computation of diluted net loss per share since the effects are anti-dilutive.

 

 

NOTE 8.     INCOME TAXES

 

Deferred income taxes arise from the temporary differences between financial statement and income tax recognition of net operating losses. These loss carryovers are limited under the Internal Revenue Code should a significant change in ownership occur. The Company accounts for income taxes pursuant to ASC Topic 740. The Company early adopted ASU 2015-17, Balance Sheet Classification of Deferred Taxes, during the year ended September 30, 2016.

 

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

 

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

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

Deferred tax assets

 

$

-

 

 

$

-

 

 

 

 

 

 

 

 

 

 

Deferred tax liabilities

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Net deferred tax assets/(liabilities)

 

$

-

 

 

$

-

 

 

F-14

 

 

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

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

 

Temporary Difference

 

 

Tax Effect

 

 

Temporary Difference

 

 

Tax Effect

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred tax assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating loss

 

$

1,789,958

 

 

$

663,358

 

 

$

1,156,331

 

 

$

428,536

 

Other temporary differences

 

 

716,750

 

 

 

265,628

 

 

 

9,261

 

 

 

3,432

 

Net deferred tax assets

 

 

2,506,708

 

 

 

928,986

 

 

 

1,165,592

 

 

 

431,968

 

Valuation allowance

 

 

(2,506,708

)

 

 

(928,986

)

 

 

(1,165,592

)

 

 

(431,968

)

Total deferred tax asset

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred tax liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deferred liability

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total net deferred tax asset

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

At September 30, 2017 and September 30, 2016, the Company had approximately and $4,370,404 and $2,551,748 respectively, in unused federal net operating loss carryforwards, which begin to expire principally in the year 2034.  A deferred tax asset at each date of approximately $928,986 and $431,968 resulting from the loss carryforwards and other temporary differences has been offset by a 100% valuation allowance.  The change in the valuation allowance for the period ended September 30, 2017 and September 30, 2016 was approximately $497,018 and $27,396.

 

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

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

U.S. Federal statutory graduated rate

 

 

34.00

%

 

 

34.00

%

State income tax rate, net of federal benefit

 

 

3.06

%

 

 

3.06

%

Total rate

 

 

37.06

%

 

 

37.06

%

 

 

 

 

 

 

 

 

 

Less: Net operating loss for which no benefit is currently available

 

 

(37.06

)%

 

 

(37.06

)%

Net effective rate

 

 

0.00

%

 

 

0.00

%

 

The Company’s income tax filings are subject to audit by various taxing authorities. The Company’s open audit periods are September 30, 2015, 2016, and 2017. In evaluating the Company’s provisions and accruals, future taxable income, and reversal of temporary differences, interpretations and tax planning strategies are considered. The Company believes its estimates are appropriate based on current facts and circumstances.

 

 

NOTE 9.     EQUITY

 

Preferred Stock

 

The Company has authorized 20,000,000 shares of $.0001 par value preferred stock. No preferred shares were outstanding at September 30, 2017 and 2016.

 

Common Stock

 

On July 14, 2016, $500,000 of a note payable to SCP was converted into 400,000 shares of the Company’s common stock ($1.25 conversion rate) as part of an overall debt modification. See Note 5.

 

F-15

 

 

On November 7, 2016, we sold 2,000,000 Units at a price of $1.00 per Unit. The Units were sold in a private offering to a group of accredited investors. Each Unit consisted of one share of our common stock and one Series I Warrant. Each Series I Warrant allows the Holder to purchase one share of our common stock at a price of $3.00 per share at any time on or before November 4, 2020. The relative fair value of the warrants issued was approximately 43% of the proceeds received. The offering provided us with $2,000,000 in gross proceeds and the potential for an additional $6,000,000 in proceeds with the exercise of the Series I Warrants. Stock issuance costs of $193,726 were netted against the proceeds from this placement. The proceeds from the placement will be utilized for the MMCC development, to pursue new opportunities in California, Pennsylvania, Florida and other states, and general corporate purposes.

 

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

 

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

 

On September 1, 2017, we entered into an equity line agreement with Mountain States Capital, LLC (“MSC”). Under the equity line agreement, MSC agreed to provide us with up to $10,000,000 of funding through the purchase of shares of the Company’s common stock. MSC has the option to increase the equity line agreement for a total of $20,000,000. During the term of the agreement, at our sole discretion we 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 we 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, we will sell, and MSC will purchase, the shares of the Company’s common stock specified in the Put Notice. The amount to be paid by MSC on a particular closing date will be determined by dividing the dollar amount specified in the Put Notice by the Purchase Price. The Purchase Price is 90% of the lowest daily volume weighted average price of the Company’s common stock during the Pricing Period. The Pricing Period, with respect to a particular Put Notice, is five consecutive trading days including, and immediately following, the delivery of a Put Notice. However, no Put Notice may be delivered on a day that is not a Trading Day. The Company may specify a Minimum Price when submitting a Put Notice, provided however that the Minimum Price must be more than 75% of the Closing Price of the Company’s Common Stock on the date immediately preceding the date of the delivery of the Put Notice. If the Purchase Price is less than the Minimum Price, the Company may, at its option,

 

 

sell shares to MSC on the Closing Date using the Purchase Price; or

 

provide MSC the opportunity to purchase some or all of the shares using the Minimum Price instead of the Purchase Price.

 

The Company is under no obligation to submit any Put Notices. The equity line agreement has a term of 18 months, which will begin on the effective date of the registration statement which the Company has agreed to file with the Securities and Exchange Commission so that the shares of common stock to be sold to MSC may be sold in the public market. As of September 30, 2017, we have not drawn on the equity line and no shares have been issued.

 

Shares Issued to Officer

 

In connection with an employment agreement described in Note 10, SCP, the Company's largest shareholder, sold 1,200,000 shares of the Company's common stock to Mr. Keogh at a price of $0.001 per share. The estimated fair market value of the stock was $0.75 per share based the then current Private Placement Memorandum in place resulting in an aggregate stock based compensation of $898,800 for the difference between the estimated fair market value of $0.75 and the purchase price of $0.001 per share. As the Company expects the shares to be earned over the vesting period, the Company will amortize the entire amount to stock based compensation in the Company's consolidated statement of operations over the vesting period. Stock based compensation expense for these shares was $37,450 and $131,075 for the years ended September 30, 2017 and 2016, respectively.  As of September 30, 2017, there was no unrecognized stock based compensation expense associated with this award. As of September 30, 2017, all shares have vested.

 

Shares Issued to Consultants

 

On February 19, 2015, the Company issued 50,000 shares of common stock in connection with an investment relation services agreement dated December 1, 2014 whereby 25,000 shares vested immediately and 25,000 shares vested on the six-month anniversary of the agreement. Services are for a period of 12 months. These shares had an aggregate value of $34,250 based on the fair market value of the stock on the vesting date.  Amortization of the prepaid expense for these shares was $0 and $5,708 for the years ended September 30, 2017 and 2016, respectively, and recognized in general and administrative expenses.

 

F-16

 

 

Shares Issued to Lessor

 

As described in Note 10, on October 17, 2016, we entered into a Share Purchase Agreement with MMP pursuant to which we issued to MMP 100,000 shares of our common stock at par value of $0.0001 (“Common Stock”), and a warrant to purchase up to 3,640,000 shares of Common Stock at an exercise price of $1.00 per share. The warrant can be exercised at any time on or after October 17, 2018 and on or before October 17, 2020. The warrant does not contain a cashless exercise provision.

 

Stock Options

 

Options Issuances in 2016

 

There were no stock options granted in 2016.

 

Options Issuances in 2017

 

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

 

 

Risk-free interest rate – 1.62 percent

 

Expected term – 4.0 years

 

Volatility – 179 percent

 

As these options were fully vested at grant date, the full value of $222,988 was recognized immediately as stock based compensation expense and no further expense will be recognized associated with these awards.

 

Summary Option Activity

 

The following table shows the stock option activity for the years ended September 30, 2017 and 2016: 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Contractual

 

 

Aggregate

 

 

 

Number of

 

 

Exercise

 

 

Term

 

 

Intrinsic

 

 

 

Shares

 

 

Price

 

 

(Years)

 

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2015

 

 

1,205,000

 

 

$

8.70

 

 

 

1.5

 

 

$

-

 

Granted

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Cancelled

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Exercised

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Outstanding at September 30, 2016

 

 

1,205,000

 

 

$

8.70

 

 

 

1.5

 

 

$

-

 

Granted

 

 

150,000

 

 

$

2.50

 

 

 

4.0

 

 

 

-

 

Cancelled

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Exercised

 

 

50,000

 

 

$

0.75

 

 

 

2.0

 

 

 

-

 

Outstanding as of September 30, 2017

 

 

1,305,000

 

 

$

8.29

 

 

 

0.9

 

 

$

-

 

Vested and expected to vest at September 30, 2017

 

 

1,305,000

 

 

$

8.29

 

 

 

0.9

 

 

$

-

 

Exercisable at September 30, 2017

 

 

1,305,000

 

 

$

8.29

 

 

 

0.9

 

 

$

-

 

 

 

Stock based compensation expense related to the options was $222,988 and $9,173 for the years ended September 30, 2017 and 2016, respectively. At September 30, 2017, there is no remaining unrecognized stock-based compensation associated with stock options. During the years ended September 30, 2017 and 2016, we received proceeds of $37,500 and $0, respectively, from stock option exercises.

 

F-17

 

 

Warrants

 

Warrant Issuances in 2016

 

On July 14, 2016, $500,000 of the amount owed to SCP discussed in Note 6 was converted into 400,000 shares of our common stock. In connection with the conversion, 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. The first set of warrants was valued at $510,960 using the Black Scholes option pricing model with the following assumptions: $1.02 value of stock on grant date; $1.25 exercise price; 4-year vesting; 0.96% risk free interest rate; 100% volatility factor; and 0% dividend yield. The second set of warrants was valued at $410,328 using the Black Scholes option pricing model with the following assumptions: $1.02 value of stock on grant date; $3.00 exercise price; 4-year vesting; 0.96% risk free interest rate; 100% volatility factor; and 0% dividend yield.

 

The warrants to purchase the first 800,000 shares of our common stock will expire 45 days after written notice to SCP that the average closing price of our common stock was at least $3.00 for twenty consecutive trading days, and the average daily volume of trades of our common stock during the twenty trading days was at least 100,000 shares, provided a registration statement is in effect with respect to the shares issuable upon the exercise of the Warrants.

 

The warrants to purchase the additional 800,000 shares of our common stock will expire 45 days after written notice to SCP that the average closing price of our common stock was at least $4.80 for twenty consecutive trading days, and the average daily volume of trades of our common stock during the twenty trading days was at least 100,000 shares, provided a registration statement is in effect with respect to the shares issuable upon the exercise of the Warrants.

 

On September 15, 2016, we borrowed $25,000 each from three unrelated parties. In connection with these notes, we issued warrants to purchase a total of 75,000 shares of our common stock, exercisable at a price of $0.75 per share, and warrants to purchase an additional 75,000 shares of common stock, exercisable at a price of $1.25 per share. Both sets of warrants expire on September 15, 2020.

 

Warrant Issuances in 2017

 

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

 

On November 7, 2016, we sold 2,000,000 Units at a price of $1.00 per Unit. The Units were sold in a private offering to a group of accredited investors. Each Unit consisted of one share of our common stock and one Series I Warrant. Each Series I Warrant allows the Holder to purchase one share of our common stock at a price of $3.00 per share at any time on or before November 4, 2020. The relative fair value of the warrants issued was approximately 43% of the proceeds received. The offering provided us with $2,000,000 in gross proceeds and the potential for an additional $6,000,000 in proceeds with the exercise of the Series I Warrants. The proceeds from the placement will be utilized for the MMCC development, to pursue new opportunities in California, Pennsylvania, Florida and other states, and general corporate purposes.

 

As described in Note 10, on October 17, 2016, we entered into a Share Purchase Agreement with MMP pursuant to which we issued to MMP 100,000 shares of our common stock at par value of $0.0001 (“Common Stock”), and a warrant to purchase up to 3,640,000 shares of Common Stock at an exercise price of $1.00 per share. The warrant can be exercised at any time on or after October 17, 2018 and on or before October 17, 2020. The warrant does not contain a cashless exercise provision.

 

F-18

 

 

The following table shows the warrant activity for the years ended September 30, 2017 and 2016: 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Contractual

 

 

Aggregate

 

 

 

Number of

 

 

Exercise

 

 

Term

 

 

Intrinsic

 

 

 

Shares

 

 

Price

 

 

(Years)

 

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2015

 

 

2,591,000

 

 

$

8.92

 

 

 

2.7

 

 

$

-

 

Granted

 

 

1,750,000

 

 

 

2.14

 

 

 

3.8

 

 

$

-

 

Cancelled

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Exercised

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Outstanding at September 30, 2016

 

 

4,341,000

 

 

$

6.19

 

 

 

2.1

 

 

$

-

 

Granted

 

 

5,825,000

 

 

 

1.81

 

 

 

3.1

 

 

$

-

 

Cancelled

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Exercised

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Outstanding as of September 30, 2017

 

 

10,166,000

 

 

$

3.68

 

 

 

2.4

 

 

$

3,756,000

 

Vested and expected to vest at September 30, 2017

 

 

10,166,000

 

 

$

3.68

 

 

 

2.4

 

 

$

-

 

Exercisable at September 30, 2017

 

 

6,526,000

 

 

$

5.18

 

 

 

2.0

 

 

$

480,000

 

 

 

NOTE 10.     COMMITMENTS AND CONTINGENCIES

 

Officer Employment Agreement.  On March 25, 2014, the Company entered into an employment agreement with Mr. Keogh. The agreement: (i) has an initial term of three years; (ii) requires that Mr. Keogh devote at least 50% of his time to the Company and; (iii) provides that the Company will pay Mr. Keogh $12,000 per month during the term of the agreement. In connection with this employment agreement the Company granted Mr. Keogh shares of common stock and options.  See Note 9.

 

Investment Relations Consulting Agreement. On December 1, 2014, the Company entered into an investment relation services agreement where the Company pays $4,000 per month in exchange for services.  There were no such transactions during the year ended September 30, 2017 and 2016.

 

Consulting Agreement. On December 1, 2014, the Company entered into a consulting agreement with a community relations and public affairs company.  There were no such transactions during the year ended September 30, 2017 and 2016.

 

MMCC.  On January 14, 2015, we entered into an agreement to purchase a 52.6 acre parcel of undeveloped land in Freetown, Massachusetts. The property is located approximately 47 miles southeast of Boston. We plan to develop the property as the MMCC. Plans for the may include the construction of sustainable greenhouse cultivation and processing facilities that will be leased or sold to Registered Marijuana Dispensaries under the Massachusetts Medical Marijuana Program. We paid the seller $100,000 upon the signing of the agreement which amount will be applied toward the purchase price at the closing.

 

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

 

Operating Leases 

 

Land

 

On October 17, 2016, the Company closed the acquisition of the 52.6-acre parcel of undeveloped land in Freetown, Massachusetts. The deposits of $925,000 previously paid by the Company to the seller, BBC, were credited against the total purchase price of $4,475,000. The remaining balance of $3,550,000 was paid to BBC by Massachusetts MMP. The property is located approximately 47 miles southeast of Boston. The Company plans to develop the property as the MMCC. Plans for the MMCC include the construction of sustainable greenhouse cultivation, processing, and infused product facilities that will be leased or sold to Registered Marijuana Dispensaries under the Massachusetts Medical Marijuana Program.

 

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

 

F-19

 

 

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.

 

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 $1,972,966 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 was $506,765 and $0 for the year ended September 30, 2017 and 2016, respectively.

 

Office space

 

The Company leases its office space located at 3200 Brighton Boulevard, Denver, Colorado for $2,920 per month on a month-to-month basis. Upon signing the lease, the Company paid a refundable deposit of $3,110. The lease expense was $35,610 and $35,145 for the year ended September 30, 2017 and 2016, respectively.

 

Automobiles

 

The Company leases an automobile under an operating lease commencing October 4, 2014 for 39 months at $611 per month. The lease expense was $7,390 and $7,483 for the year ended September 30, 2017 and 2016, respectively.  

 

At  September 30, 2017, the future rental payments required under operating leases are as follows:

 

2018

 

 

342,406

 

2019

 

 

341,496

 

2020

 

 

341,496

 

2021

 

 

341,496

 

2022

 

 

341,496

 

Thereafter

 

 

15,026,024

 

Total

 

 

16,734,414

 

 

F-20

 

 

 

NOTE 11.     SUBSEQUENT EVENTS

 

Convertible loans

 

On October 5, 2017, the Company borrowed $128,000 from an unrelated party. The loan bears interest at a rate of 12% and is due and payable on October 5, 2018.  At any time on or before April 5, 2018 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 April 5, 2018, the Company may not repay the loan without the consent of the Lender. At any time after  April 5, 2018, 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 $1.35, the greater of (1) the variable conversion price (defined as market price multiplied by 65 percent) and (2) the fixed conversion price of $1.00, and (b) if the market price is less than $1.35, the lessor of (1) the variable conversion price and (2) the fixed conversion price.

 

On November 13, 2017, the Company borrowed $68,000 from an unrelated party. The loan bears interest at a rate of 12% and is due and payable on November 13, 2018.  At any time on or before May 13, 2018 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 May 13, 2018, the Company may not repay the loan without the consent of the Lender. At any time after  May 13, 2018, 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 $1.35, the greater of (1) the variable conversion price (defined as market price multiplied by 65 percent) and (2) the fixed conversion price of $1.00, and (b) if the market price is less than $1.35, the lessor of (1) the variable conversion price and (2) the fixed conversion price.  Market price is defined as the average of the lowest two daily dollar volume-weighted average sales price for the common stock during the fifteen day trading period ending on the latest complete trading day prior to the conversion date.

 

Construction loan

 

On October 30, 2017 the Company secured $800,000 in financing from three unrelated parties (the “Lenders”) in the form of a loan. The primary use of the loans proceeds will be to prepare the Company’s Massachusetts Medical Cannabis Center (the “MMCC”) for the first phase of development, which will include a pad-ready site for Building 3 and the improvements to the entrance and roadways for the entire project. The remaining loan proceeds will be used to pay lease payments, thru Nov 17, 2017, to Medical Massachusetts Properties, LLC, owner of the land on which the MMCC will be built, and for working capital.

 

The loan bears interest at 8% per year and is due and payable on April 30, 2018. At the options of the Lenders, all or any portion of the outstanding loan balance is convertible into shares of the Company’s common stock. The number of shares of the Company’s common stock which will be issued upon any conversion will be determined by dividing the amount to be converted by $1.50, which amount will be proportionately adjusted in the event of any stock split or capital reorganization. The loan may be prepaid at any time, without penalty on 5 days’ notice to the Lenders.

 

The loan is secured by a second deed of trust on the Company’s property in Denver, Colorado. Following the closing of any sale of the Company’s Denver property, the Lenders will have 10 days to notify the Company in writing as to whether the Lenders want to:

 

 

use all or a portion of the net proceeds from the sale of the Denver property to purchase restricted shares of the Company’s common stock at a price of $1.50 per share; or

 

have the net proceeds applied to the unpaid accrued interest and principal amount of the Loan.

 

As further consideration for the loan, the Company issued warrants to the Lenders which allow the Lenders to purchase up to 660,000 shares of the Company’s common stock. The warrants are exercisable at a price of $1.50 per share any time on or before October 13, 2022.

 

Amendment to Lease on property in Freetown, Massachusetts

 

On October 17, 2016, the Company closed the previously announced acquisition of a 52.6-acre parcel of undeveloped land in Freetown, Massachusetts. The Company plans to develop the property as the Massachusetts Medical Cannabis Center (the “MMCC”).

 

As part of a simultaneous transaction, the Company sold the property to Massachusetts Medical Properties, LLC (“MMP”) and the Company and MMP entered into a lease, pursuant to which MMP leased the property to the Company for an initial term of fifty years.

 

Under the terms of the lease, the Company had until October 16, 2017 to obtain capital funding for the construction of the first phase building. On October 17, 2017 the Company and MMP amended the lease to provide that the Company will have until 16 months from October 17, 2016 to raise $2.6 million for the construction of the first phase of the MMCC. If the Company is unable to raise $2.6 million on or before 16 months from October 17, 2016, the lease will terminate.

 

As further consideration for the amendment to the lease, the Company issued a warrant which allows MMP to purchase 100,000 shares of the Company’s common stock at a price of $1.50 per share. The warrant expires on October 17, 2022.

 

F-21

 

 

 

AMERICANN, INC.

 

FINANCIAL STATEMENTS

 

PERIOD ENDED DECEMBER 31, 2017

 

UNAUDITED

 

 

 

Consolidated Balance Sheets as of December 31, 2017 and September 30, 2017

F-22

Consolidated Statements of Operations for the Three Months Ended December 31, 2017 and 2016

F-23

Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2017 and 2016

F-24

Notes to Consolidated Financial Statements

F-25

 

 

 

 

 

AMERICANN, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)  

 

 

 

December 31, 2017

 

 

September 30, 2017

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

732,355

 

 

$

1,627

 

Restricted cash

 

 

365,480

 

 

 

-

 

Current portion of prepaid land lease

 

 

57,959

 

 

 

57,959

 

Prepaid expenses and other current assets

 

 

5,000

 

 

 

5,000

 

Total current assets

 

 

1,160,794

 

 

 

64,586

 

 

 

 

 

 

 

 

 

 

Land held for sale

 

 

-

 

 

 

1,611,312

 

Construction in progress

 

 

681,181

 

 

 

680,028

 

Furniture and equipment (net of depreciation of $3,985 and $3,704)

 

 

3,872

 

 

 

4,153

 

Website development costs (net of amortization of $32,278 and $28,820)

 

 

9,222

 

 

 

12,680

 

Notes and other receivables (net of allowance of $469,699)

 

 

782,130

 

 

 

780,315

 

Note receivable - related party

 

 

131,589

 

 

 

125,327

 

Prepaid land lease and related deposits, net of current portion

 

 

2,767,557

 

 

 

2,782,047

 

Security deposit

 

 

3,110

 

 

 

3,110

 

Total assets

 

$

5,539,455

 

 

$

6,063,558

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

429,320

 

 

$

624,623

 

Interest payable (including $106,596 and $84,998 to related parties)

 

 

115,337

 

 

 

86,253

 

Other payables

 

 

11,913

 

 

 

19,699

 

Notes payable (net of discount of $843,452 and $0)

 

 

440,862

 

 

 

1,070,000

 

Total current liabilities

 

 

997,432

 

 

 

1,800,575

 

 

 

 

 

 

 

 

 

 

Notes payable - related party (inclusive of premium of $41,696 and $47,037)

 

 

1,973,342

 

 

 

1,978,683

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

2,970,774

 

 

 

3,779,258

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies - see Note 10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value; 20,000,000 shares authorized; no shares issued and outstanding

 

 

-

 

 

 

-

 

Common stock, $0.0001 par value; 100,000,000 shares authorized; 19,366,000 and 19,366,000 shares issued and outstanding as of December 31, 2017 and September 30, 2017, respectively

 

 

1,937

 

 

 

1,937

 

Additional paid in capital

 

 

12,617,933

 

 

 

10,959,188

 

Accumulated deficit

 

 

(10,051,189

)

 

 

(8,676,825

)

Total stockholders' equity

 

 

2,568,681

 

 

 

2,284,300

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$

5,539,455

 

 

$

6,063,558

 

 

See accompanying notes to unaudited consolidated financial statements.

 

F-22

 

 

 

AMERICANN, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

 

 

Three Months Ended December 31,

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

Consulting fees

 

$

-

 

 

$

15,000

 

Total revenues

 

 

-

 

 

 

15,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Advertising and marketing

 

 

962

 

 

 

2,247

 

Professional fees

 

 

151,987

 

 

 

150,404

 

General and administrative expenses

 

 

434,862

 

 

 

288,433

 

Provision for doubtful accounts

 

 

-

 

 

 

3,325

 

Total operating expenses

 

 

587,811

 

 

 

444,409

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(587,811

)

 

 

(429,409

)

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

8,077

 

 

 

27,187

 

Interest expense

 

 

(754,379

)

 

 

(81,575

)

Other income (expense)

 

 

(2,861

)

 

 

-

 

Interest expense - related party

 

 

(37,390

)

 

 

(32,968

)

Total other income (expense)

 

 

(786,553

)

 

 

(87,356

)

 

 

 

 

 

 

 

 

 

Net loss

 

$

(1,374,364

)

 

$

(516,765

)

 

 

 

 

 

 

 

 

 

Basic and diluted loss per common share

 

$

(0.07

)

 

$

(0.03

)

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

19,366,000

 

 

 

18,286,435

 

 

See accompanying notes to unaudited consolidated financial statements.

 

F-23

 

 

 

AMERICANN, INC.

consolidated STATEMENTS OF CASH FLOWS

(unaudited)

 

 

 

Three Months Ended December 31,

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(1,374,364

)

 

$

(516,765

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,739

 

 

 

3,740

 

Provision for doubtful accounts

 

 

-

 

 

 

3,325

 

Stock based compensation and option expense

 

 

171,307

 

 

 

18,725

 

Loss on disposal of land

 

 

2,861

 

 

 

-

 

Amortization of equity instruments issued to lessor

 

 

14,490

 

 

 

-

 

Amortization of debt discount/(premium)

 

 

708,645

 

 

 

21,668

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Interest receivable

 

 

(8,077

)

 

 

2,521

 

Amounts due from WGP

 

 

-

 

 

 

(12,108

)

Prepaid expenses

 

 

-

 

 

 

13,477

 

Accounts payable and accrued expenses

 

 

(178,215

)

 

 

(233,708

)

Interest payable

 

 

50,682

 

 

 

(8,924

)

Interest payable - related party

 

 

(21,598

)

 

 

(109,825

)

Other payables

 

 

1,891

 

 

 

1,354

 

Deferred revenue

 

 

-

 

 

 

30,000

 

Net cash flows used in operating activities

 

 

(628,639

)

 

 

(786,520

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Additions to construction in progress

 

 

(1,153

)

 

 

-

 

Payments received on notes receivable

 

 

-

 

 

 

86,231

 

Advances made on notes receivable - related party

 

 

-

 

 

 

(64,993

)

Advances made on notes receivable

 

 

-

 

 

 

(15,000

)

Net cash flows provided by (used) in investing activities

 

 

(1,153

)

 

 

6,238

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Common stock issued for cash, net

 

 

-

 

 

 

1,806,274

 

Proceeds from note payable, net of financing costs

 

 

1,726,000

 

 

 

24,657

 

Payments on note payable - related party

 

 

-

 

 

 

(20,000

)

Payments on notes payable

 

 

-

 

 

 

(227,904

)

Net cash flows provided by financing activities

 

 

1,726,000

 

 

 

1,583,027

 

 

 

 

 

 

 

 

 

 

Net increase in cash, cash equivalents, and restricted cash

 

 

1,096,208

 

 

 

802,745

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents, and restricted cash at beginning of period

 

 

1,627

 

 

 

24

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents, and restricted cash at end of period

 

$

1,097,835

 

 

$

802,769

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplementary Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

54,040

 

 

$

164,450

 

Cash paid for income taxes

 

$

-

 

 

$

-

 

 

 

 

 

 

 

 

 

 

Non-Cash Investing and Financing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares and warrants issued to lessor as consideration for land lease

 

 

-

 

 

 

1,770,333

 

Proceeds from sale of land used to satisfy debt obligations

 

 

1,608,451

 

 

 

-

 

Debt discount related to warrants issued with debt and beneficial conversion feature

 

 

1,536,000

 

 

 

-

 

 

See accompanying notes to unaudited consolidated financial statements. 

  

F-24

 

 

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.

 

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 offer a comprehensive, turnkey package of services that includes consulting, design, construction and financing to approved and licensed marijuana operators throughout the United States. The Company's business plan is based on the anticipated growth of the regulated marijuana market in the United States.

 

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

 

Basis of Presentation

 

The (a) balance sheet as of September 30, 2017, which has been derived from audited financial statements, and (b) the unaudited financial statements as of and for the three months ended December 31, 2017 and 2016, 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 4, 2017. 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 2017 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:

 

 

 

December 31,
2017

 

 

September 30,

2017

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

732,355

 

 

$

1,627

 

Restricted cash

 

 

365,480

 

 

 

-

 

Total cash, cash equivalents, and restricted cash shown in the cash flow statement

 

$

1,097,835

 

 

$

1,627

 

 

Amounts included in restricted cash represent those required to be set aside by a contractual agreement with a lender for the payment of specific construction related expenditures as part of the Company’s property development in Massachusetts. See Notes 5 and 10.

  

Recent Accounting Pronouncements

 

In July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The ASU was issued to address the complexity associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics of liabilities and equity. The ASU, among other things, eliminates the need to consider the effects of down round features when analyzing convertible debt, warrants and other financing instruments.  As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The amendments are effective for fiscal years beginning after December 15, 2018, and should be applied retrospectively. Early adoption is permitted, including adoption in an interim period. The Company plans to early adopt the ASU, and is currently evaluating implementation date and the impact of this amendment on its financial statements.

 

F-25

 

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. The ASU provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC 718. The amendments are effective for fiscal years beginning after December 15, 2017, and should be applied prospectively to an award modified on or after the adoption date. Early adoption is permitted, including adoption in an interim period. The Company does not expect this amendment to have a material impact on its financial statements.

  

In February 2017, the FASB issued ASU No. 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, to clarify the scope of Subtopic 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets, and to add guidance for partial sales of nonfinancial assets. Subtopic 610-20, which was issued in May 2014 as a part of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. The amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, which is the same time as the amendments in ASU No. 2014-09, and early adoption is permitted. The Company is currently evaluating the impact of this amendment on its financial statements.

 

In January 2017, the FASB issued ASU No. 2017-03, Accounting Changes and Error Corrections (Topic 250). The ASU adds SEC disclosure requirements for both the quantitative and qualitative impacts that certain recently issued accounting standards will have on the financial statements of a registrant when such standards are adopted in a future period. Specially, these disclosure requirements apply to the adoption of ASU No. 2014- 09, Revenue from Contracts with Customers (Topic 606); ASU No. 2016-02, Leases (Topic 842); and ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.   As indicated below, the Company does not believe that the adoption of ASU No. 2014-09 will have a material impact on its revenue recognition as it pertains to current revenue streams.

 

Between May 2014 and December 2016, the FASB issued several ASU’s on Revenue from Contracts with Customers (Topic 606). These updates will supersede nearly all existing revenue recognition guidance under current U.S. generally accepted accounting principles (GAAP). The core principle is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. A five-step process has been defined to achieve this core principle, and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standards are effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standards in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting the standards recognized at the date of adoption (which includes additional footnote disclosures). The Company is currently evaluating the impact of its pending adoption of these standards on its financial statements and expects to adopt the modified retrospective approach. However, the adoption of these new standards will not have a material impact on its revenue recognition as it pertains to current revenue streams.

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force), to provide guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flow. The amendments should be applied using a retrospective transition method, and are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This current quarter represents the first period in which the Company has maintained restricted cash balances, and the Company has elected to early adopt this amendment as of October 1, 2017. As this amendment affects presentation and disclosures only, the adoption had no impact on the Company’s financial position or results of operations.

 

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

 

 

 

NOTE 2. GOING CONCERN 

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. The Company had an accumulated deficit of $10,051,189 and $8,676,825 at December 31, 2017 and September 30, 2017, respectively, and had a net loss of $1,374,364 for the three months ended December 31, 2017. Further, the amount due from WGP of $1,251,829 (before an allowance of $469,699) may not be collectible. These matters, among others, raise substantial doubt about the Company’s ability to continue as a going concern. While the Company is attempting to increase operations and generate additional revenues, the Company's cash position may not be significant enough to support the Company's daily operations. Management intends to raise additional funds through the sale of its securities. The Company filed a Demand for Arbitration against WGP on April 7, 2017. There are no indicators to suggest that the amounts due from WGP will not be collectible. On January 18, 2018, the arbitration panel awarded us $1,045,000 plus interest at the rate of 18% per year from April 18, 2015 to January 18, 2018 for $523,023. In addition to the principal and interest awarded of $1,568,023, we were also awarded our attorneys’ fees and arbitration fees. The Company has not collected on the award as of the filing date.

 

F-26

 

 

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 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, 2017 and September 30, 2017, consisted of the following: 

 

 

 

December 31,
2017

 

 

September 30,

2017

 

 

 

 

 

 

 

 

 

 

Notes and other receivables from WGP, a licensed medical marijuana cultivator; $673,294 note secured by real and personal property of the borrower, interest rate of 18.0%; accrued consulting fees of $40,000, construction advances of $332,357 and accrued interest of $206,178. Net of reserves of $469,699. All amounts are due and payable immediately.

 

 

782,130

 

 

 

780,315

 

 

 

 

 

 

 

 

 

 

Related party note receivable from CCI, a non-profit corporation, financing of up to $2.5 million through April 2021, interest rate of 18.0%; monthly principal and interest payments commencing the sixth month after CCI begins to generate sales; construction and working capital advances of $119,635, and accrued interest of $11,954; unsecured.

 

 

131,589

 

 

 

125,327

 

 

 

$

913,719

 

 

$

905,642

 

 

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. LAND

 

On July 31, 2014, the Company purchased a five-acre parcel of land located at 4200 Monaco Street, Denver, Colorado for $2,250,809. The property is currently zoned for cannabis cultivation and processing by the City and County of Denver. On October 5, 2017, the Company entered into a purchase and sale agreement to sell the parcel of land for $1,760,000 to an unrelated third party. An impairment loss was recognized for the year ended September 30, 2017 to adjust the carrying value to $1,611,312, net of estimated selling costs. The property was reported in the Company’s consolidated balance sheet at September 30, 2017 as Land Held for Sale of $1,611,312.

 

F-27

 

 

The land sale was completed on December 4, 2017 and a loss of $2,861 was recognized during the quarter ended December 31, 2017 based on the difference between the net proceeds and the carrying amount of the land at the date of sale. The proceeds were used to repay a $990,000 loan and interest of $17,088 secured by the property and $601,363 was used to partially repay an $800,000 loan that was secured by a second lien on the property.

 

 

 

NOTE 5.  NOTES PAYABLE

 

Unrelated

 

The Company maintained a loan secured by a first lien on the five-acre parcel of land in Denver. During the quarter ended December 31, 2017, the land was sold and the related loan balance of $990,000 was repaid. See Note 4.

 

On August 25, 2017, we entered into a Promissory Note with an unrelated party that provides financing of up to $150,000. The note bears interest at 12% and is due and payable on May 31, 2018. As of December 31, 2017, we had borrowed $89,677 and accrued interest on this note payable was $4,311. Interest expense was $3,057 and $0 for the three months ended December 31, 2017 and 2016, respectively.

 

Convertible loans

 

On October 5, 2017, the Company borrowed $128,000 from an unrelated party. The loan bears interest at a rate of 12% and is due and payable on October 5, 2018. At any time on or before April 5, 2018 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 April 5, 2018, the Company may not repay the loan with the consent of the Lender. At any time after  April 5, 2018, 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 $1.35, the greater of (1) the variable conversion price (defined as market price multiplied by 65 percent) and (2) the fixed conversion price of $1.00, and (b) if the market price is less than $1.35, the lessor of (1) the variable conversion price and (2) the fixed conversion price. Market price is defined as the average of the lowest two daily dollar volume-weighted average sales price for the common stock during the fifteen day trading period ending on the latest complete trading day prior to the conversion date. The Company incurred debt issuance costs of $3,000 which is reflected as a debt discount in the accompanying consolidated balance sheet at December 31, 2017. As the instrument is not yet convertible, no beneficial conversion feature has been recognized at December 31, 2017. Amortization expense related to the debt discount was $750 and $0 for the three months ended December 31, 2017 and 2016, respectively.

 

On November 13, 2017, the Company borrowed $68,000 from an unrelated party. The loan bears interest at a rate of 12% and is due and payable on November 13, 2018. At any time on or before May 13, 2018 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 May 13, 2018, the Company may not repay the loan with the consent of the Lender. At any time after  May 13, 2018, 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 $1.35, the greater of (1) the variable conversion price (defined as market price multiplied by 65 percent) and (2) the fixed conversion price of $1.00, and (b) if the market price is less than $1.35, the lessor of (1) the variable conversion price and (2) the fixed conversion price. Market price is defined as the average of the lowest two daily dollar volume-weighted average sales price for the common stock during the fifteen day trading period ending on the latest complete trading day prior to the conversion date. The Company incurred debt issuance costs of $3,000 which is reflected as a debt discount in the accompanying consolidated balance sheet at December 31, 2017. As the instrument is not yet convertible, no beneficial conversion feature has been recognized at December 31, 2017. Amortization expense related to the debt discount was $500 and $0 for the three months ended December 31, 2017 and 2016, respectively.

 

Construction loan

 

On October 30, 2017 the Company secured $800,000 in financing from three unrelated parties (the “Lenders”) in the form of a loan. The primary use of the loans proceeds will be to prepare the Company’s Massachusetts Medical Cannabis Center (the “MMCC”) for the first phase of development, which will include a pad-ready site for Building 3 and the improvements to the entrance and roadways for the entire project. The remaining loan proceeds will be used to pay lease payments, thru Nov 17, 2017, to Medical Massachusetts Properties, LLC, owner of the land on which the MMCC will be built, and for working capital.

 

F-28

 

 

The loan bears interest at 8% per year and is due and payable on April 30, 2018. At the options of the Lenders upon the sale of the Denver property or the Company’s notice to prepay the note, all or any portion of the outstanding loan balance is convertible into shares of the Company’s common stock. The number of shares of the Company’s common stock which will be issued upon any conversion will be determined by dividing the amount to be converted by $1.50, which amount will be proportionately adjusted in the event of any stock split or capital reorganization. The loan may be prepaid at any time, without penalty on 5 days’ notice to the Lenders.

 

As further consideration for the loan, the Company issued warrants to the Lenders which allow the Lenders to purchase up to 660,000 shares of the Company’s common stock. The warrants are exercisable at a price of $1.50 per share any time on or before October 30, 2022. The Company allocated the proceeds between the note and the warrants based on their relative fair values. The relative fair value of the 660,000 warrants was $442,388 which was recognized as additional paid in capital and a corresponding debt discount. After such allocation, the effective conversion price on the issuance date was less than the fair value of the stock into which the note is convertible, giving rise to a beneficial conversion feature of $357,612 which is recognized as additional paid in capital and a corresponding debt discount.

 

As described in Note 4, on December 4, 2017, the Company sold its property in Denver, Colorado and used $601,363 of the sale proceeds to partially repay this loan. triggering the conversion option described above and the lenders elected not to exercise their conversion option. As the conversion period had passed, the Company’s has fully expensed the debt discount associated with the beneficial conversion feature. The remaining debt discount is being recognized on a straight line basis over the life of the note. Amortization expense related to the debt discounts were $712,736 and $0 for the three months ended December 31, 2017 and 2016, respectively.

 

Convertible Note Offering

 

On December 29, 2017 the Company sold convertible notes in the principal amount of $800,000 to a group of accredited investors. The notes bear interest at 8% per year, are unsecured, and are due and payable on December 31, 2018. At the option of the note holders, the notes may be converted at any time into shares of the Company's common stock at an initial conversion price of $1.50 per share.

 

The note holders also received warrants which entitle the note holders to purchase up to 533,333 shares of the Company's common stock. The warrants are exercisable at a price of $1.50 per share and expire on October 17, 2022.

 

GVC Capital LLC acted as the placement agent for the offering and received a cash commission of $64,000, plus warrants to purchase 106,667 shares of the Company's common stock. The warrants are exercisable at a price of $1.50 per share and expire on December 29, 2022.

 

The Company allocated the proceeds between the note and the warrants based on their relative fair values. The relative fair value of the 640,000 warrants was $607,024 which was recognized as additional paid in capital and a corresponding debt discount. After such allocation, the effective conversion price on the issuance date was less than the fair value of the stock into which the note is convertible, giving rise to a beneficial conversion feature of $128,976 which is recognized as additional paid in capital and a corresponding debt discount.

 

In connection with the offering, the Company paid fees of $64,000 to the placement agent, which 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

 

All debt discounts are being recognized on a straight-line basis over the terms of the notes. As the transaction occurred just prior to the quarter end, no amortization expense was recorded as of December 31, 2017.

 

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.

 

F-29

 

 

Of the amounts owed to SCP, $500,000 was converted into 400,000 shares of our common stock ($1.25 conversion rate).

 

The remaining $1,931,646 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 $931,646, 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 $106,596 and $84,998 at December 31, 2017 and 2016, respectively.

 

In connection with the debt modification agreement, we issued SCP warrants to purchase 800,000 shares of our common stock, exercisable at a price of $1.50 per share, and warrants to purchase an additional 800,000 shares of common stock, exercisable at a price of $3.00 per share. Both sets of warrants expire on June 30, 2020. We allocated the relative fair values to the warrants, stock options, and convertible debt, as determined by the Black Scholes option pricing model. Based on the Black Scholes option pricing model, a net debt premium of $72,651 was allocated to the warrants which are reflected in additional paid-in-capital. The debt premium is being amortized on a straight-line basis over the term of the notes. At December 31, 2017, the outstanding principal on these notes was $1,931,646, and the unamortized debt premium was $41,696. Amortization of debt premium was $5,341 and $9,763 for the three months ended December 30, 2017 and 2016.

 

 

 

NOTE 6. RELATED PARTY TRANSACTIONS

 

Strategic Capital Partners. At December 31, 2017 and September 30, 2017, we had outstanding notes payable to SCP of $1,931,646 and $1,978,683, respectively.

 

Interest expense was $37,390 and $32,968 for the three months ended December 31, 2017 and 2016, respectively. Interest payable – related party of $106,596 and $84,998 was included in the accompanying consolidated balance sheets at  December 31, 2017 and September 30, 2017, respectively.  We made interest payments of $21,133 during the quarter ended December 31, 2017. 

  

Coastal Compassion. On April 7, 2016, we signed agreements with Coastal Compassion Inc. (“CCI”). CCI is one of a limited number of non-profit organizations that has received a provisional or final registration to cultivate, process and sell medical cannabis by the Massachusetts Department of Public Health. CCI has agreed to become the initial tenant in our planned MMCC. Tim Keogh, our Chief Executive Officer, is a Board Member of CCI.

 

Pursuant to the agreements, we agreed to provide CCI with financing of up to $2.5 million for a five-year term at 18% interest per year for construction and working capital required for CCI’s approved dispensary and cultivation center in Fairhaven, MA. For a three- year period beginning April 1, 2016, we agreed to consult with CCI in the design, construction and operation of the Fairhaven facility. CCI will pay us $10,000 each month for these consulting services. Although the DPH has approved our agreement with CCI relating to the development and lease terms of the MMCC, the actual lease agreement with CCI has not been finalized or approved by the DPH. We will need to secure significant capital to provide the financing to CCI.

 

As of December 31, 2017, we have provided financing to CCI of $131,589, which includes construction and working capital advances of $119,635, and accrued interest of $11,954.

 

F-30

 

 

 

NOTE 7. LOSS PER SHARE

 

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

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(1,374,364

)

 

$

(516,765

)

 

 

 

 

 

 

 

 

 

Basic weighted average outstanding shares of common stock

 

 

19,366,000

 

 

 

18,236,435

 

Dilutive effects of common share equivalents

 

 

-

 

 

 

-

 

Dilutive weighted average outstanding shares of common stock

 

 

19,366,000

 

 

 

18,236,435

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share of common stock

 

$

(0.07

)

 

$

(0.03

)

 

As of December 31, 2017, we have excluded 1,305,000 of stock options and 11,566,000 of warrants from the computation of diluted net loss per share since the effects are anti-dilutive. As of December 31, 2016, we have excluded 1,205,000 of stock options and 9,981,000 of warrants from the computation of diluted net loss per share since the effects are anti-dilutive.

 

 

 

NOTE 8. INCOME TAXES

 

We did not record any income tax expense or benefit for the three months ended December 31, 2017. 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, 2017.

 

As of December 31, 2017, we did not have any unrecognized tax benefits. There were no significant changes to the calculation since September 30, 2017.

 

 

 

NOTE 9. STOCK BASED COMPENSATION

 

Restricted Stock Awards. We use restricted stock awards to compensate certain key executives and other individuals.  At December 31, 2017, we had no outstanding unvested restricted stock awards. Stock-based compensation expense associated with restricted stock awards was $0 and $18,725 for the three months ended December 31, 2017 and 2016, respectively. As of December 31, 2017, there is no remaining unrecognized stock-based compensation associated with restricted stock awards. 

 

Stock Options. There was no stock option activity for the quarter ended December 31, 2017. Stock option details are as follows: 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Contractual

 

 

Aggregate

 

 

 

Number of

 

 

Exercise

 

 

Term

 

 

Intrinsic

 

 

 

Shares

 

 

Price

 

 

(Years)

 

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding and exercisable at December 31, 2017

 

 

1,305,000

 

 

$

8.29

 

 

 

0.6

 

 

$

431,200

 

 

There was no stock-based compensation expense associated with stock options for the three months ended December 31, 2017 and 2016. At December 31, 2017, there is no remaining unrecognized stock-based compensation associated with stock options.

 

F-31

 

 

 

NOTE 10.  COMMITMENTS AND CONTINGENCIES

 

Coastal Compassion. On April 7, 2016, we signed agreements with Coastal Compassion Inc. (“CCI”). CCI is one of a limited number of non-profit organizations that has received a provisional or final registration to cultivate, process and sell medical cannabis by the Massachusetts Department of Public Health. CCI has agreed to become the initial tenant in our planned MMCC. Tim Keogh, our Chief Executive Officer, is a Board Member of CCI.

 

Pursuant to the agreements, we agreed to provide CCI with financing of up to $2.5 million for a five-year term at 18% interest per year for construction and working capital required for CCI’s approved dispensary and cultivation center in Fairhaven, MA. For a three- year period beginning April 1, 2016, we agreed to consult with CCI in the design, construction and operation of the Fairhaven facility. CCI will pay us $10,000 each month for these consulting services. Although the DPH has approved our agreement with CCI relating to the development and lease terms of the MMCC, the actual lease agreement with CCI has not been finalized or approved by the DPH. We will need to secure significant capital to provide the financing to CCI.

 

As of December 31, 2017, we have provided financing to CCI of $131,589, which includes construction and working capital advances of $119,635, and accrued interest of $11,954.

 

Operating Leases

 

Land

 

On October 17, 2016, the Company closed the previously announced acquisition of a 52.6-acre parcel of undeveloped land in Freetown, Massachusetts. The deposits of $925,000 previously paid by the Company to the seller, Boston Beer Company (“BBC”), were credited against the total purchase price of $4,475,000. The remaining balance of $3,550,000 was paid to BBC by Massachusetts Medical Properties, LLC (“MMP”). The property is located approximately 47 miles southeast of Boston. The Company plans to develop the property as the Massachusetts Medical Cannabis Center (the “MMCC”). Plans for the MMCC include the construction of sustainable greenhouse cultivation, processing, and infused product facilities that will be leased or sold to Registered Marijuana Dispensaries under the Massachusetts Medical Marijuana Program.

 

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

 

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

 

Between October 17, 2016 and April 17, 2017, the monthly lease payments will accrue, with all accrued lease payments to be paid to MMP on April 17, 2017. On April 17, 2017, the Company will reimburse 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 months to obtain $2.6 million in capital funding for the construction of the first phase building. In the event that the Company is unable to raise these funds within the six month period, the Company had an additional six months to do so; provided, that the Company has paid accrued lease payments and closing costs. 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 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 on October 17, 2022. The Company recognized an expense of $171,307 during the three months ended December 31, 2017, representing the entire grant date fair value of the warrant.

 

On February 16, 2018, the lease agreement was amended to provide that the Company will have until 18 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 50,000 shares of the Company’s common stock at an exercise price of $1.50 per share. The warrant can be exercised on  October 17, 2022.

 

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

 

F-32

 

 

 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 – 100 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 was $108,625 and $98,852 for the three months ended December 31, 2017 and 2016. At December 31, 2017, the future rental payments required under this lease are $256,122 for the remainder of fiscal 2018, $341,496 for fiscal years 2019 through 2022, and $15,026,024 thereafter.

 

Office space

 

The Company leases its office space located at 1550 Wewatta, Denver, Colorado 80202 for $1,845 per month under a month-to-month lease.

 

Except as described above, the Company has no other non-cancelable lease commitments.

 

 

 

NOTE 11.  SHAREHOLDERS’ EQUITY

 

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

 

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

 

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

 

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

 

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

 

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

 

The equity line agreement has a term of 18 months, which will begin on the effective date of the registration statement which the Company has agreed to file with the Securities and Exchange Commission so that the shares of common stock to be sold to MSC may be sold in the public market. As of December 31, 2017, the Company has not drawn from this line.

 

F-33

 

 

Warrants. Warrant activity as of and for the three months ended December 31, 2017 is as follows: 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Contractual

 

 

Aggregate

 

 

 

Number of

 

 

Exercise

 

 

Term

 

 

Intrinsic

 

 

 

Shares

 

 

Price

 

 

(Years)

 

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding and exercisable at September 30, 2017

 

 

10,166,000

 

 

$

3.68

 

 

 

2.4

 

 

$

-

 

Granted

 

 

1,400,000

 

 

$

1.50

 

 

 

4.8

 

 

 

 

 

Cancelled

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding as of December 31, 2017

 

 

11,566,000

 

 

$

3.42

 

 

 

2.4

 

 

$

20,461,100

 

Vested and expected to vest at December 31, 2017

 

 

11,566,000

 

 

$

3.42

 

 

 

2.4

 

 

$

20,461,100

 

Exercisable at December 31, 2017

 

 

7,826,000

 

 

$

5.50

 

 

 

2.2

 

 

$

8,954,500

 

 

As disclosed in Notes 5 and 10, the Company issued warrants to purchase up to 1,400,000 shares of Common Stock at an exercise price of $1.50 per share. The fair value of the warrants was determined using the Black-Scholes option pricing model using the following assumptions:

 

 

Expected term – 3 to 5 years

 

Volatility – 163% to 176%

 

Risk-free rate – 1.73% to 2.00%

 

Stock price - $1.74 to $4.09

 

Expected dividends – $0

 

For those warrants that were issued with debt, the proceeds were allocated to the respective instruments on a pro rata basis based on the fair value of each instrument. See Note 5.

 

 

 

NOTE 12. SUBSEQUENT EVENTS

 

On April 7, 2017, we filed an arbitration claim against Wellness Groups Pharms LLC (“WGP”). On January 18, 2018, the arbitration panel awarded us $1,045,000 plus interest at the rate of 18% per year from April 18, 2015 to January 18, 2018 for $523,023. In addition to the principal and interest awarded of $1,568,023, we were also awarded our attorneys’ fees and arbitration fees.

 

On February 12, 2018, the Company sold convertible notes in the principal amount of $810,000 to a group of accredited investors. The notes bear interest at 8% per year, are unsecured, and are due and payable on December 31, 2018. At the option of the note holders, the notes may be converted at any time into shares of the Company’s common stock at an initial conversion price of $1.50 per share. The note holders also received warrants which entitle the note holders to purchase up to 540,000 shares of the Company’s common stock. The warrants are exercisable at a price of $1.50 per share and expire on October 17, 2022.

 

As described in Note 10, on February 16, 2018, the Company’s lease agreement with MMP was amended to provide that the Company will have until 18 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 50,000 shares of the Company’s common stock at an exercise price of $1.50 per share. The warrant can be exercised on  October 17, 2022.

 

F-34

 

 

 

TABLE OF CONTENTS

 

 

 

  Page

PROSPECTUS SUMMARY

4

RISK FACTORS

5

MARKET FOR OUR COMMON STOCK

9

MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION

14

BUSINESS

28

MANAGEMENT

34

PRINCIPAL SHAREHOLDERS

39

DESCRIPTION OF SECURITIES

43

LEGAL PROCEEDINGS

44

INDEMNIFICATION

45

AVAILABLE INFORMATION

45

FINANCIAL STATEMENTS

F-1

 

No dealer, salesperson or other person has been authorized to give any information or to make any representation not contained in this prospectus, and if given or made, such information or representations must not be relied upon as having been authorized by AmeriCann, Inc. This prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any of the securities offered in any jurisdiction to any person to whom it is unlawful to make an offer by means of this prospectus.

 

47

 

 

PART II

Information Not Required in Prospectus

 

Item 13.     Other Expenses of Issuance and Distribution.

 

The following table shows the costs and expenses payable by the Company in connection with this registration statement.

 

SEC Filing Fee

  $ 980  

Blue Sky Fees and Expenses

    1,000  

Legal Fes and Expenses

    35,000  

Accounting Fees and Expenses

    5,000  

Miscellaneous Expenses

    8,020  

TOTAL

  $ 50,000  

 

All expenses other than the SEC filing fee are estimated.

 

Item 14.     Indemnification of Officers and Directors

 

The Delaware General Corporation Code provides that the Company may indemnify any and all of its officers, directors, employees or agents or former officers, directors, employees or agents, against expenses actually and necessarily incurred by them, in connection with the defense of any legal proceeding or threatened legal proceeding, except as to matters in which such persons shall be determined to not have acted in good faith and in the Company’s best interest.

 

Item 15.      Recent Sales of Unregistered Securities.

 

 

 

 

Note

Reference

 

 

During March and April 2014 the Company sold 1,000,000 shares of its common stock to twenty-nine private investors at a price of $0.75 per share.

A.C.

 

 

During July 2014, the Company sold 791,000 Units to fifteen investors at a price of $3.00 per Unit. Each Unit consisted of one share of common stock and one warrant. Each warrant allows the holder to purchase one share of the Company’s common stock at a price of $8.00 per share anytime on or before April 30, 2018.  

B.

   

On February 19, 2015, the Company issued 50,000 shares of its common stock, valued at $34,250, to Stratcon Partners for providing investor relations services to the Company.

A. C.

 

48

 

 

 

   

 

Note

Reference

In October 2016, the Company issued 100,000 shares of its common stock and a warrant to purchase up to 3,640,000 shares of common stock to Massachusetts Medical Properties, LLC.  The warrant can be exercised at a price of $1.00 per share any time on or after October 17, 2018 and on or before October 17, 2020.

B.C.

   

In November 2016, the Company sold 2,000,000 Units, at a price of $1.00 per Unit, to a group of accredited investors.  Each Unit consists of one share of our common stock and one Series I Warrant. Each Series I Warrant allows the holder to purchase one share of our common stock at a price of $3.00 per share at any time on or before November 4, 2020.  We paid commissions to GVC Capital, LLC and West Park Capital, Inc. in connection with the sale of these Units.

B.

   

During the three months ended June 30, 2017, we sold 185,000 Units at a price of $2.00 per Unit to a group of accredited investors. Each Unit consisted of one share of our common stock and one Series V Warrant. Each Series V Warrant allows the Holder to purchase one share of our common stock at a price of $5.00 per share at any time on or before May 18, 2021.

A.

 

 

On October 5, 2017 we borrowed $128,000 from an unrelated third party.  At any time after April 5, 2018 the Lender may convert the unpaid principal amount of the loan into shares of our common stock.  On November 13, 2017 we borrowed $68,000 from the same unrelated third party.  At any time after May 13, 2018 the lender may convert the unpaid principal amount of the loan into shares of our common stock.

A.

 

 

On December 29, 2017 we sold convertible notes in the principal amount of $800,000 to a group of accredited investors.  The notes bear interest at 8% per year, are unsecured, and are due and payable on December 31, 2018.  At the option of the note holders, the notes may be converted at any time into shares of the Company’s common stock at an initial conversion price of $1.50 per share.

B.

 

 

The note holders also received Series VI 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.

B.

 

 

GVC Capital LLC acted as the placement agent for the offering of the notes in Note K and warrants in Note L and received Series VII 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.

B.

 

 

On February 12, 2018 we sold convertible notes in the principal amount of $810,000 to a group of private investors.  The notes bear interest at 8% per year, are unsecured, and are due and payable on December 31, 2018.  At the option of the note holders, the notes may be converted at any time into shares of our common stock at an initial conversion price of $1.50 per share.  The note holders also received warrants (Series VIII) which entitle the note holders to purchase up to 540,000 shares of our common stock.  The warrants are exercisable at a price of $1.50 per share and expire on October 17, 2022.

B.

 

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A.     The Company relied upon the exemption provided by Section 4(a)(2) of the Securities Act of 1933 with respect to the issuance of these shares. The persons who acquired these shares were sophisticated investors and were provided full information regarding the Company. There was no general solicitation in connection with the offer or sale of these securities. The persons who acquired these shares acquired them for their own accounts. The certificates representing these shares bear a restricted legend providing that they cannot be sold except pursuant to an effective registration statement or an exemption from registration.

 

B.     The Company relied upon the exemption provided by Rule 506 of the Securities and Exchange Commission with respect to the issuance of these securities. The persons who acquired these securities were sophisticated investors and were provided full information regarding the Company. There was no general solicitation in connection with the offer or sale of these securities. The persons who acquired these securities acquired them for their own accounts. The certificates representing these securities bear a restricted legend providing that they cannot be sold except pursuant to an effective registration statement or an exemption from registration.

 

C.      No commission or other form of remuneration was given to any person in connection with the issuance of these securities.

 

Item 16.     Exhibits and Financial Statement Schedules

 

The following exhibits are filed with this Registration Statement:

 

3.1.1

Certificate of Incorporation (1)

3.1.2

Certificate of Ownership and Merger (name change to AmeriCann) (2)

3.2

Bylaws (2)

4.1

Form of Series I Warrant (2)

4.2

Form of Series II Warrant (2)

4.3

Form of Series III Warrant (2)

4.4

Form of Series VI Warrant (2)

4.5

Form of Series VII Warrant (2)

4.6

Form of Series VII Warrant (2)

4.7

Form of Series VIII Warrant

 

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5

Opinion of Counsel

10.1

Agreements with Wellness Group Pharms (2)

10.2

Loan Modification Agreement with Strategic Capital Partners, LLC, together with Warrants and Promissory Notes (2)

10.3

Agreements with Coastal Compassion, Inc. (2)

10.4

Share Purchase Agreement with Massachusetts Medical Properties, LLC, together with Warrant (Series IV) and Ground Lease  (2)

10.5

Investment Agreement with Mountain States Capital, LLC (2)

10.6

First Amendment to Ground Lease (2)

10.7

Loan Agreement ($800,000) (2)

10.8

Loan Agreement ($128,000) (2)

10.9

Loan Agreement ($68,000) (2)

10.10

Form of Convertible Note (December 2017 financing) (2)

10.11

Form of Convertible Note (February 2018 financing)

10.12

Second Amendment to Ground Lease

23.1

Consent of Attorneys  

23.2

Consent of MaloneBailey, LLP, Independent Registered Public Accounting Firm

101.INS

XBRL Instance Document.

101.SCH

XBRL Taxonomy Extension Schema Document.

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.

 

(1)

Incorporated by reference to Exhibit 3.1 filed with the Company’s Registration Statement on Form 10.

 

(2)

Incorporated by reference to same exhibit filed with Amendment No. 1 to the Company’s Registration Statement on Form S-1 (File #333-222207).

 

Item 17.     Undertakings

 

The undersigned registrant hereby undertakes:

 

(1)          To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

 

(i)      To include any prospectus required by Section l0 (a)(3) of the Securities Act:

(ii)     To reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and

 

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(iii)     To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

 

(2)      That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

(3)      To remove from registration by means of a post-effective amendment any of the securities that remain unsold at the termination of the offering.

 

Insofar as indemnification for liabilities arising under the Securities Act of l933 (the “Act”) may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

 

(5)      That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser:

 

(i)       If the registrant is relying on Rule 430B:

 

(A)     Each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and

 

(B)     Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date; or

 

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(ii)      If the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

 

(6)      That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities:

 

The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

 

(i)       Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;

 

(ii)      Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;

 

(iii)     The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and

 

(iv)      Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Act of l933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Denver, Colorado on the 11th day of April, 2018.

 

  AMERICANN, INC.
     
     
  By: /s/ Timothy Keogh
    Timothy Keogh, Chief Executive Officer
     
     
  By: /s/ Benjamin J. Barton
    Benjamin J. Barton, Chief Financial and Accounting Officer

 

 

In accordance with the requirements of the Securities Act of l933, this registration statement has been signed by the following persons in the capacities and on the dates indicated:

 

 

Signature    Title   Date
         
         
/s/ Timothy Keogh         
Timothy Keogh    Chief Executive Officer and a Director   April 11, 2018
         
         
/s/ Benjamin J. Barton   Chief Financial and Accounting    
Benjamin J. Barton   Officer and a Director    April 11, 2018

 

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