UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q 

For the quarterly period ended DecemberMarch 31, 20192020

OR

For the transition period from __________________ to _________________

Commission file number: 001-35902

AMERICANN, INC

(Exact name of registrant as specified in its charter)

(303) 862-9000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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

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

Indicate by a checkmark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

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

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

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

Yes ☐ No ☑ 

As of February 17,May 8, 2020, the registrant had 23,504,820 shares of common stock outstanding.

NOTE 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

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

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

The Company's business plan is to design, develop, lease and operate state-of-the-art cultivation, processing and manufacturing facilities for licensed cannabis businesses throughout the United States.

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

Basis of Presentation

The (a) consolidated balance sheet as of September 30, 2019, which has been derived from audited financial statements, and (b) the unaudited financial statements as of and for the threesix months ended DecemberMarch 31, 20192020 and 2018,2019, have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission ("SEC"), and should be read in conjunction with the audited financial statements and notes thereto contained in the Company's Form 10-K filed with the SEC on January 14, 2020. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for future quarters or for the full year. Notes to the financial statements which substantially duplicate the disclosure contained in the audited financial statements for fiscal 2019 as reported in the Form 10-K have been omitted.

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

Significant Accounting Policies

Restricted Cash

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

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 $16,995,224$17,415,308 and $ 18,013,209 at DecemberMarch 31, 20192020 and September 30, 2019, respectively, and negative operating cash flows.respectively. These matters, among others, raise substantial doubt about the Company's ability to continue as a going concern. While the Company is attempting to increase operations and generate additional revenues, the Company's cash position may not be significant enough to support the Company's daily operations. Management intends to raise additional funds through the sale of its securities. 

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

NOTE 3. NOTES AND OTHER RECEIVABLES

Notes and other receivables as of DecemberMarch 31, 20192020 and September 30, 2019, consisted of the following: 

NOTE 4.4.  NOTES PAYABLE

Unrelated

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

The note holder also received a warrant which allows the holder to purchase 600,000 shares of the Company’s common stock at a price of $1.50 per share. The warrant will expire on the earlier of (i) August 2, 2024 or (ii) twenty days after written notice of the holder that the daily Volume Weighted Average Price of the Company’s common stock was at least $4.00 for twenty consecutive trading days and the average daily trading volume of the Company’s common stock during the twenty trading days was at least 150,000 shares.

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

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

At DecemberMarch 31, 2019,2020, the outstanding principal on these notes was $4,000,000 and the unamortized debt discount was $805,271.$727,342. All debt discounts are being amortized on a straight-line basis over the termsterm of the notes.note. Amortization expense related to the debt discounts was $77,332$155,261 for the threesix months ended DecemberMarch 31, 2019.2020.

December 2017 2017 Convertible Note Offering

On December 29, 2017 the Company sold convertible notes in the principal amount of $800,000 to a group of accredited investors. The notes bear interest at 8% per year, are unsecured, and were due and payable on December 31, 2018. On December 31, 2018, the maturity date of the notes were extended to mature on December 31, 2019. The notes were fully were paid off in January 2020.

The original notes included a provision to be converted at any time into shares of the Company's common stock at an initial conversion price of $1.50 per share.

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

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

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

The $64,000 paid to the placement agent was allocated on a pro-rata basis to the warrants and the debt which was recorded as an offset to additional paid in capital and an increase in debt discount of $48,562 and $15,438, respectively.

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

During May 2018, a loan in the principal amount of $575,000 was converted into 383,333 shares of common stock. In addition, interest payable in the amount of $15,233 was converted into 10,155 shares.

At DecemberMarch 31, 20192020 and September 30, 2019, the outstanding principal on these notes was $195,000.$0 and $195,000, respectively. All debt discounts are being recognized on a straight-line basis over the terms of the notes. Amortization expense related to the debt discounts were $0 and $51,749 for the threesix months ended DecemberMarch 31, 2020 and 2019, and 2018, respectively. The outstanding balance on these notes was paid off in January 2020.

February 2018 2018 Convertible Note Offering

On February 12, 2018 the Company sold convertible notes in the principal amount of $810,000 to a group of accredited investors. The notes bear interest at 8% per year, are unsecured, and are due and payable on December 31, 2018. On December 31, 2018, the notes were extended to mature on December 31, 2019. At the option of the note holders, the notes may be converted at any time into shares of the Company's common stock at an initial conversion price of $1.50 per share.

The note holders also received warrants which entitle the note holders to purchase up to 540,000 shares of the Company's common stock. The warrants are exercisable at a price of $1.50 per share and expire on October 17, 2022.

The Company allocated the proceeds between the note and the warrants based on their relative fair values. The relative fair value of the 540,000 warrants was $523,013 which was recognized as additional paid in capital and a corresponding debt discount. After such allocation, the effective conversion price on the issuance date was less than the fair value of the stock into which the note is convertible, giving rise to a beneficial conversion feature of $286,987 which is recognized as additional paid in capital and a corresponding debt discount.

During January 2019, a loan in the amount of $35,000 was repaid in cash.

In October 2018, a loan in the principal amount of $45,000 was converted into 30,000 shares of common stock. In addition, interest payable in the amount of $1,992 was converted into 1,328 shares.

During July 2018, loans in the principal amount of $375,000 were converted into 250,000 shares of common stock. In addition, interest payable in the amount of $14,704 was converted into 9,802 shares.

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

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

At DecemberMarch 31, 20192020 and September 30, 2019, the outstanding principal on these notes was $190,000.$150,000 and $190,000, respectively. All debt discounts are being recognized on a straight-line basis over the terms of the notes. Amortization expense related to the debt discounts were $0 and $87,001 for the threesix months ended DecemberMarch 31, 20192020 and 2018,2019, respectively. On December 31, 2019, a note in the amount of $150,000 was extended to mature on December 31, 2020. A loan in the amount of $40,000 was paid off in January 2020.

Related Party

On February 1, 2016, we entered into an agreement with an unrelated party which provided us with borrowing capacity of $200,000. On May 1, 2016, the agreement was amended to increase the borrowing capacity to $1,000,000. On July 14, 2016, Strategic Capital Partners (“SCP”) assumed the $521,297 loan borrowed against this credit line, increasing the total balance owed to SCP to $2,431,646. SCP is controlled by Benjamin J. Barton, one of our officers and directors and a principal shareholder. The amounts borrowed from SCP were used to fund our operations.

On July 14, 2016, we entered into a debt modification agreement whereby a portion of the debt was converted into common stock and the remaining debt was renegotiated into two promissory notes.

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

The remaining $1,756,646 owed to SCP was divided into two promissory notes.

The first note, in the principal amount of $1,000,000, bears interest at 9.5% per year and matureswas due and payable on December 31, 2019. Interest is payable quarterly. The note can be converted at any time, at the option of the lender,SCP, into shares of our common stock, initially at a conversion price of $1.25 per share. The conversion price will be proportionately adjusted in the event of any stock split or capital reorganization. The note is not secured.

If the average closing price of our common stock is at least $2.50 for twenty consecutive trading days, and the average daily volume of trades of our common stock during the twenty trading days is at least 100,000 shares, we may, within 10 days of the end of such twenty-day period, notify SCP that its right to convert the note into shares of our common stock will end 45 days after the date of the notice to SCP.

The second note, in the principal amount of $756,646, bears interest at 8% per year and matures on December 31, 2019. Interest is payable quarterly. The note is not convertible into shares of our common stock but is secured by a first lien on all amounts due to us by WGP. Any payments received from the sale, lease or commercialization of the property in Denver, and any amounts received from WGP, will be applied to the principal amount of the note. Otherwise, all unpaid principal and interest will bewas due on December 31, 2019.

Accrued interest on these notes payable was $0 and $12,742 at September 30, 2019 and 2018, respectively. 

In connection with the debt modification agreement, we issued SCP warrants to purchase 800,000 shares of our common stock, exercisable at a price of $1.50 per share, and warrants to purchase an additional 800,000 shares of common stock, exercisable at a price of $3.00 per share. Both sets of warrants expire on June 30, 2020. We allocated the relative fair values to the warrants, stock options, and convertible debt, as determined by the Black Scholes option pricing model. Based on the Black Scholes option pricing model, a net debt premium of $72,651 was allocated to the warrants which are reflected in additional paid-in-capital. The debt premium is being amortized on a straight-line basis over the term of the notes.

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

Accrued interest on these notes payable was $4,964 and $12,283 at March 31, 2020 and September 30, 2019, respectively. 

At DecemberMarch 31, 20192020 and September 30, 2019, the outstanding principal on these notes was $581,646 and $1,756,646, and the unamortized debt premium was $0.respectively. Amortization of debt premium was $0 and $5,341$10,682 for the threesix months ended DecemberMarch 31, 2020 and 2019, and 2018, respectively.

NOTE 5.5. RELATED PARTY TRANSACTIONS

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

Pursuant to the agreements, we agreed to provide BASK with financing for construction and working capital required for BASK’s approved dispensary and cultivation center in Fairhaven, MA.

On August 15, 2018, the Company combined the construction and working capital advances of $129,634 and accrued interest of $44,517 and setupinto a new loan with payments over 5 years with 18% interest. At DecemberMarch 31, 20192020 and September 30, 2019, the outstanding balance on the note receivable was $143,956$139,121 and 148,763, respectively

On July 26, 2019, the Company entered into a 15-Year Triple Net lease of Building 1 of the MCC with BASK. The lease commenced on September 1, 2019 and includes an annual base rent of $135,000 and a revenue participation fee equivalent to 15% of BASK's gross revenues. As of DecemberMarch 31, 2019,2020, the BASK tenant receivable balance was $1,524.$2,667.

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

During the threesix months ended DecemberMarch 31, 2019,2020, the Company incurred and paid $45,000$90,000 of consulting expenses withfees to SCP.

NOTE 6. 6. INCOME/LOSS PER SHARE

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

NOTE 7.  7.  LEASES, 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) required Mr. Keogh to devote at least 50% of his time to the Company and; (iii) provided that the Company will pay Mr. Keogh $12,000 per month during the term of the agreement. In connection with this employment agreement the Company granted Mr. Keogh shares of common stock and options.   This agreement has expired but the terms are continuing on a month to month basis.

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

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

Operating Leases

Land

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

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

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

Between October 17, 2016 and April 17, 2017, the monthly lease payments accrued, with all accrued lease payments paid to MMP on April 17, 2017. On April 17, 2017, the Company reimbursed MMP’s costs and expenses associated with the acquisition of the property, the lease, and the acquisition of the shares and the warrant from the Company (as further described below).

Under the terms of the lease, the Company had six (6) months to obtain $2.6 million in capital funding for the construction of the first phase building. In the event that the Company was unable to raise these funds within the six (6) month period, the Company had an additional six (6) month period to do so; provided, that the Company has paid accrued lease payments and closing costs. If the Company was then unable to raise these funds on or before twelve (12) months from October 17, 2016, the lease would terminate. On October 17, 2017, the lease agreement was amended to provide that the Company will have until 16 months from October 17, 2016 to raise $2.6 million in capital funding. In addition to extending the funding deadline, this amendment granted MMP warrants to purchase up to 100,000 shares of Common Stock at an exercise price of $1.50 per share. The warrant can be exercised at any time on or after October 17, 2017 and on or before October 17, 2022. In February and April, 2018, the lease agreement was amended to provide that the Company will have until 20 months from October 17, 2016 to raise $2.6 million in capital funding. In addition to extending the funding deadline, this amendment granted MMP a warrant to purchase up to 100,000 shares of the Company’s common stock at an exercise price of $1.50 per share. The warrant can be exercised at any time on or before October 17, 2022. The Company recognized an expense of $0 during the three months ended December 31, 2018 related to those warrants. In July 2018, the Company fulfilled the $2.6 million capital funding commitment.

The Company received a credit for the $925,000 paid towards the purchase price of the land in the form of discounted lease payments. For the initial fifty (50) year term of the lease, the lease payments will be reduced by $1,542 each month

In connection with the sale of the property to MMP and the lease, the Company and MMP entered into a Share Purchase Agreement pursuant to which the Company issued to MMP 100,000 shares of its common stock at par value of $0.0001 (“Common Stock”), and a warrant to purchase up to 3,640,000 shares of Common Stock at an exercise price of $1.00 per share. The warrant can be exercised at any time on or after October 17, 2018 and on or before October 17, 2020. The warrant does not contain a cashless exercise provision. The fair value of the warrant was established using the Black Scholes option pricing model using the following assumptions:

The Company allocated $1,899,966 to the warrant which is reflected in additional paid-in-capital and was initially allocated to prepaid land lease. The fair value of the common stock on the date of the agreement was $73,000, which is also reflected in additional paid-in-capital and was also initially allocated to prepaid land lease. On June 26, 2019 the expiration date of warrants to purchase 3,640,000 shares of common stock was extended to October 17, 2021. In August 2019, the Company completed construction of Building 1 at MCC and on September 1^st,1st, 2019, Bask, Inc commenced its 15-year lease of Building 1 which includes a base rent plus 15% of BASK’s gross revenue. The Company has the option to extend the term of the land lease for four (4) additional ten (10) year periods.

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

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

As of DecemberMarch 31, 2019,2020, the Company’s right-of-use assets were $6,964,302,$6,947,605, the Company’s current maturities of operating lease liabilities were $9,093,$9,273, and the Company’s noncurrent lease liabilities were $4,245,612.$4,243,224. During the threesix months ended DecemberMarch 31, 2019,2020, the Company had operating cash flows from operating leases of 85,375.170,750.

The table below presents lease related terms and discount rates as of DecemberMarch 31, 2019.2020.

The reconciliation of the maturities of the operating leases to the lease liabilities recorded in the Consolidated Balance Sheet as of DecemberMarch 31, 20192020 are as follows:

NOTE 8.  8STOCKHOLDERS’ .  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.

The equity line agreement expired on August 14, 2019.

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

Stock Options. There was no stock option activity for the quartersix months ended DecemberMarch 31, 2019.2020. Stock option details are as follows: 

Stock option-based compensation expense associated with stock options was $108,522$147,073 and $0 for the threesix months ended DecemberMarch 31, 20192020 and 2018,2019, respectively. At DecemberMarch 31, 2019,2020, the remaining unrecognized stock-based compensation associated with stock options is $132,080.$93,529. These expenses are expected to be recognized over a remaining weighted average period of 2.252.0 years.

Warrants. WarrantThere was no warrant activity as of and for the threesix months ended DecemberMarch 31, 2019 is2020. Warrant details are as follows:

NOTE 9.9. INCOME TAXES

We did not record any income tax expense or benefit for the three or six months ended DecemberMarch 31, 20192020 or 2018.2019. We increased our valuation allowance and reduced our net deferred tax assets to zero. Our assessment of the realization of our deferred tax assets has not changed, and as a result we continue to maintain a full valuation allowance for our net deferred assets as of DecemberMarch 31, 20192020 and 2018.2019.

As of DecemberMarch 31, 2019,2020, we did not have any unrecognized tax benefits. There were no significant changes to the calculation since September 30, 2019.

NOTE 10. SUBSEQUENT EVENTS

On February 5, 2020 the Company received cash of $2,069,138 from WGP as payment in full for the fully reserved notes and other receivables related to the January 18, 2018 arbitration award which include principal, interest, attorneys’ fees and arbitration fees (see Note 3).