Note 4 - Notes Payable

3 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Debt Disclosure [Text Block]

NOTE

4

.  NOTES PAYABLE

Unrelated

On

August 2, 2019

the Company secured a

$4,000,000

investment from an unrelated

third

party in the form of a loan. The loan was evidenced by a note which bears interest at the rate of

11%

per year, is due and payable on

August 2, 2022

and is secured by a

first

lien on Building

1

at the Company’s Massachusetts Cannabis Center (“MCC”).

The note holder also received a warrant which allows the holder to purchase

600,000

shares of the Company’s common stock at a price of

$1.50

per share. The warrant will expire on the earlier of (i)

August 2, 2024

or (ii)

twenty

days after written notice of the holder that the daily Volume Weighted Average Price of the Company’s common stock was at least

$4.00

for

twenty

consecutive trading days and the average daily trading volume of the Company’s common stock during the

twenty

trading days was at least

150,000

shares.

The placement agent for the offering 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

December 31, 2019,

the outstanding principal on these notes was

$4,000,000

and the unamortized debt discount was

$805,271.

All debt discounts are being amortized on a straight-line basis over the terms of the notes. Amortization expense related to the debt discounts was

$77,332

for the

three

months ended

December 31, 2019.

December

201

7

Convertible Note Offering

On

December 29, 2017

the Company sold convertible notes in the principal amount of

$800,000

to a group of accredited investors. The notes bear interest at

8%

per year, are unsecured, and were due and payable on

December 31, 2018.

On

December 31, 2018,

the notes were extended to mature on

December 31, 2019.

The notes 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 is convertible, giving rise to a beneficial conversion feature of

$128,976

which is recognized as additional paid in capital and a corresponding debt discount.

The

$64,000

paid to the placement agent was allocated on a pro-rata basis to the warrants and the debt which was recorded as an offset to additional paid in capital and an increase in debt discount of

$48,562

and

$15,438,

respectively.

During

February 2019,

a loan in the principal amount of

$30,000

was converted into

20,000

shares of common stock.

During

May 2018,

a loan in the principal amount of

$575,000

was converted into

383,333

shares of common stock. In addition, interest payable in the amount of

$15,233

was converted into

10,155

shares.

At

December 31, 2019

and

September 30, 2019,

the outstanding principal on these notes was

$

195,000.

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

three

months ended

December 31, 2019

and

2018,

respectively. The outstanding balance on these notes was paid off in

January 2020.

February

201

8

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

December 31, 2019

and

September 30, 2019,

the outstanding principal on these notes was

$190,000

.

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

three

months ended

December 31, 2019

and

2018,

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

$1,756,64

6

owed to SCP was divided into

two

promissory notes.

The

first

note, in the principal amount of

$1,000,000,

bears interest at

9.5%

per year and matures on

December 31, 2019.

Interest is payable quarterly. The note can be converted at any time, at the option of the lender, into shares of our common stock, initially at a conversion price of

$1.25

per share. The conversion price will be proportionately adjusted in the event of any stock split or capital reorganization. The note is

not

secured.

If the average closing price of our common stock is at least

$2.50

for

twenty

consecutive trading days, and the average daily volume of trades of our common stock during the

twenty

trading days is at least

100,000

shares, we

may,

within

10

days of the end of such

twenty

-day period, notify SCP that its right to convert the note into shares of our common stock will end

45

days after the date of the notice to SCP.

The

second

note, in the principal amount of

$756,646,

bears interest at

8%

per year and matures on

December 31, 2019.

Interest is payable quarterly. The note is

not

convertible into shares of our common stock but is secured by a

first

lien on all amounts due to us by WGP. Any payments received from the sale, lease or commercialization of the property in Denver, and any amounts received from WGP, will be applied to the principal amount of the note. Otherwise, all unpaid principal and interest will be due on

December 31, 2019.

Accrued interest on these notes payable was

$0

and

$12,742

at

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 holder 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.

At

December 31, 2019

and

September 30, 2019,

the outstanding principal on these notes was

$1,756,646,

and the unamortized debt premium was

$0

.

Amortization of debt premium was

$0

and

$5,341

 for the

three

months ended

December 31, 2019

and

2018,

respectively.