Note 10 - Commitments and Contingencies

12 Months Ended

Sep. 30, 2024

Commitments and Contingencies Disclosure [Text Block]

NOTE 10.

COMMITMENTS AND CONTINGENCIES

Operating Leases

Land

On October 17, 2016, the Company closed on the acquisition of the 52.6-acre parcel of undeveloped land in Freetown, Massachusetts. The property is located approximately 47 miles southeast of Boston. The Company is developing the property as the MCC. Plans for the property 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.

As part of a simultaneous transaction, the Company assigned the property rights to Massachusetts Medical Properties, LLC (“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.

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. (See Note 11)

The Company completed the construction of Building 1 on the leased land and on September 1, 2019, BASK, commenced its 15-year sublease of Building 1 which includes a base rent plus 15% of BASK’s gross revenues.

On May 13, 2024, the Company and BASK mutually agreed to modify the lease effective August 31, 2024. AmeriCann and BASK have agreed that, for the last five months of the lease effective April 1 2024, the new monthly payment by BASK will be $57,588 per month, inclusive of property taxes and Host Community Agreement fees. After August 31, 2024, AmeriCann intends to operate the building as a regulated cannabis cultivation and manufacturing operator. Bask agreed to transfer to the Company its provisional Cultivation and provisional Product Manufacturing licenses. BASK will receive a credit of $40,000 for each license transferred. Any transfer of licenses is contingent upon approval from the Massachusetts Cannabis Control Commission. An application for the Change of Ownership and Control of the licenses was filed on June 19, 2024. BASK granted the Company the option to purchase any furniture and equipment located in the space currently occupied by BASK. A third-party valuation of the items to be purchased was completed and valued the assets at $551,800. Additionally, the remaining balance due and the existing promissory note from BASK were converted to a new promissory note which will be paid in 24 equal monthly installments without interest.

As of September 30, 2024, the Company’s right-of-use assets were $6,638,679, the Company’s current maturities of operating lease liabilities were $13,201 and the Company’s noncurrent lease liabilities were $4,191,188. During the year ended September 30, 2024, the Company had operating cash flows from operating leases of $341,450.

The table below presents lease related terms and discount rates as of September 30, 2024.

	As of September 30, 2024

Weighted average remaining lease term
Operating leases		42.00
Weighted average discount rate
Operating leases		7.9	%

The reconciliation of the maturities of the operating leases to the lease liabilities recorded in the Consolidated Unaudited Balance Sheet as of September 30, 2024 are as follows:

2025		341,500
2026		341,500
2027		341,500
2028		341,500
2029		341,500
Thereafter		12,635,501
Total lease payments		14,343,001
Less: Interest		(10,138,612	)
	$	4,204,389
Less: operating lease liability, current portion		(13,201	)
Operating lease liability, long term	$	4,191,188

Office space

The Company leases its office space located at 1555 Blake St., Unit 502, Denver, CO 80202 for $2,500 per month with a lease term of less than 12 months from SCP, a related party. See Note 6.

Aggregate rental expense under all leases totaled $481,375 and $481,375 for the years ended September 30, 2024 and 2023, respectively.

AmeriCann, Inc. 10-K