See accompanying notes
to unaudited condensed consolidated financial statements
See accompanying notes to unaudited condensed
consolidated financial statements
See accompanying notes to unaudited condensed
consolidated financial statements
Notes to the Unaudited Condensed Consolidated Financial Statements
March 31, 2016
Note 1 — Interim Financial Statements
The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”) for interim financial information and with the rules and regulations of the U.S.
Securities and Exchange Commission (“SEC”). Accordingly, these condensed consolidated financial statements do not include
all of the information and footnotes required for audited annual financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary to make the condensed consolidated financial statements not misleading
have been included. The balance sheet at December 31, 2015, has been derived from the Company’s audited consolidated
financial statements as of that date.
The unaudited condensed consolidated financial statements included
herein should be read in conjunction with the audited consolidated financial statements and the notes thereto that are included
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, that was filed with the SEC on March 30,
2016. The results of operations for the three months ended March 31, 2016, are not necessarily indicative of the results to be
expected for the full year.
The unaudited condensed consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries, 5353 Joliet, LLC, MJ Havana, LLC, and MJ Sheridan, LLC. Intercompany
balances and transactions have been eliminated in consolidation.
Note 2 — Summary of Significant Accounting Policies
The significant accounting policies followed by the Company for
interim reporting are consistent with those included in the Company’s Annual Report on Form 10-K for the year ended December
31, 2015. There were no material changes to our significant accounting policies during the interim period ended March 31, 2016.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the “FASB”)
issued guidance to clarify the principles for recognizing revenue. The core principle of the guidance is that an entity should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a comprehensive framework
for revenue recognition that supersedes current general revenue guidance and most industry-specific guidance. In addition, the
guidance requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and
uncertainty of revenue that is recognized. An entity should apply the guidance either retrospectively to each prior reporting period
presented or retrospectively with the cumulative adjustment at the date of the initial application. In July 2015, the FASB delayed
the effective date of the new guidance to annual reporting periods beginning after December 15, 2017, including interim periods
within that reporting period. Early adoption is now permitted after the original effective date of December 15, 2016. The
Company is currently in the process of evaluating the impact of adoption of the new accounting guidance on its consolidated financial
statements and has not determined the impact of adoption on its consolidated financial statements.
In August 2014, FASB issued guidance that requires management to
evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a
going concern, and to provide certain disclosures when it is probable that the entity will be unable to meet its obligations as
they become due within one year after the date that the financial statements are issued. The Company adopted this guidance for
the annual period ending December 31, 2016, beginning with the first quarter ended March 31, 2016. The adoption of this guidance
primarily addressed certain disclosures to the financial statements and had no impact on our financial position, results of operations
or cash flows.
In April 2015, the FASB issued guidance to simplify the presentation
of debt issuance costs. This guidance provides that debt issuance costs related to a recognized liability be presented in the balance
sheet as a direct reduction from the carrying amount of that debt liability, consistent with debt discounts. The Company adopted
this guidance with the annual and the interim period beginning January 1, 2016, and applied the standard on a retrospective basis
as of December 31, 2015. As of March 31, 2016, and December 31, 2015, we had $7,617 and $11,357, respectively, of debt issuance
costs associated with $2.7 million of notes payable that were reclassified from other assets to a reduction in the carrying amount
of the notes payable. The adoption of this standard did not have a material impact on our financial position and did not impact
our results of operations or cash flows.
Note 3 — Going Concern
The Company’s financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and settlement of liabilities and commitments in the normal course
of business. During the three months ended March 31, 2016, the Company generated net income of $25,451. As of March 31,
2016, the Company had an accumulated deficit of $1,424,040 and a working capital deficit of $1,580,494, consisting of cash and
prepaid expenses of $314,698 less a promissory note for $1,800,000 due June 1, 2016, and accounts payable and accrued liabilities
of $95,192. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.
The Company’s future success is dependent upon its ability
to achieve and maintain profitable operations, generate cash from operating activities, refinance existing debt obligations and/or
obtain additional financing. Although we can provide no assurances, we believe our cash on hand, coupled with revenues generated
by rental income and our ability to refinance our equity in the real estate we own, will provide sufficient liquidity and capital
resources to fund our business for the next twelve months.
In the event the Company experiences liquidity and capital resource
constraints because of unanticipated operating losses, we may need to raise additional capital in the form of equity and/or debt
financing. If such additional capital is not available on terms acceptable to us or at all, then we may need to curtail our operations
and/or take additional measures to conserve and manage our liquidity and capital resources, any of which would have a material
adverse effect on our financial position, results of operations, and our ability to continue in existence. These financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
Note 4 — Real Estate Property Acquisitions
5353 Joliet Street
In June 2014, through its wholly-owned subsidiary, 5353 Joliet LLC,
the Company acquired an owner-occupied 22,144 square feet industrial building situated on 1.4 acres of land in Denver, Colorado
for $2,214,000. The acquisition was funded with proceeds from the issuance of a secured promissory note in the amount of $1,800,000
and $414,000 of cash on-hand. The promissory note is held by Chemtov Mortgage Group ("CMG"), an entity wholly-owned by
the Company's co-CEO, Shawn Chemtov. CMG has assigned all ownership and security interest granted to it pursuant to the promissory
note to 5353 Mortgage Loan, LLC, a single purpose entity created solely for the purpose of this transaction. CMG invested $100,000
of the $1,800,000 of funds used to finance the purchase of the promissory note. CMG acts as the loan servicing entity for the promissory
note, administering the note, processing payments from the Company, and transferring all payments to 5353 Mortgage Loan, LLC. CMG
charges no administration fees for servicing the promissory note.
The promissory note bears interest at 10% per annum, provides for
cash interest payments on a monthly basis, matures on June 1, 2016, and is callable at the option of the Company at any time after
June 19, 2015. The Company has guaranteed the promissory note and has pledged its ownership interest in 5353 Joliet LLC, and as
such its fee-simple ownership interest in the property as security for the promissory note. The promissory note does not restrict
the Company's ability to incur future indebtedness. For the three months ended March 31, 2016 and 2015, the Company recorded $45,000
and $45,000, respectively, of interest expense related to the promissory note.
In September 2014, the Company entered into a lease agreement contingent
upon the lessee obtaining city and state licenses and permits for its intended operations at the premises. The contingencies were
met by the lessee, and the lease agreement became effective December 1, 2014. The lease agreement is for a term of seven years.
Insurance and real property taxes shall be paid by the Company and, subsequently, charged to the lessee as additional rent based
on the actual expenses incurred - see Note 5 below for additional lease details.
503 Havana Street
In September 2014, through its wholly-owned subsidiary, MJ Havana
LLC, the Company acquired an owner-occupied 1,250 square foot building situated on 23,625 square feet of land in Aurora, Colorado
for $756,000, exclusive of closing costs. The acquisition was funded with cash on-hand. The property is zoned B-2 and has been
approved by the city of Aurora as a retail dispensary for recreational marijuana.
Prior to closing on the property acquisition, the Company had pre-negotiated
a 10-year lease agreement with a third-party, a licensed marijuana dispensary company serving both medical and adult (21+) customers
in Colorado. Once the closing of the property was completed with the seller, the pre-negotiated lease was executed in September
2014 with the third-party. Pursuant to the terms of the lease agreement, the Company agreed to contribute $150,000 to improvements
to the property - see Note 5 below for additional lease details. As of March 31, 2016, the Company had paid $146,026 towards the
tenant's building improvements.
1126 South Sheridan Boulevard
In May 2015, through its wholly-owned subsidiary, MJ Sheridan LLC,
the Company acquired real estate property located at 1126 South Sheridan Boulevard in Denver, Colorado, for $771,750, exclusive
of closing costs. The Company funded the acquisition through the issuance of a promissory note in the amount of $925,000 to a related
party of which $771,750 was used to purchase the property. The balance of the funds will be used by the Company as working capital.
The acquired property is 17,729 square feet with a 3,828 square foot one story free-standing building. The property is zoned B-2
and has been approved by the city of Denver as a retail dispensary for recreational marijuana.
The promissory note is held by CMG, an entity wholly-owned by the
Company's co-CEO, Shawn Chemtov. CMG has assigned all ownership and security interest granted to it pursuant to the promissory
note to a single purpose entity created solely for the purpose of this transaction. CMG acts as the loan servicing entity for the
promissory note, administering the note and processing payments from the Company. CMG charges no administration fees for servicing
the promissory note.
The promissory note bears interest at 10% per annum, provides for
cash interest payments on a monthly basis, matures on June 1, 2017. The promissory note is collateralized with the Company's ownership
interest in the newly acquired property and its previously acquired property located at 503 Havana Street in Aurora, Colorado.
The promissory note does not restrict the Company's ability to incur future indebtedness. For the three months ended March 31,
2016, the Company recorded $23,125 of interest expense related to the promissory note.
Prior to closing on the property acquisition, the Company had pre-negotiated
a 10-year lease agreement with a third-party, a licensed marijuana dispensary company serving both medical and adult (21+) customers
in Colorado. Once the closing of the property was completed with the seller, the pre-negotiated lease was executed in May 2015
with the third-party - see Note 5 below for additional lease details.
A summary of real estate property at March 31, 2016, is as follows:
|
|
Estimated
|
|
March 31,
|
|
|
|
Life
|
|
2016
|
|
Buildings
|
|
|
30 years
|
|
|
$
|
2,995,167
|
|
Improvements
|
|
|
9-10 years
|
|
|
|
146,026
|
|
Land
|
|
|
Not depreciated
|
|
|
|
747,389
|
|
Computer equipment and software
|
|
|
3 years
|
|
|
|
2,000
|
|
Total real estate property
|
|
|
|
|
|
|
3,890,582
|
|
Less: Accumulated depreciation
|
|
|
|
|
|
|
(169,737
|
)
|
Real estate property, net
|
|
|
|
|
|
$
|
3,720,845
|
|
|
|
|
|
|
|
|
|
|
Note 5 — Operating Leases
The Company generates revenues by leasing its acquired real estate
properties through operating leasing arrangements. A summary of revenues generated from our rental properties for the three months
ended March 31, 2016 and 2015, is as follows:
|
For the three months ended
March 31,
|
|
|
2016
|
|
|
2015
|
|
Revenues:
|
|
|
|
|
|
|
|
Rental payments
|
$
|
142,113
|
|
|
$
|
111,254
|
|
Reimbursed operating expenses
|
|
15,647
|
|
|
|
11,753
|
|
Deferred rental income
|
|
11,113
|
|
|
|
9,797
|
|
Total revenues from rental properties
|
$
|
168,873
|
|
|
$
|
132,804
|
|
|
|
|
|
|
|
|
|
503 Havana Street
In September 2014, the Company entered into a non-cancelable operating
lease agreement with a marijuana dispensary (the "Lessee") to move into the Company's acquired property located at 503
Havana Street in Aurora, Colorado. The lease agreement is for a term of ten years and a monthly rent obligation of $11,250, subject
to annual increases of 3% per year. Insurance and real property taxes shall be paid by the Company and, subsequently, charged to
the Lessee as additional rent based on the actual expenses incurred. Pursuant to the terms of the lease agreement, the Company
has agreed to contribute $150,000 to improvements to the property.
Upon the expiration of the term of ten years, the Lessee has the
option to renew the lease agreement for one additional ten-year term, on the same terms as provided in the lease agreement. During
the third year of the lease agreement, the Lessee may exercise an option to purchase the Property.
5353 Joliet Street
In September 2014, the Company entered into a lease agreement for
its property and warehouse building located at 5353 Joliet Street in Denver, Colorado. The lease agreement is for a term of seven
years and a monthly rent obligation of $25,835, subject to annual increases of 2% per year. Insurance and real property taxes shall
be paid by the Company and, subsequently, charged to the lessee as additional rent based on the actual expenses incurred.
The lease was contingent upon the lessee, obtaining city and state
licenses and permits for its intended operations at the premises, within the dates provided in the lease agreement. The contingencies
were met by the lessee, and the lease agreement became effective December 1, 2014.
Upon the expiration of the seven-year term, the lessee has the option
to renew the lease for two separate five-year terms, subject to rent reviews and adjustments, as set out in the lease agreement.
1126 South Sheridan Boulevard
In May 2015, the Company entered into a lease agreement for its
acquired property located at 1126 South Sheridan Boulevard in Denver, Colorado. The lease agreement is for a term of ten years
and a monthly rent obligation of $10,945, subject to annual increases of 3% per year. Insurance and real property taxes shall be
paid by the Company and, subsequently, charged to the Lessee as additional rent based on the actual expenses incurred.
Upon the expiration of the term of ten years, the Lessee has the
option to renew the lease agreement for one additional ten-year term, on the same terms as provided in the lease agreement. During
the third year of the lease agreement, the Lessee may exercise an option to purchase the Property.
Future minimum rental payments, excluding the reimbursement of specified
operating expenses, for non-cancelable operating lease agreements are as follows as of March 31, 2016:
2016
|
$
|
431,629
|
|
2017
|
|
588,457
|
|
2018
|
|
602,886
|
|
2019
|
|
617,681
|
|
2020
|
|
632,857
|
|
Thereafter
|
|
1,489,861
|
|
Total minimal rental payments
|
$
|
4,363,371
|
|
|
|
|
|
Note 6 — Related Party Transactions
During the three months ended March 31, 2016 and 2015, the Company
paid $68,125 and $45,000, respectively, for interest due pursuant to $2,725,000 of promissory notes held by CMG, wholly-owned by
the Company's co-CEO and shareholder, Shawn Chemtov - see Note 4 above for additional details regarding the promissory notes held
by a related party.
Note 7 — Stock Based Compensation
Warrants
A summary of warrants issued, exercised and expired during the three
months ended March 31, 2016, is as follows:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Avg.
|
|
|
|
|
|
|
Exercise
|
|
Warrants:
|
|
Shares
|
|
|
Price
|
|
Balance at January 1, 2016
|
|
|
166,665
|
|
|
$
|
5.88
|
|
Issued
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
Balance at March 31, 2016
|
|
|
166,665
|
|
|
$
|
5.88
|
|
|
|
|
|
|
|
|
|
|
Common Stock
During the three months ended March 31, 2015, the Company issued
8,272 shares of common stock for consulting services and recorded $20,000 of stock-based compensation expense for these consulting
services, which has been classified as General and administrative expenses. The stock-based compensation expense was calculated
based on the grant date fair value of the common stock shares issued in exchange for the consulting services.
Note 8 — Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance on deferred
tax assets is established when management considers it is more likely than not that some portion or all of the deferred tax assets
will not be realized.
The Company did not incur any federal or state income tax expense
or benefit for the three months ended March 31, 2016 and 2015. As of December 31, 2015, the Company had net operating losses of
approximately $684,000 for federal and state income tax purposes that can be carried forward for up to twenty years and deducted
against future federal taxable income. The taxable income generated as a result of the Company's net income of $25,451 for the
three months ended March 31, 2016, was completely offset by the available net operating loss carryforwards for federal and state
income tax purposes. Based on the expected taxable income for the year ending December 31, 2016, the Company does not expect to
incur alternative minimum tax on its net alternative minimum taxable income for the year. The net operating loss carryforwards
expire in various years through 2035. All of the federal and state net operating losses incurred prior to 2014 are subject to 100
percent limitation under the provisions of Internal Revenue Code section 382 due to an ownership change and the continuity of business
requirement.
Note 9 — Basic and Diluted Earnings (Loss) per Common Share
Basic earnings (loss) per share is computed by dividing the net
income or net loss available to common shareholders by the weighted average number of common shares outstanding for the period.
Diluted earnings (loss) per share is calculated using the treasury stock method and reflects the potential dilution that could
occur if warrants were exercised and were not anti-dilutive.
For the
three months ended March 31, 2016 and 2015, basic and diluted earnings (loss) per common share were the same since there were no
potentially dilutive shares outstanding during the respective periods. For the three months ended March 31, 2016 and 2015, there
were outstanding warrants to purchase 166,665 shares of common stock that were not included in the calculation of diluted income
per share because the impact would have been anti-dilutive for each of the periods presented.