Form 10-K for MJ HOLDINGS, INC.
30-Mar-2015
Annual Report
Executive Overview and Plan of Operation
We were originally incorporated on November 17, 2006, as Securitas EDGAR Filings, Inc. under the laws of the State of Nevada. Prior to the formation of Securitas EDGAR Filings Inc., the business was operated as Xpedient EDGAR Filings, LLC, a Florida Limited Liability Company, formed on October 31, 2005. On November 21, 2005, Xpedient EDGAR Filings LLC amended its Articles of Organization to change its name to Securitas EDGAR Filings, LLC. On January, 21 2009, Securitas Edgar Filings LLC merged into Securitas Edgar Filings, Inc., a Nevada corporation. Since our inception and until February 2014, we operated as an EDGAR filing agent, wherein we assisted company’s in preparing and filing periodic reports with the United States Securities and Exchange Commission (“SEC”) on the EDGAR, (electronic data gathering analysis retrieval) platform.
On February 14, 2014, we amended and restated our Articles of Incorporation and changed our name to MJ Holdings, Inc., concurrent with our name change, we changed our business model and began exploring opportunities in the legal marijuana industry, principally in real estate opportunities in connection therewith. Our fiscal year is a calendar year ending December 31.
Our principal executive offices are located at 4141 NE 2nd Avenue Suite 204A, Miami, Florida 33137, and our telephone number is (305) 455-1800.
How We Plan to Generate Revenue
MJ Holdings acquires and leases real estate to licensed marijuana operators. Additionally, MJ Holdings plans to explore ancillary opportunities in the regulated marijuana industry.
As of December 31, 2014, we have acquired two real estate properties in Colorado that are leased to state licensed marijuana operators and generating $44,268 in monthly rental income. The following table provides certain summary information about our real estate properties:
Year Built Building Lease Monthly
/ Date of Square Land Expiration Rental
Property (Renovated) Zoning Purchase Feet Area Date Income(1)
5353 Joliet Street 1980 / Industrial 6/19/2014 22,144 1.41 8/31/2021 $ 30,354
Denver, Colorado (2014) acres
503 Havana Street 1967 / Retail 9/24/2014 1,255 0.54 9/30/2024 13,914
Aurora, Colorado (2007) acres
$ 44,268
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The Company does not and will not, until such time as Federal law allows, grow, harvest, distribute or sell marijuana or any substances that violate the laws of the United States of America.
As a participant in the regulated marijuana industry, we intend to:
� Acquire and lease real estate zoned for legalized marijuana operations;
� Finance real estate acquisitions and facilitate loan programs backed by real estate assets;
� Offer real estate structures that maximize working capital to legal marijuana operators; and,
� Position ourselves to operate legal marijuana operations in the U.S. if and when Federal laws reconcile with state laws and marijuana becomes legal under federal law.
Critical Accounting Policies, Judgments and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimate that are reasonably likely to occur, could materially impact the consolidated financial statements. We believe that the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of the consolidated financial statements.
Deferred Leasing Costs
Commissions and other direct costs associated with the acquisition of tenants, or lessees, are capitalized and amortized on a straight-line basis over the terms of the related leases. Costs associated with unsuccessful leasing opportunities are expensed.
Leasing commissions of $205,077 and $0 were deferred during the years ended December 31, 2014 and 2013, respectively. Deferred leasing costs charged to property expenses for the years ended December 31, 2014 and 2013, were $2,532 and $0, respectively. As of December 31, 2014, $202,545 of deferred leasing costs are included on the Balance Sheet as a deferred asset.
Debt Issuance Costs
Costs associated with obtaining, closing, and modifying loans and/or debt instruments such as, but not limited to placement agent fees, attorney fees and state documentary fees are capitalized and charged to interest expense over the term of the loan.
Debt issuance costs of $19,152 and $0 were capitalized during the years ended December 31, 2014 and 2013, respectively. Debt issuance costs charged to interest expense for the years ended December 31, 2014 and 2013, were $5,218 and $0, respectively. As of December 31, 2014, $13,934 of debt issuance costs are included on the Balance Sheet within the Prepaid expenses and other assets.
Real Estate Property
Real estate property is recorded at cost, less accumulated depreciation and amortization. Real estate property, excluding land, is depreciated using the straight-line method over the estimated useful life of the respective assets. Leasehold improvements are amortized using the straight-line method over the shorter of the related lease term or useful life. Maintenance, repairs, and minor improvements are charged to expense as incurred; major renewals and betterments that extend the useful life of the associated asset are capitalized. When real estate property is sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in results of operations for the period.
Revenue Recognition
Before revenue can be recognized, four basic criteria must be met: persuasive evidence of an arrangement exists; the delivery has occurred or services have been rendered; the fee is fixed or determinable; and collectability is reasonably assured.
The Company’s revenues are rental income generated by leasing acquired real estate properties to licensed marijuana operators. All leases are classified as operating leases. Rental income is recognized on a straight-line basis over the terms of the leases. Straight-line rent is recognized for all tenants with contractual fixed increases in rent. Deferred rent receivable represents rental revenue recognized on a straight-line basis in excess of billed rents. Reimbursements from tenants for real estate taxes and other recoverable operating expenses are recognized as rental income in the period the applicable costs are incurred.
Stock-Based Compensation
The Company estimates the fair values of share-based payments on the date of grant using a Black-Scholes option pricing model, which requires assumptions for the expected volatility of the share price of our common stock, the expected dividend yield, and a risk-free interest rate over the expected term of the stock-based financial instrument.
Since the number of outstanding and free-trading shares of the Company’s common stock is limited and the trading volume is relatively low, we do not have sufficient company specific information regarding the volatility of our share price on which to base an estimate of expected volatility. As a result, we use the average historical volatilities of similar entities within our industry as the expected volatility of our share price.
The expected dividend yield is 0% as the Company has not paid any dividends on its common stock and does not anticipate it will pay any dividends in the foreseeable future.
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant date with a remaining term equal to the expected term of the stock-based award.
For stock-based financial instruments issued to parties other than employees, we use the contractual term of the financial instruments as the expected term of the stock-based financial instruments.
The assumptions used in calculating the fair value of stock-based financial instruments represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.
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.
Tax benefits from an uncertain tax position are only recognized if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Interest and penalties related to unrecognized tax benefits are recorded as incurred as a component of income tax expense. The Company has not recognized any tax benefits from uncertain tax positions for any of the reporting periods presented.
Results of Operations For the Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012
Revenue
Revenue for the year ended December 31, 2014, was $108,871 compared with revenue of $0 for the year ended December 31, 2013. Revenue for 2014 was generated as a result of rental income from operating leases for two real estate properties acquired in June 2014 and September 2014.
Certain property expenses are reimbursable to the Company through our existing leasing arrangements. During the year ended December 31, 2014, the Company recorded $13,157 of revenue pursuant to operating lease agreements to offset a portion of the property expenses incurred during the respective periods.
Operating Expenses
Property expenses consist of those costs associated with acquiring and leasing real estate properties. These expenses include costs for commissions, appraisals, real property taxes, insurance, repairs and maintenance. For the year ended December 31, 2014, we incurred property expenses of $72,859 compared with $0 for the year ended December 31, 2013. The property expenses for 2014 were the result of costs incurred from the two real estate properties acquired in 2014 and from costs incurred analyzing potential real estate acquisition opportunities.
General and administrative expenses for the year ended December 31, 2014, increased by $1,033,611 to $1,058,569 compared with general and administrative expenses of $24,958 for the year ended December 31, 2013. The increase in general and administrative expenses was attributed to increases in professional fees, legal fees, and overhead expenses due to the ramp up of our business during 2014, of which $862,476 was associated with non-cash stock-based compensation for consulting services.
Depreciation expense for the year ended December 31, 2014, was $38,173 compared with depreciation expense of $0 for the year ended December 31, 2013. Depreciation expense for 2014 was associated with the deprecation of two real estate properties acquired in June 2014 and September 2014.
Other Expenses
Interest expense for the year ended December 31, 2014, increased by $100,050 to $104,350 compared with interest expense of $4,200 for the year ended December 31, 2013. The increase in interest expense for 2014 was primarily due to $95,918 of interest expense incurred on a $1.8 million promissory note from a related party used to fund a $2.2 million real estate property acquisition in June 2014.
We had a net loss of $1,165,080, or a basic and diluted loss per share of $0.09, for the year ended December 31, 2014, compared with a net loss of $32,946, or a basic and diluted loss per share of $0.00, for the year ended December 31, 2013. The increase in the net loss
was primarily due to increases in operating expenses, general and administrative expenses, depreciation expense, and interest expense as a result of the change in our business model in 2014 to acquire and lease real estate to licensed marijuana operators.
Liquidity and Capital Resources
The following table summarizes the cash flows for the years ended December 31, 2014 and 2013:
2014 2013
Cash Flows:
Net cash used in operating activities $ (227,295 ) $ (22,731 )
Net cash used in investing activities (2,993,439 ) -
Net cash provided by financing activities 3,396,048 22,910
Net increase in cash 175,314 179
Cash at beginning of period 478 299
Cash at end of period $ 175,792 $ 478
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Operating Activities
We had net cash used in operating activities of $227,295 for the year ended December 31, 2014, which consisted of a net loss of $1,165,080, an increase of $205,077 in deferred leasing costs, and an increase of $59,443 in prepaid and other assets, partially offset by non-cash charges of $901,463, an increase of $198,797 in accounts payable and accrued liabilities, and receipt of $102,045 in security deposits associated with new operating leases.
The net cash used in operating activities of $227,295 for the year ended December 31, 2014, represented an increase of $204,564 compared with net cash used in operating activities of $22,731 for year ended December 31, 2013. the increase in net cash used in operating activities for 2014 was the result of the ramp up our new business model in 2014 to acquire and lease real estate to licensed marijuana operators.
Investing Activities
In June 2014 and September 2014, we acquired real estate properties for $2,970,806 in Denver and Aurora, Colorado. Pursuant to the terms of the lease agreement for the real estate property located in Aurora, the Company agreed to contribute $150,000 to improvements to the property. In December 2014, we incurred $22,633 of the $150,000 commitment for building improvements.
Financing Activities
We had $3,396,048 in net cash provided by financing activities for the year ended December 31, 2014. This was an increase of $3,373,138 compared with net cash provided by financing activities of $22,910 for the year ended December 31, 2013. The increase in net cash provided by financing activities was primarily due to proceeds of $1,800,000 from the issuance of a promissory note and proceeds of $1,615,000 received from the sale of common stock, partially offset by debt issuance costs of $19,152 during 2014.
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 we experience liquidity and capital resources 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 business, results of operations and financial condition.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Seasonality
We do not consider our business to be seasonal.
Commitments and Contingencies
We are subject to the legal proceedings described in “Item 3. Legal Proceedings” of this report. We believe that any ultimate liability resulting from such legal proceedings will not have a material adverse effect on our business, results of operations or financial condition.
Inflation and Changing Prices
Neither inflation nor changing prices for the years ended December 31, 2014 and 2013 had a material impact on our operations
MAPH Enterprises, LLC | (305) 414-0128 | 1501 Venera Ave, Coral Gables, FL 33146 | new@marijuanastocks.com
