MJ Holdings, Inc. - Quarter Report: 2016 June (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

 or

Commission file number: 333-167824

MJ HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

4141 NE 2nd Avenue, Suite 204-A, Miami, Florida 33137
(Address of principal executive offices) (Zip Code)

(305) 455-1881
(Registrant’s telephone number, including area code)

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 þ   No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

Yes þ   No ¨

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

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

Yes ¨   No þ

APPLICABLE TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

MJ HOLDINGS, INC.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

MJ HOLDINGS, INC.

Condensed Consolidated Balance Sheets

As of June 30, 2016 and December 31, 2015

(Unaudited)

 See accompanying notes to unaudited condensed consolidated financial statements

MJ HOLDINGS, INC.

Condensed Consolidated Statements of Operations

For the three and six months ended June 30, 2016 and 2015

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements

MJ HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

For the six months ended June 30, 2016 and 2015

(unaudited)

See accompanying notes to unaudited condensed consolidated financial statements

MJ HOLDINGS, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

June 30, 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 six months ended June 30, 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. The Company adopted the following accounting policy during the interim period ended June 30, 2016:

Real Estate Loans Receivable

The Company’s real estate loans receivable are recorded at amortized cost, net of loan loss reserves, and evaluated for impairment at each balance sheet date. The amortized cost of a real estate loan receivable is the outstanding unpaid principal balance, net of unamortized acquisition premiums or discounts and unamortized costs and fees directly associated with the origination or acquisition of the loan, if applicable.

Interest income on the Company’s real estate loans receivable is recognized as revenue on an accrual basis over the life of the investment using the effective interest method. Direct loan origination fees and origination or acquisition costs, if applicable, are amortized over the term of the loan as an adjustment to interest income.

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 still evaluating the impact of

adopting the new accounting guidance, but does not expect the adoption to have a material impact 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 June 30, 2016, and December 31, 2015, we had $4,697 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 six months ended June 30, 2016, the Company generated net income of $17,132. As of June 30, 2016, the Company had an accumulated deficit of $1,432,359 and a working capital deficit of $2,485,443, consisting of cash and prepaid expenses of $182,148 and a loan receivable of $150,000 less promissory notes for $2,725,000 due within the next twelve months and accounts payable and accrued liabilities of $92,591. 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 Loans Receivable

In May 2016, the Company invested $150,000 in a $1,750,000 promissory note secured by the assignment of a mortgage on real estate property located in Miami, Florida. The mortgage is held by Chemtov Mortgage Group (“CMG”), an entity wholly-owned by the Company’s co-CEO, Shawn Chemtov. The Company did not incur any loan origination fees or any other costs associated with the mortgage investment.

The promissory note bears interest at 12% per annum and provides for cash interest payments on a monthly basis, commencing on July 1, 2016. The outstanding principal amount and any unpaid interest are due on May 19, 2017.

During the three and six months ended June 30, 2016, the Company recorded $2,139 of revenue generated by interest income from the $150,000 real estate loan receivable.

Note 5 — 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 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, matured on June 1, 2016. The Company is currently in the process of refinancing or extending the due date of the promissory note. In the interim, the Company continues paying the monthly interest payments. 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.

For the six months ended June 30, 2016 and 2015, the Company recorded $90,000 and $90,000, 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 6 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 6 below for additional lease details. As of June 30, 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 six months ended June 30, 2016 and 2015, the Company recorded $46,250 and $14,804, respectively, 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 June 30, 2016, is as follows:

Note 6 — 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 and six months ended June 30, 2016 and 2015, is as follows:

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 June 30, 2016:

Note 7 — Related Party Transactions

During the six months ended June 30, 2016 and 2015, the Company paid $136,250 and $97,096, 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 5 above for additional details regarding the promissory notes held by a related party.

During the six months ended June 30, 2016, the Company invested $150,000 in a promissory note held by CMG - see Note 4 above for additional details regarding this investment.  

Note 8 — Stock Based Compensation

Warrants

A summary of warrants issued, exercised and expired during the six months ended June 30, 2016, is as follows:

Common Stock

During the six months ended June 30, 2015, the Company issued 98,866 shares of common stock for consulting services and recorded $81,250 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 9 — 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 six months ended June 30, 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 $17,132 for the six months ended June 30, 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 10 — 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 and six months ended June 30, 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. The outstanding warrants as of June 30, 2016 and 2015, to purchase 166,665 shares of common stock that were not included in the calculations of diluted income per share because the impact would have been anti-dilutive for each of the periods presented.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our Management’s Discussion and Analysis should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this quarterly report.

Forward-Looking Statements

This quarterly report contains forward-looking statements and information relating to us that are based on the beliefs of our management as well as assumptions made by, and information currently available to, our management. When used in this report, the words “believe,” “anticipate,” “expect,” “will,” “estimate,” “intend”, “plan” and similar expressions, as they relate to us or our management, are intended to identify forward-looking statements. Although we believe that the plans, objectives, expectations and prospects reflected in or suggested by our forward-looking statements are reasonable, those statements involve risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements, and we can give no assurance that our plans, objectives, expectations and prospects will be achieved. Important factors that might cause our actual results to differ materially from the results contemplated by the forward-looking statements are contained in the “Risk Factors” section of and elsewhere in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, and in our subsequent filings with the SEC, and include, among others, the following: marijuana is illegal under federal law, competition, our business is dependent on laws pertaining to the marijuana industry, government regulation, our business model depends on the availability of private funding, we will be subject to general real estate risks and the availability, if debt payments to note holder are not made we could lose our investment in our real estate properties, terms and deployment of capital. The terms “MJ Holdings, Inc.,” “MJ Holdings,” “MJ,” “we,” “us,” “our,” and the “Company” refer to MJ Holdings, Inc. 

Business Overview

MJ Holdings owns and leases real estate zoned for legalized marijuana operations to licensed marijuana operators. We also invest in real estate-related investments, not necessarily related to the marijuana industry. In addition to our portfolio of income producing real estate and real estate-related investments, MJ Holdings owns, operates and is developing a portfolio of business units related to the regulated marijuana industry, including internet websites and mobile apps.

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.

We have devised our current business strategy based on certain limitations related to the legal status of marijuana under federal law and the fact that we are a public company and make certain representations and warranties in connection with our public filings with the United States Securities and Exchange Commission. We recognize the significant opportunities in the legalized marijuana space and believe that using our current business model, we can position ourselves to not only develop a significant business along our current path, but be able to leverage our position, relationships and assets to capitalize on additional opportunities in the future, if and when federal law reconciles with state law; resulting in the federal legalization of marijuana.

Critical Accounting Policies 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.

Deferred leasing costs charged to property expenses for the six months ended June 30, 2016 and 2015, were $13,894 and $13,678, respectively. As of June 30, 2016, $143,569 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 charged to interest expense for the six months ended June, 2016 and 2015, were $6,660 and $5,731, respectively. As of June 30, 2016, $4,697 of debt issuance costs are included on the Balance Sheet as a reduction in the carrying amount of notes payable to a related party.

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.

Real Estate Loans Receivable

The Company’s real estate loans receivable are recorded at amortized cost, net of loan loss reserves, and evaluated for impairment at each balance sheet date. The amortized cost of a real estate loan receivable is the outstanding unpaid principal balance, net of unamortized acquisition premiums or discounts and unamortized costs and fees directly associated with the origination or acquisition of the loan, if applicable.

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 include 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. 

The Company generates revenues through interest income earned on investments in real estate loans receivable, such as mortgages. Interest income is recognized as revenue on an accrual basis over the life of the investment using the effective interest method. Direct loan origination fees and origination or acquisition costs, if applicable, are amortized over the term of the loan as an adjustment to interest income.

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 Three and Six Months Ended June 30, 2016 Compared to the Three and Six Months Ended June 30, 2015

Revenue

Revenue for the three and six months ended June 30, 2016, was $171,260 and $340,133, respectively, compared with revenue of $155,883 and $288,687,respectively, for the three and six months ended June 30, 2015. Revenues for the three and six months ended June 30, 2016 and 2015, were generated as a result of rental income from operating leases for three real estate properties and interest income from an investment in a real estate loan receivable. Revenue increased by $15,377 and $51,446, respectively, for the three and six months ended June 30, 2016, compared with revenue for three and six months ended June 30, 2015, primarily as a result of rental income generated by the third real estate property acquired in May 2015. 

Certain property expenses are reimbursable to the Company through our existing leasing arrangements. During the three and six months ended June 30, 2016, the Company recorded $15,647 and $31,294, respectively, of revenue pursuant to operating lease agreements to offset a portion of the property expenses incurred during the respective periods compared with $14,177 and $25,930, respectively, of revenue recorded during the three and six month ended June 30, 2015, 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 three and six months ended June 30, 2016, we incurred property expenses of $39,243 and $63,699, respectively, compared with $ 22,246 and $77,949, respectively, for the three and six months ended June 30, 2015.

The increase of $16,997 in property expenses for the three months ended June 30, 2016, compared with the three months ended June 30, 2015, was primarily attributed to increases in real property taxes and insurance during the three months ended June 30, 2016.

The decrease of $14,250 in property expenses for the six months ended June 30, 2016, compared with the six months ended June 30, 2015, was primarily attributed to a decrease in costs for repairs and maintenance, partially offset by increases in costs for real property taxes and insurance during the six months ended June 30, 2016.

General and administrative expenses for the three and six months ended June 30, 2016, were $40,281 and $58,378, respectively, compared with general and administrative expenses of $88,470 and $161,978, respectively, during the three and six months ended June 30, 2015.

The decreases of $48,189 and $103,600, respectively, in general and administrative expenses for the three and six months ended June 30, 2016, was primarily attributed to decreases in consulting fees and legal fees, of which $61,250 and $81,250, respectively, was for non-cash stock-based compensation for consulting services during the three and six months ended June 30, 2015, which were partially offset by an increase in travel related expenses during the three and six months ended June 30, 2016.

Depreciation expense for the three and six months ended June 30, 2016, was $29,038 and $58,076, respectively, compared with depreciation expense of $24,510 and $44,673, respectively, for the three and six months ended June 30, 2015. The increases in depreciation expense for the three and six months ended June 30, 2016, were primarily associated with depreciation of the third real estate property acquired in May 2015.

Other Expenses

Interest expense for the three months ended June 30, 2016, increased by $7,942 to $71,017 compared with interest expense of $63,075 for the three months ended June 30, 2015. Interest expense for the six months ended June 30, 2016, increased by $32,314 to $142,848 compared with interest expense of $110,534 for the six months ended June 30, 2015. The increases in interest expense for the three and six months ended June 30, 2016, were due to interest expense incurred on a $925,000 promissory note used to fund a real estate property acquisition in May 2015.  

We had a net loss of $8,319, or a basic and diluted loss per share of $0.001, for the three months ended June 30, 2016, compared with a net loss of $42,418, or a basic and diluted loss per share of $0.003, for the three months ended June 30, 2015. We had net income of $17,132, or a basic and diluted earnings per share of $0.001, for the six months ended June 30, 2016, compared with a net loss of $106,447, or a basic and diluted loss per share of $0.008, for the six months ended June 30, 2015.

The reduction of $34,099 in net loss for the three months ended June 30, 2016, and the increase in earnings of $123,579 during the six months ended June 30, 2016, were due to the increases in revenues and the decreases in operating expenses described above, partially offset by the increases in interest expense associated with the additional debt to acquire our third real estate property acquisition in May 2015. 

Liquidity and Capital Resources

The following table summarizes the cash flows for the six months ended June 30, 2016 and 2015:

The Company had cash of $176,349 at June 30, 2016, compared with cash of $303,368 at December 31, 2015, a decrease of $127,019. The decrease in cash during the six months ended June 30, 2016, was attributed to a $150,000 investment in a real estate mortgage, partially offset by cash generated by operating activities of $22,981.

Operating Activities

We had net cash provided by operating activities of $22,981 for the six months ended June 30, 2016, which consisted of net income of $17,132, non-cash charges of $56,982, and a decrease of $294 in prepaid and other assets; partially offset by a decrease of $25,035 in security deposits, which was used for rental income during the period, and a decrease of $26,392 in accounts payable and accrued liabilities.

We had net cash used in operating activities of $43,914 for the six months ended June 30, 2015, which consisted of a decrease of $126,598 in accounts payable and accrued liabilities, a net loss of $106,447, and a decrease in security deposits of $6,842, partially offset by non-cash charges of $123,098, a decrease in prepaid and other assets of $55,365, and a decrease in deferred leasing costs of $17,510.

Investing Activities

During the six months ended June 30, 2016, we invested $150,000 in a $1,750,000 promissory note secured by the assignment of a mortgage on real estate property located in Miami, Florida. The promissory note bears interest at 12% per annum and provides for cash interest payments on a monthly basis, commencing on July 1, 2016.

During the six months ended June 30, 2015, we purchased a 3,828 square feet retail building in Denver, Colorado for $771,750. In addition, pursuant to the terms of the lease agreement for the real estate property located in Aurora, Colorado, the Company agreed to contribute $150,000 to improvements to the property. For the six months ended June 30, 2015, we incurred $123,393 for building improvements to the property in Aurora, Colorado. As of June 30, 2016, the Company had paid $146,026 of the $150,000 towards the improvements to the property.

Financing Activities

There were no financing activities for the six months ended June 30, 2016.

We had $914,366 in net cash provided by financing activities for the six months ended June 30, 2015, which consisted of proceeds of $925,000 from the issuance of a promissory note, partially offset by debt issuance costs of $10,634.

Although we can provide no assurances, we believe our cash on hand, coupled with revenues generated by rental and interest income from our real estate investments 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.

Inflation and Changing Prices

Neither inflation or changing prices for the three and six months ended June 30, 2016,, had a material impact on our operations.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not required for smaller reporting companies.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Co-Chief Executive Officers and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of June 30, 2016. Based on that evaluation, our Co-Chief Executive Officers and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2016.

Changes in Internal Control Over Financial Reporting

During the quarter ended June 30, 2016, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Securities Exchange Act Rules 13a-15 or 15d-15 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

This quarterly report does not include an attestation report of the Company’s registered public accounting firm regarding internal controls over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this quarterly report.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

There are no legal proceedings, which are pending or have been threatened against us or any of our officers, directors or control persons of which management is aware.

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. Please refer to the “Risks Factors” section in our Annual Report for a discussion of risks to which our business, financial condition, results of operations and cash flows are subject.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the six months ended June 30, 2015, the Company issued 98,866 shares of common stock in exchange for consulting services. The securities were issued in reliance upon the exemptions from registration provided by Section 4(2) of the Securities Act of 1933, as amended.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

The documents set forth below are filed, incorporated by reference or furnished herewith as indicated.

Index to Exhibits

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.