The following management’s discussion and analysis of financial condition and
results of operations should be read in conjunction with the Company’s audited
consolidated financial statements and related notes thereto included elsewhere
in this report.
Company Background
providing cultivation management, asset and infrastructure development –
currently concentrated in the
grow its business and provide a 360-degree spectrum of infrastructure,
including, cannabis cultivation, production of cannabis related products,
management services, dispensaries and consulting services. The Company intends
to grow its business through joint ventures with existing companies possessing
complementary subject matter expertise, acquisition of existing companies and
through the development of new opportunities. The Company intends to “prove the
concept” profitably in the rapidly expanding
anticipated success as a template for replicating the concept in other
developing states through a combination of strategic partnerships, acquisitions
and opening new operations.
The Company was incorporated on
Inc.
EDGAR Filings Inc.
2005
its name to
Filings LLC
Incorporation and changed its name to
On
real estate business, the Company submitted to its stockholders an offer to
exchange (the “Exchange Offer”) its common stock for shares in
Partners, LLC
effecting the Exchange Offer. On
exchange 1,800,000 shares of its Common Stock in exchange for 1,800,000 shares
of MJRE’s common units, representing membership interests in MJRE. Effective
estate properties and its subsidiaries, through which the Company held ownership
of the real estate properties, to MJRE. MJRE also assumed the senior notes and
any and all obligations associated with the real estate properties and business,
effective
Operational highlights:
? a three-acre, hybrid, outdoor, marijuana-cultivation facility (the
"Cultivation Facility") located in the Amargosa Valley of Nevada . The Company
had the contractual right to manage and cultivate marijuana on this property
until 2026, for which it would have received sixty percent (60%) of the net
revenues realized from its management of this facility and twenty-five percent
(25%) of the net revenues from equipment rental. The licensed facility is
owned by Acres Cultivation, LLC , a wholly owned subsidiary of Curaleaf
Holdings, Inc. On January 21, 2021 , the Company received a Notice of
Termination, effective immediately, from Acres Cultivation, LLC . During the
year ended December 31, 2021 , the Company relocated all of its equipment
utilized on the Acres lease to its 260 Acres adjacent to the Acres lease. The
Company will not generate any further revenue under the Acres relationship.
? 260 acres of farmland for the purpose of cultivating additional marijuana (the
"260 Acres") purchased in January of 2019. The Company intends to utilize the
state-of-the-art Cravo® cultivation system for growing an additional five
acres of marijuana on this property. The Cravo® system will allow multiple
harvests per year and should result in higher annual yields per acre. The land
has more than 180-acre feet of permitted water rights, which will provide more
than sufficient water to markedly increase the Company's marijuana cultivation
capabilities. This facility, upon receipt of its business license in Nye
County and its final inspection by the Cannabis Compliance Board ("CCB"), is
expected to become operational in the summer of 2022. During the year ended
December 31, 2021 , the Company elected to relocate all of its equipment
utilized on the Acres lease to its 260 Acres adjacent to the Acres lease. The
Company will utilize the 260 Acres for its own harvest along with additional
harvests under any Cultivation and Sales Agreements.
? Cultivation and Sales Agreements entered into for multiple grows on the
Company's 260 Acres located in the Amargosa Valley of Nevada . During the years
ended December 31, 2021 and 2020, the Company entered into separate
Cultivation and Sales Agreements, whereby the Company shall retain certain
independent growers to provide oversight and management of the Company's
cultivation and sale of products at its 260 Acres. The independent growers
shall pay to the Company a royalty of net sales revenue with a minimum royalty
after two years. As of the date of this filing, the Company is waiting on its
business license in Nye County and its final inspection by the Cannabis
Compliance Board before it can commence its operations under the Agreement.
? a nearby commercial trailer and RV park (THC Park - Tiny Home Community ) was
purchased in April of 2019 to supply necessary housing for the Company's farm
employees. After the Company's 2018 harvest, it came to realize that it would
need to find a more efficient method of housing and to bring its cultivation
team to its facilities. The Company purchased the 50-acre plus THC Park for
$600,000 in cash and $50,000 of the Company's restricted common stock. At
present, the Company's construction and completion of this community is
approximately seventy-five present complete. The impact of COVID-19 in
obtaining inspections and permitting has significantly delayed the completion
of this community. The Company has elected to cease any renovations or
additions at its Tiny Home Community until it plants its first grow on the 260
Acres and can better evaluate the need for additional housing.
34
? an agreement to acquire a cultivation license and production license, both
currently located in Nye County Nevada . On February 5, 2021 , the Company (the
"Purchaser") executed a Membership Interest Purchase Agreement ("MIPA3") with
MJ Distributing, Inc. (the "Seller") to acquire all of the outstanding
membership interests of MJ Distributing C202, LLC and MJ Distributing P133,
LLC , each the holder of a State of Nevada provisional medical and recreational
cultivation license and a provisional medical and recreational production
license. In consideration of the sale, transfer, assignment and delivery of
the Membership Interests to Purchaser, and the covenants made by Seller under
the MIPA3, Purchaser agrees to pay a combination of cash, promissory notes,
and stock in the amount of One-Million-Two-Hundred-Fifty Thousand Dollars
($1,250,000.00 ) in cash and/or promissory notes and 200,000 shares of the
Company's restricted common stock, all of which constitutes the consideration
agreed to herein for (the "Purchase Price"), payable as follows: (i) a
non-refundable down payment in the amount of $300,000 was made on January 15,
2021 , (ii) the second payment in the amount of $200,000 was made on February
5, 2021 , (iii) a deposit in the amount of $310,000 was paid on February 22,
2021 ($210,000 was a pre-payment against future compensation due under the
MIPA3), (iv) $200,000 was deposited on June 24, 2021 , (v) $200,000 shall be
deposited on or before June 12, 2021 , and (vi) $250,000 shall be deposited
within five (5) business days after the Nevada Cannabis Compliance Board
("CCB") provides notice on its agenda that the Licenses are set for hearing to
approve the transfer of ownership from the Seller to the Purchaser.
? indoor cultivation facility build-out in the City of Las Vegas (the "Indoor
Facility"). Through its former subsidiary, Red Earth, LLC ("Red Earth"), the
Company held a Medical Marijuana Establishment Registration Certificate,
Application No. C012. In August of 2019, the Company entered into a Membership
Interest Purchase Agreement (the "Agreement") with Element NV, LLC
("Element"), to sell a 49% interest in the license. Under the terms of the
Agreement, Element was required to invest more than $3,500,000 into this
Indoor Facility. Element paid the monthly rent on the facility from December
2019 through March 2020 but failed to make any additional payments. On June
11, 2020 , the Company entered into the First Amendment ("First Amendment") to
the Agreement. Under the terms of the First Amendment, the Closing Purchase
Price was adjusted to $441,000 , and Element was required to make a capital
contribution (the "Initial Contribution Payment") to the Target Company in the
amount of $120,000 and was required to make an additional cash contribution
(the Final Contribution Payment") in the amount of $240,000 . The Company
terminated its discussions with Element regarding its past due payments. On or
about May 7, 2021 , Red Earth, received an inquiry from the State of Nevada
Cannabis Compliance Board ("CCB") regarding the transfer of ownership of the
Subsidiary from its previous owners to the Company. The CCB has determined
that the transfer was not formally approved, thus a Category II violation. On
July 27, 2021 , Red Earth entered into a Stipulation and Order for Settlement
of Disciplinary Action (the "Stipulation Order") with the CCB. Under the terms
of the Stipulation Order, Red Earth agreed to present to the CCB, by not later
than August 31, 2021 , a plan pursuant to which the ownership of Red Earth will
be returned to the original owners. The Parties to the Stipulation Order
resolved the matter without the necessity of taking formal action. Red Earth
agreed to pay a civil penalty of $10,000 , which was paid on July 29, 2021 . On
August 26, 2021 , the Company and the Company's Chief Cultivation Officer and
previous owner of Red Earth, Paris Balaouras , entered into a Termination
Agreement. Under the terms of the Termination Agreement, the Purchase
Agreement (the "Purchase Agreement"), dated December 15, 2017 , entered into
between the Company and Red Earth was terminated as of the date of the
Termination Agreement resulting in the return of ownership of Red Earth to Mr.
Balaouras. Neither party shall have any further obligation to one another
pursuant to the terms of the Purchase Agreement.
The Company may also continue to seek to identify potential acquisitions of
revenue producing assets and licenses within legalized cannabis markets that can
maximize shareholder value.
The Company may face substantial competition in the operation of cultivation
facilities in
cultivation licenses, and, therefore, the Company anticipates that it will face
competition from these other companies. The Company’s management team has
experience in successfully developing, implementing, and operating marijuana
cultivation and related businesses in other legal cannabis markets. The Company
believes its experience in outdoor cultivation provides it with a distinct
competitive advantage over its competitors and it will continue to focus on this
area of its operations.
35 Acquisition of Red Earth
On
membership interests of
Earth”) established in
Common Stock and a promissory note in the amount of
was accounted for as a “Reverse Merger”, whereby Red Earth was considered the
accounting acquirer and became its wholly owned subsidiary. Upon the
consummation of the acquisition, the now former members of Red Earth became the
beneficial owners of approximately 88% of the Company’s Common Stock, obtained
controlling interest of the Company, and retained certain of its key management
positions. In accordance with the accounting treatment for a “reverse merger” or
a “reverse acquisition”, the Company’s historical financial statements prior to
the reverse merger will be replaced with the historical financial statements of
Red Earth prior to the reverse merger in all future filings with the
Earth is the holder of a Nevada Marijuana Establishment Certificate for the
cultivation of marijuana.
On or about
(the “Subsidiary”), received an inquiry from the State of Nevada Cannabis
Compliance Board (“CCB”) regarding the transfer of ownership of the Subsidiary
from its previous owners to the Company. The CCB has determined that the
transfer was not formally approved, thus a Category II violation.
The consolidated financial statements after completion of the reverse merger
included: the assets, liabilities, and results of operations of the combined
company from and after the closing date of the reverse merger, with only certain
aspects of pre-consummation stockholders’ equity remaining in the consolidated
financial statements. In February of 2019, the Company repurchased, from the
Company’s largest shareholder, 20,000,000 of the 26,366,484 shares of common
stock that this shareholder originally received in connection with the Reverse
Merger – for a total purchase price of
On
Settlement of Disciplinary Action (the “Stipulation Order”) with the CCB. Under
the terms of the Stipulation Order, the Subsidiary has agreed to present to the
CCB, by not later than
of the Subsidiary will be returned to the original owners. The Parties to the
Stipulation Order resolved the matter without the necessity of taking formal
action. The Subsidiary agreed to pay a civil penalty of
on
On
Agreement for Technical Services and Short-Term Funding (the “Agreement”) with
Cultivation Officer,
Company will provide a short-term loan (the “Loan”) to Red Earth for expenses
related to the activation and operation of Red Earth’s cultivation license. The
Loan shall bear interest at 12% per annum and increase to 18% upon default. In
addition, the Company shall provide Red Earth pre-opening technical services at
a cost of
the Company under the short-term loan is
On
previous owner of Red Earth,
Agreement. Under the terms of the Termination Agreement, the Purchase Agreement
(the “Purchase Agreement”), dated
Company and Red Earth was terminated as of the date of the Termination Agreement
resulting in the return of ownership of Red Earth to
party shall have any further obligation to one another pursuant to the terms of
the Purchase Agreement. On
the Termination Agreement from the CCB. Please see Note 7 – Intangible Assets
and Note 15 – Gain on Disposal of Subsidiary for further information.
36
Critical Accounting Policies, Judgments and Estimates
The Company’s discussion and analysis of its financial condition and results of
operations is based upon its consolidated financial statements, which have been
prepared in accordance with
(“GAAP”). The preparation of these consolidated financial statements requires
the Company 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. The Company bases its estimates
on historical experience and on various other assumptions that it believes 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.
The Company believes that the following critical accounting policies reflect the
more significant estimates and assumptions used in the preparation of the
consolidated financial statements.
Revenue Recognition
On
(“ASC”) 606 – Revenue from Contracts with Customers using the modified
retrospective method. Since the Company had not previously recognized any
revenue there was no impact upon adoption of ASC 606 on its consolidated
financial statements. The new revenue standard was applied prospectively in the
Company’s consolidated financial statements from
reported financial information for historical comparable periods will not be
revised and will continue to be reported under the accounting standards in
effect during those historical periods. Revenues are recognized when control of
the promised goods or performance obligations for services is transferred to the
Company’s customers, in an amount that reflects the consideration the Company
expects to be entitled to in exchange for the goods or services.
37 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 carry forwards. 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 Years Ended
The Company’s historical financial statements prior to the reverse merger were
replaced with the historical financial statements of Red Earth, the “accounting
acquirer,” based on the accounting treatment for reverse merger transactions.
Revenues
Revenues were
for the year ended
For the years ended
December 31,
2021 2020
Revenues:
Rental income (i) $ 74,003 $ 140,391
Management income (ii) 30,989 587,237
Equipment lease income (ii) 12,912 95,217
Product sales (iii) 123,966 -
Total $ 241,870 $ 822,845
(i) The rental income is from the Company's THC Park.
(ii) In April 2018 , the Company entered into a management agreement with Acres
Cultivation, LLC , a Nevada limited liability company (the "Licensed
Operator") that holds a license for the legal cultivation of marijuana for
sale under the laws of the State of Nevada . In January of 2019, the
Company entered into a revised agreement, which replaced the April 2018
agreement, with the Licensed Operator in order to be more stringently
aligned with Nevada marijuana laws. The material terms of the agreement
remain unchanged. The Licensed Operator is contractually obligated to pay
over to the Company eighty-five (85%) percent of gross revenues defined as
gross proceeds from sales of marijuana products minus applicable state
excise taxes and local sales tax. The agreement is to remain in force
until April 2026 . In April 2019 , the Licensed Operator was acquired by
Curaleaf Holdings, Inc., a publicly traded Canadian cannabis company. On
January 21, 2021 , the Company received a Notice of Termination, effective
immediately, from Acres Cultivation, LLC . The Company does not anticipate
that it will generate any further revenue under the Acres relationship.
(iii) Product sales from Company inventory. As part of the termination of the
Acres Cultivation, LLC Cultivation and Sales Agreement, the Company was
given cannabis available for resale. Sales in 2021 include product sold to
third parties and product given in exchange for rent. Please see Note 4 -
Inventory for further information.
Operating Expenses
Direct cost of revenue was
compared to
decrease of
of the management agreement with
Year ended
December 31,
Direct costs of revenue: 2021 2020
Rental income $ - $ -
Management and lease equipment income - 1,206,960
Product sales 341,626 -
Total $ 341,626 $ 1,206,960
General and administrative, marketing and selling expenses were
the year ended
largely attributable to an increase in the Company’s payment for payroll
expenses and the settlement of its rights participation agreement.
Depreciation and amortization were
compared to
decrease of
Company’s subsidiary, Red Earth.
Other income (expenses)
Other income (expenses) were
compared to (
increase of
sale of marketable securities of
Net income (loss)
Net income (loss) was
to loss of (
increase of
attributable to the gain on sale of marketable securities of
other income of
38
Liquidity and Capital Resources
The following table summarizes the cash flows for the years endedDecember 31, 2021 and 2020: 2021 2020 Cash Flows: Net cash used in operating activities (4,657,679 ) (186,365 )
Net cash provided by (used in) investing activities 10,772,190 (35,477 )
Net cash (used in) provided by financing activities (1,532,675 ) 316,446
Net change in cash 4,581,836 94,604 Cash at beginning of year 117,536 22,932 Cash at end of year$ 4,699,372 $ 117,536
The Company had cash of
Operating Activities
Net cash used in operating activities for the year ended
cash used in operating activities in 2021 is largely attributable to a net
income of
Investing Activities
Net cash provided by (used in) investing activities during the year ended
is largely attributable to the Company’s proceeds from the sale of marketable
securities in the amount of
Financing Activities
Net cash (used in) provided by financing activities during the year ended
is largely attributable to the repayment of notes payable in the amount of
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
Seasonality
The Company does not consider its business to be seasonal.
Commitments and Contingencies
The Company is subject to the legal proceedings described in “Item 3. Legal
Proceedings” of this report.
39
Inflation and Changing Prices
Neither inflation nor changing prices for the year ended
material impact on the Company’s operations.
© Edgar Online, source
Be the first to comment