Innovative Industrial Properties, Inc. (NYSE:IIPR) Files An 8-K Financial Statements and ExhibitsItem 9.01 Financial Statements and Exhibits.
| (a) | Financial Statements of Businesses Acquired. |
| Holistic Industries LLC | |
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Independent Auditor’s Report |
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| Audited Balance Sheets as of December 31, 2016 and 2015 | |
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Audited Statements of Operations and Changes in Members’ Equity for the period from July 1, 2015 (Inception) through December 31, 2015 and the year ended December 31, 2016 Audited Statements of Cash Flows for the period from July 1, 2015 (Inception) through December 31, 2015 and the year ended December 31, 2016 |
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| Notes to Audited Financial Statements | |
| (b) | Pro Forma Financial Information. |
| Unaudited Pro Forma Consolidated Balance Sheet as of March 31, 2017 | |
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Unaudited Pro Forma Consolidated Statement of Operations for the year ended December 31, 2016 |
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| Unaudited Pro Forma Consolidated Statement of Operations for the three months ended March 31, 2017 | |
| Notes to Unaudited Pro Forma Consolidated Financial Statements | |
| (d) | Exhibits. |
| Exhibit | Description of Exhibit |
| 10.1(1) | Lease Agreement, dated as of May 26, 2017, between IIP-MD 1 LLC and Holistic Industries LLC. |
| 10.2(2) | Purchase and Sale Agreement and Joint Escrow Instructions dated as of May 1, 2017 between IIP Operating Partnership, LP and PGHI LLC. |
| 23.1 | Consent of Grossberg Company LLP. |
| (1) | Incorporated by reference to Innovative Industrial Properties, Inc.'s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 30, 2017. |
| (2) | Incorporated by reference to Innovative Industrial Properties, Inc.'s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2017. |
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 hereunto duly authorized.
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Date: August 2, 2017 |
INNOVATIVE INDUSTRIAL PROPERTIES, INC. |
| By: | /s/ Paul Smithers |
| Name: | Paul Smithers |
| Title: | President and Chief Executive Officer |
Item 9.01 (a) – FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
INDEPENDENT AUDITOR’S REPORT
To the Board of Managers
Holistic Industries LLC
We have audited the accompanying financial statements of Holistic Industries LLC which comprise the balance sheets as of December 31, 2016 and 2015, the related statements of operations, members’ equity, and cash flows for the period July 1, 2015 (inception) through December 31, 2015 and the year ended December 31, 2016, and the related notes to the financial statements.
MANAGEMENT’S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
AUDITOR’S RESPONSIBILITY
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
UNMODIFIED OPINION
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Holistic Industries LLC at December 31, 2016 and 2015, and the results of its operations and its cash flows for the period July 1, 2015 (inception) through December 31, 2015 and the year ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
/s/ Grossberg Company LLP
Bethesda, MD
July 27, 2017
HOLISTIC INDUSTRIES LLC
(A LIMITED LIABILITY COMPANY)
BALANCE SHEETS
DECEMBER 31, 2016 AND 2015
| Assets | ||||
| Cash | $ | 10,200 | $ | – |
| Deposit for equipment | 10,000 | – | ||
| Intangible assets: | ||||
| License costs | 850,104 | 442,768 | ||
| Intangible assets – net | 850,104 | 442,768 | ||
| $ | 870,304 | $ | 442,768 | |
| Liabilities and Members' Equity | ||||
| Accrued expenses | $ | 38,604 | $ | 15,000 |
| Members' equity | 831,700 | 427,768 | ||
| $ | 870,304 | $ | 442,768 |
HOLISTIC INDUSTRIES LLC
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF OPERATIONS AND CHANGES IN MEMBERS'
EQUITY FOR THE PERIOD JULY 1, 2015 (INCEPTION) THROUGH
DECEMBER 31, 2015 AND THE YEAR ENDED DECEMBER 31, 2016
| Revenue: | ||||
| Sales | $ | – | $ | – |
| Expenses: | ||||
| Start up costs | 6,402 | 3,081 | ||
| Organization cost | ||||
| Political contributions | 41,500 | – | ||
| Total expenses | 48,349 | 3,621 | ||
| Net loss | (48,349 | ) | (3,621 | ) |
| Members' equity, beginning of period | 427,768 | – | ||
| Capital contributions | 452,281 | 431,389 | ||
| Members' equity, end of period | $ | 831,700 | $ | 427,768 |
HOLISTIC INDUSTRIES LLC
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE PERIOD JULY 1, 2015 (INCEPTION) THROUGH DECEMBER
31, 2015 AND THE YEAR ENDED DECEMBER 31, 2016
| Cash flows from operating activities: | ||||||
| Net loss | $ | (48,349 | ) | $ | (3,621 | ) |
| Adjustments to reconcile net loss to net cash used for operations | ||||||
| Changes in operating assets and liabilities | ||||||
| Accrued expenses | 23,604 | – | ||||
| Net cash used for operating activities | (24,745 | ) | (3,621 | ) | ||
| Cash flows from investing activities: | ||||||
| Expenditures paid for licenses | (407,336 | ) | (427,768 | ) | ||
| Equipment deposit | (10,000 | ) | – | |||
| Net cash used for investing activities | (417,336 | ) | (427,768 | ) | ||
| Cash flows from financing activities: | ||||||
| Contributions from members | 452,281 | 431,389 | ||||
| Increase in cash | 10,200 | – | ||||
| Cash, beginning of period | – | – | ||||
| Cash, end of period | $ | 10,200 | $ | – |
HOLISTIC INDUSTRIES LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
Nature of operations – Holistic Industries LLC (the “Company”) was formed as a limited liability company under the laws of the State of Maryland, on July 1, 2015, and is to continue in business until December 31, 2199, unless sooner dissolved to the operating agreement. These financial statements include cost incurred prior to the Company being formed. The Company was organized to engage in the business of growing, processing and dispensing marijuana in the State of Maryland (the “State”) in accordance with all Maryland laws and regulations.
The Company was pre-approved to pursue a Medical Cannabis Dispensary License in Senatorial District 18 of the State of Maryland on December 9, 2016. The Company also received pre-approvals to pursue Medical Cannabis Processor and Grower Licenses in Maryland on August 15, 2016. The members of the Company have the resources and intend to fund the Company through the approval process and start-up phase.
Use of estimates – The Company prepares its financial statements in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.
Cash equivalents – Holdings of highly liquid investments with maturities of three months or less when purchased are considered to be cash equivalents.
License costs – The costs associated with obtaining three Medical Cannabis licenses from the Maryland Medical Cannabis Commission (the “Commission”) have been capitalized. The licenses have an initial four-year term after the final awards are made. Each of the three licenses (grower, processor and dispensary) are renewable every two years, subject to: (a) meeting the State’s compliance requirement based upon an inspection of the relevant facility and (b) payment of the applicable renewal fee. The State has imposed certain restrictions on the transferability of the licenses.
The Company will amortize the costs associated with procuring the licenses over the four-year period starting after final approval by the Commission is received, which is expected to occur by August 15, 2017 for grower and processor, and by December 9, 2017 for dispensing.
Subsequent event – We have evaluated subsequent events through July 27, 2017, which is the date these financial statements were available to be issued. All subsequent events requiring recognition as of December 31, 2016 have been incorporated into these statements.
HOLISTIC INDUSTRIES LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
The Company is treated as a partnership for income tax purposes. Therefore, the Company is not liable for income taxes and no provision for income taxes has been provided for in the accompanying financial statements. All members are required to report their allocable share of the Company’s income, gains, losses and deductions on their tax returns.
The nature of the Company’s business creates uncertain tax position for the members. The business consists of trafficking in controlled substances, which is prohibited by federal law (not state law); as such, the business is limited in taking deductions. These tax positions do not affect the Company because any loss of deduction would be reported on the members’ own returns.
| 3. | Related party transactions |
The Company had no employees for the period from inception through December 31, 2016, but utilized the services of Willco Construction Company, Inc. (“Willco”) for asset management, development/construction management, general administrative, legal, and accounting duties. Willco is owned by a member of the Company. No fees were paid or accrued for these services as they were not material to the operations.
On December 2, 2016, the Company entered into a build-to-suit lease with PGHI LLC, an affiliate of a member of the Company, to lease certain land and a building to be constructed containing approximately 72,471 of rentable square feet. PGHI, LLC sold the facility to IIP – MD 1 LLC, an indirect wholly owned subsidiary of Innovative Industrial Properties, Inc., a publicly-traded company, on May 26, 2017, upon which time a new lease was signed. The new lease has a sixteen (16) year term with three options to extend the term for five (5) years each. The initial base rent is $100,000 per month, subject to subsequent adjustment detailed in the lease agreement.
The Company entered into a lease with an affiliate of a member of the Company for the planned dispensary. The lease is for ten (10) years and has an annual base rent of $105,000 with a 2.5% escalation.
The Commission is currently being sued by multiple parties alleging the regulators improperly considered geographic and racial diversity when selecting applicants. The Company was granted its motion to intervene in one of the lawsuits, but if the Commission is required to re-examine the approval process as a result of a court order in one of the lawsuits, the Company may be required to re-apply for the licenses. The Company does not believe the plaintiffs in this lawsuit will prevail and, accordingly, is continuing operations on such basis.
In addition, the Company will be conducting its business, once operational, in violation of federal laws, and the Company is unable to predict what actions, if any, the U.S. Department of Justice or other applicable Federal agencies will initiate in the future.
HOLISTIC INDUSTRIES LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
| 5. | Members’ ownership interests |
Transfers of a member’s ownership interest in the Company of 5% or more is subject to approval by the Commission. In addition, the Company’s Operating Agreement also places certain restrictions on the transfer of ownership interests.
On May 11, 2017, the Company offered $9,000,000 of unsecured promissory notes that are convertible into Class A Units, and bear interest at a rate of 10% per annum until conversion. All notes were fully committed in June of 2017.
Item 9.01(b) – PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Forma Consolidated Financial Statements
Innovative Industrial Properties, Inc. (the “Company”) completed its initial public offering on December 5, 2016, in which the Company issued 3,350,000 shares of its common stock and raised approximately $61.1 million after deducting underwriting discounts and commissions and offering expenses. As previously disclosed in its Current Report on Form 8-K filed with the Securities and Exchange Commission on May 30, 2017, the Company completed the acquisition of the property located at 9220 Alaking Court in Capitol Heights, Maryland (the “9220 Alaking Court Property”) and entered into a triple-net lease with a tenant for the entire property (the “Alaking Lease”) on May 26, 2017. The unaudited pro forma consolidated financial statements of the Company as of March 31, 2017, and for the year ended December 31, 2016 and the three months ended March 31, 2017, are presented as if the acquisition of the 9220 Alaking Court Property and commencement of the Alaking Lease had occurred on March 31, 2017 for the unaudited pro forma consolidated balance sheet, and on January 1, 2016 for the unaudited pro forma consolidated statements of operations.
The unaudited pro forma consolidated financial statements should be read in conjunction with the consolidated historical financial statements of the Company and the notes thereto, included in the Company’s Annual Report on Form 10-K for the period from June 15, 2016 (date of incorporation) through December 31, 2016, and its Quarterly Report on Form 10-Q for the three months ended March 31, 2017 filed with the Securities and Exchange Commission. Certain adjustments, described below, have also been made to give effect to the Company's initial public offering, which closed on December 5, 2016, and the acquisition of the property located in New York (the “Initial Property”), which was acquired by the Company on December 19, 2016 and leased back to the seller on the date the acquisition closed (the “Initial Property Lease”) as if both transactions had occurred on January 1, 2016 for the unaudited pro forma consolidated statements of operations for the year ended December 31, 2016.
The unaudited pro forma consolidated financial statements do not purport to represent the Company’s financial position or the results of operations that would actually have occurred assuming the acquisition of properties and execution of the related leases had occurred on the dates specified; nor do they purport to project the Company’s financial position or results of operations as of any future date or any future period.
Unaudited Pro Forma Consolidated Balance Sheet as of March 31, 2017
(In thousands)
| Historical | Adjustment | ||||||
| Innovative | Related to the | Pro Forma | |||||
| Industrial | Acquisition of | Innovative | |||||
| Properties, | 9220 Alaking | Industrial | |||||
| Inc. | Court Property | Properties, Inc. | |||||
| Assets | |||||||
| Real estate, at cost: | |||||||
| Land | $ | 7,600 | $ | 2,785 | (1) | $ | 10,385 |
| Buildings and improvements | 22,475 | 5,400 | (1) | 27,875 | |||
| Total real estate, at cost | 30,075 | 8,185 | 38,260 | ||||
| Less accumulated depreciation | (187 | ) | – | (187 | ) | ||
| Net real estate held for investment | 29,888 | 8,185 | 38,073 | ||||
| Cash and cash equivalents | 33,351 | (7,085 | )(3) | 26,266 | |||
| Prepaid insurance and other assets, net | – | ||||||
| Total assets | $ | 63,507 | $ | 1,100 | $ | 64,607 | |
| Liabilities and stockholders' equity | |||||||
| Accounts payable, accrued expenses and other liabilities | $ | $ | – | $ | |||
| Rents received in advance and tenant security deposits | 2,545 | 1,100 | (2) | 3,645 | |||
| Total liabilities | 2,889 | 1,100 | 3,989 | ||||
| Commitments and contingencies | |||||||
| Stockholders' equity: | |||||||
| Common stock | – | ||||||
| Additional paid-in-capital | 65,597 | – | 65,597 | ||||
| Accumulated deficit | (4,983 | ) | – | (4,983 | ) | ||
| Total stockholders' equity | 60,618 | – | 60,618 | ||||
| Total liabilities and stockholders' equity | $ | 63,507 | $ | 1,100 | $ | 64,607 |
Unaudited Pro Forma Consolidated Statement of Operations for the Year Ended December 31, 2016
(In thousands, except share and per share amounts)
| Historical Innovative Industrial Properties, Inc. (*) | Adjustment Related to the Acquisition of Initial Property | Subtotal | Adjustment Related to the Acquisition of 9220 Alaking Court Property | Pro Forma Innovative Industrual Properties, Inc. | ||||||||
| Revenues: | ||||||||||||
| Rental | $ | 4,979 | (4) | $ | 5,159 | $ | (6) | $ | 6,077 | |||
| Tenant reimbursements | – | – | ||||||||||
| Other | – | – | ||||||||||
| Total revenues | 4,979 | 5,300 | 6,218 | |||||||||
| Expenses: | ||||||||||||
| Property expenses | – | – | ||||||||||
| General and administrative (9) | – | – | ||||||||||
| Stock-based compensation (9) | – | – | ||||||||||
| Forfeited Class B common shares | 3,707 | – | 3,707 | – | 3,707 | |||||||
| Organization costs | – | – | ||||||||||
| Depreciation | (5) | (7) | ||||||||||
| Total expenses | 4,713 | 5,327 | 5,481 | |||||||||
| Net (loss)/income | $ | (4,392 | ) | $ | 4,365 | $ | (27 | ) | $ | $ | ||
| Net loss per share (basic and diluted) | $ | (4.56 | ) | $ | 0.34 | |||||||
| Weighted average shares outstanding: | ||||||||||||
| Basic and diluted | 962,775 | 2,188,013 | (8) |
(*) Historical consolidated statement of operations for the period from June 15, 2016 (date of incorporation) through December 31, 2016.
Unaudited Pro Forma Consolidated Statement of Operations for the Three Months Ended March 31, 2017
(In thousands, except share and per share amounts)
| Historical | Adjustment | |||||||
| Innovative | Related to the | Pro Forma | ||||||
| Industrial | Acquisition of | Innovative | ||||||
| Properties, | 9220 Alaking | Industrial | ||||||
| Inc. | Court Property | Properties, Inc. | ||||||
| Revenues: | ||||||||
| Rental | $ | 1,290 | $ | (6) | $ | 1,595 | ||
| Other | – | |||||||
| Total revenues | 1,325 | 1,630 | ||||||
| Expenses: | ||||||||
| General and administrative | – | |||||||
| Stock-based compensation | – | |||||||
| Depreciation | (7) | |||||||
| Total expenses | 1,916 | 1,955 | ||||||
| Net (loss)/income | $ | (591 | ) | $ | $ | (325 | ) | |
| Net loss per share (basic and diluted) | $ | (0.18 | ) | $ | (0.10 | ) | ||
| Weighted average shares outstanding: | ||||||||
| Basic and diluted | 3,350,000 | 3,350,000 |
Notes to Unaudited Pro Forma Consolidated Financial Statements
Adjustments to the Unaudited Pro Forma Consolidated Balance Sheet
The adjustments to the unaudited pro forma consolidated balance sheet as of March 31, 2017 are as follows:
| (1) | Represents the sum of the initial purchase price for the 9220 Alaking Court Property of $8.0 million (the “Initial Purchase Price”) and $185,000 of transaction costs. The Company expects to pay additional purchase consideration to the seller of up to $3.0 million (the “Additional Purchase Consideration”) upon the seller’s completion of certain development milestones and reimburse the tenant for up to $4.0 million (the “TI Reimbursement”) in tenant improvements in accordance with the Alaking Lease. The Company also agreed to separately fund a rent reserve for the tenant equal to $1.9 million (the “Rent Reserve”) for the estimated base rent and property management fee payable from month four through month twelve of the Alaking Lease. These additional payments are not reflected in the unaudited pro forma balance sheet as of March 31, 2017. |
| (2) | Represents the initial security deposit that is contractually required to be paid by the tenant to the Alaking Lease. |
| (3) | Represents the net decrease in cash and cash equivalents resulting from the payment of the Initial Purchase Price and transaction costs for the 9220 Alaking Court Property, offset by receipt of the security deposit INNOVATIVE INDUSTRIAL PROPERTIES INC ExhibitEX-23.1 2 v471872_ex23-1.htm EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITOR We hereby consent to the inclusion of our Auditor’s Report,…To view the full exhibit click hereAbout Innovative Industrial Properties, Inc. (NYSE:IIPR) Innovative Industrial Properties, Inc. is focused on the acquisition, ownership and management of specialized industrial properties leased to state-licensed operators for their regulated medical-use cannabis facilities. The Company intends to acquire its properties through sale-leaseback transactions and third-party purchases. It is focused on leasing its properties on a triple-net lease basis, where the tenant is responsible for all aspects of and costs related to the property and its operation during the lease term, including maintenance, taxes and insurance. The Company intends to conduct business in an umbrella partnership real estate investment trust (UPREIT), structure through its operating partnership. The Company’s real estate investments will consist of primarily properties suitable for cultivation and production of medical-use cannabis. |
