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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2021

 

OR

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to          

 

Commission file number 000-56327

 

NEWLAKE CAPITAL PARTNERS, INC.

(Exact name of registrant as specified in its charter)

 

Maryland	83-4400045
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

 

27 Pine Street

Suite 50

New Canaan, CT 06840

(Address of principal executive offices)

(Zip Code)

 

203-594-1402

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol (s)

Name of each exchange on which registered

 

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  ☐ No  ☒ 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

Yes ☒  No  ☐

 

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

 

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth company ☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐  No  ☒

 

The number of shares of the registrant’s Common Stock, par value $0.01 per share, outstanding as of November 12, 2021 was 21,235,914.

 

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NEWLAKE CAPITAL PARTNERS, INC.

 

FORM 10-Q

 

Table of Contents

 

 

		Page No.
	Special Note on Forward Looking Statements
Part I Financial Information:
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets	1
	Consolidated Statements of Operations	2
	Consolidated Statements of Equity	3
	Consolidated Statements of Cash Flows	5
	Notes to the Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	34
Part II Other Information:
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	36
Item 4.	Mine Safety Disclosures	36
Item 5.	Other Information	36
Item 6.	Exhibits	37
Signatures		38

 

 

 

		September 30, 2021				December 31, 2020
ASSETS:		(Unaudited)
Real Estate
Land		$	15,444			$	2,490
Building and Improvements			249,857				124,121
Total Real Estate			265,301				126,611
Less Accumulated Depreciation			(7,160	)			(2,650	)
Net Real Estate			258,141				123,961
Cash and Cash Equivalents			167,811				19,617
In-Place Lease Intangible Assets, net			24,504				-
Other Assets			1,083				598
TOTAL ASSETS		$	451,539			$	144,176
LIABILITIES AND EQUITY:
LIABILITIES:
Security Deposits Payable		$	5,430			$	1,594
Dividends, Dividend Equivalents and Distributions Payable			2,618				894
Accrued Expenses and Other Liabilities			1,425				659
Rent Received in Advance			623				-
Total Liabilities			10,096				3,147
COMMITMENTS AND CONTINGENCIES
EQUITY:
Preferred Stock, $0.01 Par Value, 100,000,000 Shares Authorized, 12.5% Series A Redeemable Cumulative Preferred Stock, 0 and 125 Shares Issued and Outstanding at September 30, 2021 and December 31, 2020			-				61
Common Stock, $0.01 Par Value, 400,000,000 Shares Authorized, 21,235,914 Shares Issued and Outstanding at September 30, 2021 and 7,758,145 Shares Issued and Outstanding at December 31, 2020			213				78
Additional Paid-In Capital			450,822				151,778
Accumulated Deficit			(21,327	)			(17,154	)
Total Stockholders' Equity			429,708				134,763
NONCONTROLLING INTERESTS			11,735				6,266
Total Equity			441,443				141,029
TOTAL LIABILITIES AND EQUITY		$	451,539			$	144,176

		For the Nine Months Ended September 30,								For the Three Months Ended September 30,
		2021				2020				2021				2020
REVENUE:
Rental Income		$	19,158			$	7,594			$	8,090			$	3,443
EXPENSES:
Depreciation and Amortization Expense			5,601				1,692				2,464				732
General and Administrative Expense			4,644				3,263				2,052				933
Stock-Based Compensation			1,820				3,884				816				3,872
Management Internalization Costs			-				12,360				-				12,360
TOTAL EXPENSES			12,065				21,199				5,332				17,897
INCOME (LOSS) FROM OPERATIONS			7,093				(13,605	)			2,758				(14,454	)
OTHER INCOME:
Interest Income			40				153				21				-
TOTAL OTHER INCOME			40				153				21				-
NET INCOME (LOSS)			7,133				(13,452	)			2,779				(14,454	)
Preferred Stock Dividends			(4	)			(12	)			-				(4	)
Net Income Attributable to Noncontrolling Interests			(236	)			(102	)			(82	)			(102	)
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS		$	6,893			$	(13,566	)		$	2,697			$	(14,560	)
Net Income (Loss) Attributable to Common Stockholders Per Share - Basic		$	0.44			$	(1.91	)		$	0.14			$	(2.03	)
Net Income (Loss) Attributable to Common Stockholders Per Share - Diluted		$	0.44			$	(1.91	)		$	0.14			$	(2.03	)
Weighted Average Shares of Common Stock Outstanding - Basic			15,588,544				7,103,706				19,410,307				7,188,015
Weighted Average Shares of Common Stock Outstanding - Diluted			15,637,064				7,103,706				19,555,867				7,188,015

		Series A				Shares of								Additional
		Preferred				Common				Common				Paid-in				Accumulated				Noncontrolling				Total
		Stock				Stock				Stock				Capital				Deficit				Interests				Equity
Balance as of December 31, 2020		$	61				7,758,145			$	78			$	151,778			$	(17,154	)		$	6,266			$	141,029
Net Proceeds from the Issuance of Common Stock			-				5,777,882				58				133,027				-				-				133,085
Issuance of Common Stock for Merger Transaction			-				7,699,887				77				162,776				-				-				162,853
Issuance of Warrants for Merger Transaction			-				-				-				4,820				-				-				4,820
Redemption of Series A Preferred Stock			(61	)			-				-				-				(64	)			-				(125	)
Issuance of 88,200 OP Units for Property Acquisition			-				-				-				-				-				2,205				2,205
Stock-Based Compensation			-				-				-				1,820				-				-				1,820
Dividends to Preferred Stock			-				-				-				-				(4	)			-				(4	)
Dividends to Common Stock			-				-				-				-				(11,002	)			-				(11,002	)
Dividend Equivalents to Restricted Stock Units			-				-				-				-				-				(90	)			(90	)
Distributions to OP Unit Holders			-				-				-				-				-				(281	)			(281	)
Adjustment for Noncontrolling Interest Ownership in Operating Partnership			-				-				-				(3,399	)			-				3,399				-
Net Income			-				-				-				-				6,897				236				7,133
Balance as of September 30, 2021		$	-				21,235,914			$	213			$	450,822			$	(21,327	)		$	11,735			$	441,443

		Series A				Shares of								Additional
		Preferred				Common				Common				Paid-in				Accumulated				Noncontrolling				Total
		Stock				Stock				Stock				Capital				Deficit				Interests				Equity
Balance as of December 31, 2019		$	61				7,060,250			$	71			$	131,457			$	(437	)		$	-			$	131,152
Issuance of Common Stock for Internalization			-				152,654				1				3,051				-				-				3,052
Exercise of Option			-				-				-				50				-				-				50
Issuance of 419,798 OP Units for Internalization			-				-				-				1,313				-				7,083				8,396
Stock-Based Compensation			-				-				-				3,884				-				-				3,884
Dividends to Preferred Stock			-				-				-				-				(12	)			-				(12	)
Dividends to Common Stock			-				-				-				-				(3,408	)			(45	)			(3,453	)
Dividend Equivalents to Restricted Stock Units			-				-				-				-				-				(1	)			(1	)
Net Loss			-				-				-				-				(13,554	)			102				(13,452	)
Balance as of September 30, 2020		$	61				7,212,904			$	72			$	139,755			$	(17,411	)		$	7,139			$	129,616

		Series A				Shares of								Additional
		Preferred				Common				Common				Paid-in				Accumulated				Noncontrolling				Total
		Stock				Stock				Stock				Capital				Deficit				Interests				Equity
Balance as of June 30, 2021			-				17,329,964				173				359,514				(19,455	)			8,877				349,109
Net Proceeds from the Issuance of Common Stock			-				3,905,950				40				93,467				-				-				93,507
Stock-Based Compensation			-				-				-				816				-				-				816
Dividends to Common Stock			-				-				-				-				(4,628	)			-				(4,628	)
Dividend Equivalents to Restricted Stock Units			-				-				-				-				59				(90	)			(31	)
Distributions to OP Unit Holders			-				-				-				-				-				(109	)			(109	)
Adjustment for Noncontrolling Interest Ownership in Operating Partnership			-				-				-				(2,975	)			-				2,975				-
Net Income			-				-				-				-				2,697				82				2,779
Balance as of September 30, 2021		$	-			$	21,235,914			$	213			$	450,822			$	(21,327	)		$	11,735			$	441,443

		Series A				Shares of								Additional
		Preferred				Common				Common				Paid-in				Accumulated				Noncontrolling				Total
		Stock				Stock				Stock				Capital				Deficit				Interests				Equity
Balance as of June 30, 2020		$	61				7,060,250			$	71			$	131,469			$	(503	)		$	-			$	131,098
Issuance of Common Stock for Internalization			-				152,654				1				3,051				-				-				3,052
Exercise of Option			-				-				-				50				-				-				50
Issuance of 419,798 OP Units for Internalization			-				-				-				1,313				-				7,083				8,396
Stock-Based Compensation			-				-				-				3,872				-				-				3,872
Dividends to Preferred Stock			-				-				-				-				(4	)			-				(4	)
Dividends to Common Stock			-				-				-				-				(2,348	)			(45	)			(2,393	)
Dividend Equivalents to Restricted Stock Units			-				-				-				-				-				(1	)			(1	)
Net Loss			-				-				-				-				(14,556	)			102				(14,454	)
Balance as of September 30, 2020		$	61			$	7,212,904			$	72			$	139,755			$	(17,411	)		$	7,139			$	129,616

		For the Nine Months Ended September 30,
		2021				2020
Cash Flows from Operating Activities:
Net Income (Loss)		$	7,133			$	(13,452	)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by
Operating Activities:
Issuance of Common Stock for Internalization			-				3,052
Issuance of OP Units for Internalization			-				8,396
Stock-Based Compensation			1,820				3,884
Depreciation and Amortization Expense			5,601				1,692
Changes in Assets and Liabilities, Net of Acquisition:
Other Assets			232				(129	)
Accrued Expenses and Other Liabilities			(1,814	)			(389	)
Security Deposits Payable			2,179				1,594
Rent Received in Advance			623				(331	)
Management Fees Payable			-				(110	)
Due to Manager			-				(84	)
Net Cash Provided by Operating Activities			15,774				4,123
Cash Flows from Investing Activities:
Cash Acquired from Merger Transaction			64,355				-
Payment of Merger Related Transaction Costs			(2,144	)			-
Reimbursements of Tenant Improvements			(8,449	)			-
Deferred Real Estate Costs			-				(10,054	)
Acquisition of Real Estate			(44,650	)			(55,000	)
Net Cash Provided by (Used in) Investing Activities			9,112				(65,054	)
Cash Flows from Financing Activities:
Proceeds from Issuance of Common Stock, Net of Offering Costs			133,085				-
Preferred Stock Dividends Paid			(4	)			(12	)
Common Stock Dividends Paid			(9,298	)			(1,056	)
Restricted Stock Units Dividend Equivalents Paid			(84	)			-
Distributions to OP Unit Holders			(266	)			-
Redemption of Series A Preferred Stock			(125	)			-
Exercise of Stock Option			-				50
Net Cash Provided by (Used in) Financing Activities			123,308				(1,018	)
Net Increase (Decrease) in Cash and Cash Equivalents			148,194				(61,949	)
Cash and Cash Equivalents - Beginning of Period			19,617				66,901
Cash and Cash Equivalents - End of Period		$	167,811			$	4,952
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Accrual for Dividends and Distributions Payable		$	2,618			$	2,398
Accrual for Reimbursements of Tenant Improvements		$	-			$	-
Real Estate Assets, In-Place Leases, Other Assets and Liabilities Acquired through the Issuance of Common Stock and Warrants		$	103,319			$	-
Issuance of 88,200 OP Units for Property Acquisition		$	2,205			$	-

Note 1 - ORGANIZATION

 

NewLake Capital Partners, Inc. (the “Company”, “we”, “us", “our”), a Maryland corporation, was formed on April 9, 2019 under the Maryland General Corporation Law, as GreenAcreage Real Estate Corp. (“GARE”). The Company is an internally managed Real Estate Investment Trust (“REIT”) focused on providing long-term, single-tenant, triple-net sale leaseback and build-to-suit transactions for the cannabis industry. The Company’s year-end is December 31. On March 17, 2021, GARE completed a merger (the “Merger”) with another company (“Target”) by issuing common stock and warrants, and subsequently changed its name to NewLake Capital Partners, Inc. See Note 3.

 

The Company conducts its business through its subsidiary, NLCP Operating Partnership LP, a Delaware limited partnership (the “Operating Partnership” or “OP”). The Company holds an equity interest in the Operating Partnership and is the sole general partner. Subsequent to the merger, the name of the Operating Partnership was changed from GreenAcreage Operating Partnership LP to NLCP Operating Partnership LP.

 

Prior to July 15, 2020, the Company was externally managed by GreenAcreage Management LLC, a Delaware limited liability company (the “Sponsor” or “Manager”), an affiliated entity. The Sponsor funded the Company’s organization, offering and transaction costs. On July 15, 2020, the Company, the Manager and certain other parties entered into a Contribution Agreement (the “Contribution Agreement”) whereby the Manager contributed the assets comprising its business and function, including the Management Agreement, to the Operating Partnership in consideration for partnership common units of the Operating Partnership. As a result of the transactions under such Contribution Agreement, the investment management functions and business of the Manager have been internalized into the Operating Partnership (the “Internalization”), employees are compensated directly by the Company and no further fees will be paid to the Manager under the Management Agreement, as the Operating Partnership assumed the Management Agreement in connection with such transactions. See Note 4.

 

Our Articles of Incorporation authorize 400,000,000 shares of common stock with a par value of $0.01 and 100,000,000 shares of preferred stock with a par value of $0.01. On April 26, 2019, 100 shares of our common stock were purchased by a member of our Sponsor, for $20 per share, who became our initial stockholder. On August 12, 2019, the Company issued 7,060,150 shares of common stock (the “Offering”) for $20 per share, resulting in net proceeds of $131,523,622, after deducting investment banking discount, placement fees and offering expenses.

 

On December 20, 2019, the Company issued 125 shares of 12.5% Series A Redeemable Cumulative Preferred Stock for $1,000 per share (the “Series A Preferred Stock”) resulting in net proceeds of $60,600, after deducting legal fees and offering expenses. On April 6, 2021, the Company redeemed the 125 shares of Series A Preferred Stock for $1,000 per share. See Note 8.

 

In December 2020, the Company issued 745,241 shares of common stock for $21.15 per share, resulting in net proceeds of $15,704,625, after deducting offering expenses.

 

During January and February 2021, the Company issued 1,871,932 shares of common stock for $21.15 per share, resulting in net proceeds of $39,579,050, after deducting offering expenses.

 

During March 2021, in connection with the Merger, the Company issued 7,699,887 shares of common stock and warrants to purchase up to 602,392 shares of the Company’s common stock. See Note 3.

 

On August 13, 2021, the Company closed on its initial public offering (“IPO”) of 3,905,950 shares of common stock at a public offering price of $26.00 per share, resulting in net proceeds of approximately $93.5 million, after deducting offering expenses.

 

 

NEWLAKE CAPITAL PARTNERS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

 

 

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The consolidated financial statements include the accounts of the Company and the Operating Partnership, as well as the Operating Partnership’s wholly owned properties, each of which is held in a single member LLC, presented in accordance with U.S. generally accepted accounting principles (“GAAP”). All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.

 

Under consolidation guidance, we have determined that our Operating Partnership is a variable interest entity because the holders of limited partnership interests do not have substantive kick-out rights or participating rights. Furthermore, we are the primary beneficiary of the Operating Partnership because we have the obligation to absorb losses and the right to receive benefits from the Operating Partnership and the exclusive power to direct the activities of the Operating Partnership. As of September 30, 2021 and December 31, 2020, the assets and liabilities of the Company and the Operating Partnership are substantially the same, as the Company does not have any significant assets other than its investment in the Operating Partnership.

 

The accompanying consolidated balance sheet as of December 31, 2020 has been derived from audited financial statements. These consolidated financial statements should be read in conjunction with the consolidated financial statements included in the final prospectus for our IPO dated as of August 12, 2021 and filed with the Securities and Exchange Commission (“SEC”), pursuant to Rule 424(b)(4) on August 13, 2021. In our opinion, all adjustments (which include only normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows have been made. The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the operating results for the full year.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management will adjust such estimates when facts and circumstances dictate. Such estimates include, but are not limited to, useful lives for depreciation of property, the fair value of property and lease intangibles, and the fair value of stock-based compensation. Actual results could differ from those estimates.

 

Organization, Offering and Transaction Costs

 

Offering costs incurred prior to receipt of any offering proceeds are recorded as an asset. Offering costs are recorded as an offset to additional paid-in capital when proceeds from the offering are received. Organization costs are recorded as an expense. Transaction costs related to portfolio investments not ultimately made are expensed as incurred. All costs related to executed asset acquisitions are capitalized in the initial cost of the investment.

 

Income Taxes

 

We have made an election to be taxed as a REIT, under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with 2019, our initial taxable year. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to currently distribute at least 90% of the REIT’s ordinary taxable income to stockholders. As a REIT, we generally will not be subject to federal income tax on taxable income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will then be subject to federal income taxes on our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders. However, we believe that we will continue to be organized and operate in such a manner as to qualify for treatment as a REIT and intend to operate in the foreseeable future in such a manner that we will remain qualified as a REIT for federal income tax purposes.

 

 

NEWLAKE CAPITAL PARTNERS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

 

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Income Taxes (continued)

 

Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property, and federal income and excise taxes on our undistributed income.

 

Acquisition of Real Estate Properties

 

Our investment in real estate is recorded at cost, less accumulated depreciation. Upon acquisition of a property, the tangible and intangible assets acquired and liabilities assumed are initially measured based upon their relative fair values. We estimate the fair value of land by reviewing comparable sales within the same submarket and/or region, the fair value of buildings on an as-if vacant basis and may engage third-party valuation specialists. Acquisition costs for asset acquisitions are capitalized as incurred. All of our real estate investments, including the Merger, to date were recorded as asset acquisitions.

 

Depreciation

 

We are required to make subjective assessments as to the estimated useful lives of our depreciable assets. We consider the period of future benefit of the assets to determine the appropriate estimated useful lives. Depreciation of our assets are charged to expense on a straight-line basis over the estimated useful lives. We depreciate each of our buildings and improvements over its estimated remaining useful life, not to exceed 35 years. We depreciate tenant improvements at our buildings, if any, over the shorter of the estimated useful lives or terms of related leases.

 

Intangible Assets and Related Amortization

 

Intangibles related to the Company’s investments in real estate consist of the value of in-place leases. In-place leases are amortized over the remaining term of the in-place lease.

 

Construction in Progress

 

Reimbursements paid to tenants or incurred by the Company for property improvements, generally consisting of building additions or significant upgrades to existing facilities, are considered construction in progress until placed in service. Such improvements are considered placed in service when ready and available for its intended use. Construction in progress was $6.4 million on September 30, 2021 and is included in Buildings and Improvements on the accompanying Consolidated Balance Sheet. There was no construction in progress on December 31, 2020.

 

Provision for Impairment

 

We review current activities and changes in the business condition of all of our properties to determine the existence of any triggering events or impairment indicators. If triggering events or impairment indicators are identified, we analyze the carrying value of our real estate for any impairment. A provision is made for impairment if estimated future operating cash flows (undiscounted and without interest charges) plus estimated disposition proceeds (undiscounted) are less than the current book value of the property. Key inputs that we utilize in this analysis include projected rental rates, estimated holding periods, capital expenditures, and property sales capitalization rates. As of September 30, 2021 and December 31, 2020 no impairment losses were recognized.

 

 

NEWLAKE CAPITAL PARTNERS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

 

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Revenue Recognition and Leases

 

As lessor, for each of our real estate transactions involving the leaseback of the related property to the seller or affiliates of the seller, we recorded such transactions as sale and leaseback transactions. Our leases and future tenant leases are expected to be triple-net leases, an arrangement under which the tenant maintains the property while paying us rent. We account for our current leases as operating leases. Under this method, leases that have fixed and determinable rent increases are recognized on a straight-line basis over the lease term, unless the collectability of minimum lease payments is not reasonably predictable. Rental increases based upon changes in the consumer price index are recognized only after the changes in the indexes have occurred and are then applied according to the lease agreements. Contractually obligated reimbursements from tenants for recoverable real estate taxes and operating expenses are included in rental revenue in the period when such costs are incurred. Contractually obligated real estate taxes that are paid directly by the tenant to the tax authorities are not reflected in our consolidated financial statements. We record revenue for each of our properties on a cash basis due to the uncertainty of collectability of lease payments from each tenant due to its limited operating history and the uncertain regulatory environment in the United States relating to the cannabis industry. Any rental payments received in advance of contractual due dates are recorded as Rent Received in Advance on the accompanying consolidated balance sheets.

 

Cash and Cash Equivalents

 

We consider all highly liquid investments with original maturities of three months or less to be cash equivalents.

 

Stock-Based Compensation

 

Stock-based compensation for equity awards is based on the grant date fair value of the equity awards and is recognized over the requisite service or performance period. If awards are forfeited prior to vesting, we reverse any previously recognized expense related to such awards in the period during which the forfeiture occurs and reclassify any non-forfeitable dividends and dividend equivalents previously paid on these awards from retained earnings to compensation expense. Forfeitures are recognized as incurred.

 

Earnings Per Share

 

We calculate earnings per share (“EPS”) in accordance with ASC 260 – Earnings Per Share (“ASC 260”). Under ASC 260, non-vested share-based payment awards that contain nonforfeitable rights to dividends are participating securities and, therefore, are included in computing basic EPS pursuant to the two-class method. The two-class method determines EPS for each class of common stock and participating securities according to dividends declared (or accumulated) and their respective participation rights in undistributed earnings.

 

Basic EPS is calculated by dividing the net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period.

 

Diluted EPS is calculated by dividing the net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding determined for the basic EPS computation plus the effect of any dilutive securities. We include unvested shares of restricted stock in the computation of diluted EPS by using the more dilutive of the two-class method or treasury stock method. We include unvested performance units as contingently issuable shares in the computation of diluted EPS once the market criteria are met, assuming that the end of the reporting period is the end of the contingency period. Any anti-dilutive securities are excluded from the diluted EPS calculation.

 

 

NEWLAKE CAPITAL PARTNERS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

 

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, Leases; in July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, and ASU 2018-11, Leases — Targeted Improvements; and in December 2018, the FASB issued ASU 2018-20, Narrow-Scope Improvements for Lessors. This group of ASUs is collectively referred to as Topic 842 and is expected to be effective for the Company beginning January 1, 2022. Topic 842 supersedes the existing standards for lease accounting (Topic 840, Leases).

 

Topic 842 requires lessees to record most leases on their balance sheet through a right-of-use ("ROU") model, in which a lessee records a ROU asset and a lease liability on their balance sheet. Leases that are less than 12 months do not need to be accounted for under the ROU model. As of September 30, 2021, the Company is the lessee under one month-to-month office lease. Under Topic 842, lessors will continue to account for leases as a sales-type, direct-financing, or operating lease. A lease will be treated as a sale if it is considered to transfer control of the underlying asset to the lessee. A lease will be classified as direct financing lease if risks and rewards are conveyed without the transfer of control. Otherwise, the lease is treated as an operating lease. Topic 842 requires accounting for a transaction as a financing lease in a sale leaseback in certain circumstances, including when the seller- lessee is provided an option to purchase the property from the landlord at the tenant's option. Topic 842 also includes the concept of separating lease and non-lease components. Under Topic 842, non-lease components, such as common area maintenance, would be accounted for under Topic 606 and separated from the lease payments. However, the Company will elect the lessor practical expedient allowing the Company to not separate these components when certain conditions are met. Upon adoption of Topic 842, the Company expects to continue to combine tenant reimbursements with rental revenues on the Company’s consolidated statement of operations. The Company has historically not capitalized allocated payroll cost incurred as part of the leasing process, which was allowable under ASC 840 but, will no longer qualify for classification as initial direct costs under Topic 842. Also, the Narrow- Scope Improvements for Lessors under ASU 2018-20 allows the Company to continue to exclude from revenue, costs paid by our tenants on our behalf directly to third parties, such as property taxes.

 

Topic 842 provides two transition alternatives. The Company expects to apply this standard based on the prospective optional transition method, in which comparative periods will continue to be reported in accordance with Topic 840. The Company also anticipates expanded disclosures upon adoption, as the new standard requires more extensive quantitative and qualitative disclosures as compared to Topic 840 for both lessees and lessors. The Company is still evaluating the effect to the Company’s consolidated financial statements as a Lessor of the adoption of Topic 842 on January 1, 2022.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses, which changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, companies will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments — Credit Losses, which among other updates, clarifies that receivables arising from operating leases are not within the scope of this guidance and should be evaluated in accordance with Topic 842. We do not expect these standards to be effective for the Company until January 1, 2023. Since we expect our leases to be operating leases, we do not anticipate these standards will have a material impact on our consolidated financial statements.

 

 

NEWLAKE CAPITAL PARTNERS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

 

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

 

Concentration of Credit Risk

 

As of September 30, 2021, we owned 27 properties located in Arizona, Arkansas, California, Connecticut, Florida, Illinois, Massachusetts, North Dakota, Ohio, and Pennsylvania. The ability of any of our tenants to honor the terms of its lease is dependent upon the economic, regulatory, competition, natural and social factors affecting the community in which that tenant operates.

 

The following table sets forth the tenants in our portfolio that represented the largest percentage of our total revenue for each of the periods presented, including tenant reimbursements:

 

 

 

 

We have deposited cash with four financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per financial institution. As of September 30, 2021, we had cash accounts in excess of FDIC insured limits.

 

Noncontrolling Interests

 

Noncontrolling interests include interests issued by the Operating Partnership and Restricted Stock Units (“RSUs”) representing a 2.7% ownership interest in the Company, at September 30, 2021.

 

Reclassification

 

Certain reclassifications of the prior period financial statements have been made to conform to the current year presentation.

 

 

NEWLAKE CAPITAL PARTNERS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 3 - INVESTMENTS IN REAL ESTATE

 

On March 17, 2021, the Company completed the Merger with Target. The Merger was completed through the issuance of 7,699,887 shares of common stock valued at $21.15 per share and warrants to purchase up to 602,392 shares of the Company’s common stock valued at approximately $4.8 million. The Company also incurred approximately $2.1 million in merger-related transaction costs. The consideration issued was based upon the relative value of the two entities, such that the shareholders of the Company and the Target, immediately prior to the Merger, owned 56.79% and 43.21%, respectively, of the outstanding post-merger common stock of the Company. The Company issued warrants to Target shareholders based on the pre-merger options outstanding, using the equivalent proportion described in the previous sentence.

 

The Target company owned a portfolio of 19 properties subject to long-term, single-tenant, triple-net sale leaseback and build-to-suit properties for the cannabis industry. The Merger was accounted for as an asset acquisition in accordance with ASC 805, Business Combinations. Upon acquisition, the purchase price was allocated to the assets acquired, including identifiable intangible assets, and liabilities assumed from the Target at their relative fair values at the date of the completion of the Merger and the Merger related transaction costs were capitalized to the basis of the assets acquired. The purchase price allocation is summarized as follows (in thousands):

 

 

 

NEWLAKE CAPITAL PARTNERS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

 

Note 3 - INVESTMENTS IN REAL ESTATE (continued)

 

The Company acquired the following properties during the nine months ended September 30, 2021 (dollars in thousands):

 

 

 

⁽¹⁾ Includes $4.6 million of tenant improvement reimbursement commitments which were funded after the merger.

⁽²⁾ Excludes $806,540 of tenant improvement reimbursement commitments which were previously included that we do not expect to be funded as of September 30, 2021.

⁽³⁾ Includes $310,035 of tenant improvement reimbursement commitments which have been fully funded.

⁽⁴⁾ Includes $40.1 million in cash and 88,200 OP units issued in connection with the purchase of the property. The Company is required to issue 132,727 OP Units pursuant to a contribution agreement if certain conditions are met.

 

 

NEWLAKE CAPITAL PARTNERS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

 

Note 3 - INVESTMENTS IN REAL ESTATE (continued)

 

The Company’s current properties also include:

 

 

Depreciation expense was approximately $4.5 million and $1.7 million for the nine months ended September 30, 2021 and 2020, respectively. Depreciation expense was approximately $2.0 million and $732,000 for the three months ended September 30, 2021 and 2020, respectively.

 

Amortization of the Company’s acquired in- place leases was approximately $1.1 million and $0 for the nine months ended September 30, 2021 and 2020. Amortization expense was approximately $503,000 and $0 for the three months ended September 30, 2021 and 2020, respectively.

 

Future amortization of the Company’s acquired in-place leases as of September 30, 2021, is as follows (in thousands):

 

 

Future contractual minimum rent under the Company’s operating leases as of September 30, 2021 for future periods is summarized as follows (in thousands):

 

 

 

 

NEWLAKE CAPITAL PARTNERS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

 

Note 3 - INVESTMENTS IN REAL ESTATE (continued)

 

In connection with the Merger, the Company issued warrants to purchase up to 602,392 shares of the Company’s common stock at an exercise price of $24.00 per share. All or any portion of the warrants may be exercised in whole or in part at any time and from time to time on or before July 15, 2027. As of September 30, 2021, 602,392 warrants are exercisable. The Company calculated the fair value of the warrants using the Black-Scholes model, and the fair value of the warrants was determined to be approximately $4.8 million. Expected volatilities were based on historical daily volatilities of publicly traded guideline companies. The risk-free interest rate for the expected term of the warrants was based on the U.S. Treasury yield. The expected volatility was 59.4% and the expected life was 6.33 years. The dividend yield on common stock and risk-free interest rate were 3.7% and 1.1%, respectively.

Note 4 - RELATED PARTY TRANSACTIONS

 

Management Agreement and Internalization Transaction

 

On July 15, 2020, the Company, the Manager and certain other parties entered into a Contribution Agreement (the “Contribution Agreement”) whereby the Manager contributed the assets comprising its business and function, including the Management Agreement, to the Operating Partnership in consideration for partnership common units of the Operating Partnership representing a 5.5% ownership interest in the Operating Partnership at the time of the Internalization. As a result of the transactions under such Contribution Agreement, the investment management functions and business of the Manager have been internalized into the Operating Partnership, employees are compensated directly by the Company and no further fees will be paid to the Manager under the Management Agreement as the Operating Partnership assumed the Management Agreement in connection with such transactions. To effectuate the Internalization, the Operating Partnership issued an aggregate of 419,798 OP Units valued at $8,395,960 to GAMO and incurred $911,289 in legal, severance and professional costs.

 

In connection with the closing of the Internalization, HG Vora Capital Management, LLC (“HG Vora”) exercised its right to contribute to the Company its option to purchase a 26.7% interest in GAMO (the sole owner of the Manager’s equity) in exchange for 152,654 shares of the Company’s common stock, valued at $3,053,079 and representing a 2% fully diluted ownership interest in our common stock (immediately following the exchange).

 

Prior to the Internalization, we had entered into a management agreement (the “Management Agreement”) on July 19, 2019, pursuant to which our Manager managed, among other things, our day-to-day activities and business affairs in conformity with the investment guidelines and policies that were approved and monitored by our board of directors. These responsibilities included, but were not limited to, (i) the location, acquisition, financing, development and disposition of retail, industrial, and other properties in both the medical- use and adult-use cannabis markets on behalf of us and our Operating Partnership, (ii) providing market research and analysis about our activities, (iii) evaluating prospective real estate investment opportunities, and (iv) recommending real estate investments for purchase by us and our Operating Partnership and any of its subsidiaries. Our Manager also made available to us and our Operating Partnership appropriate personnel reasonably required to enable our Manager to perform its services under the Management Agreement. The Manager assigned the Management Agreement to the Operating Partnership and the Operating Partnership assumed the Management Agreement and all management functions in connection with the Internalization.

 

 

NEWLAKE CAPITAL PARTNERS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

 

Note 4 - RELATED PARTY TRANSACTIONS (continued)

 

Management Agreement and Internalization Transaction (continued)

 

We paid our Manager an annual management fee, payable in monthly cash installments, in arrears, in an amount generally equal to the lesser of (i) the costs and expenses incurred by the Manager with respect to our business or (ii) 1.0% per annum of the Stockholders’ Equity, provided that to the extent the amount in (ii) did not cover the costs and expenses incurred by the Manager with respect to our business, we reimbursed the Manager to the extent of such difference. Stockholders’ Equity was generally defined in the Management Agreement to mean the sum of the net proceeds from any issuances of our equity securities since inception. Our Manager ceased collecting any management fees with respect to subsequent periods following the Internalization.

 

Our former Manager is wholly owned by GAMO, a Delaware limited liability company., which was an affiliate of Acreage. Acreage previously owned 200,000 shares of our common stock and 54,695 OP Units. Kevin Murphy, the Chairman of Acreage, previously owned 250,000 shares. As of September 30, 2021 and December 31, 2020, the Company has assets with an original cost basis of $20.9 million and a net book value of $19.8 million and $20.2 million, respectively, that are leased to Acreage.

 

Management fees to GAMO of $0 and $657,089 were incurred for the nine months ended September 30, 2021 and 2020, respectively. There were no management fees incurred during the three months ended September 30, 2021 and 2020. These amounts are included in general and administrative expense on the accompanying consolidated statements of operations. As of September 30, 2021 and December 31, 2020, there are no management fees payable.

 

For the nine months ended September 30, 2021 and 2020, the Company has reimbursed $0 and $350,755, respectively, to the Manager for expenses in accordance with the Management Agreement. For the three months ended September 30, 2021 and 2020, the Company has reimbursed $0 and $39,784, respectively, to the Manager for expenses in accordance with the Management Agreement. These amounts are presented in General and Administrative expense on the accompanying consolidated statements of operations.

 

HG Vora, on behalf of a fund managed by it, formerly had an option to acquire a 26.7% interest in GAMO for which they paid $1.05 million on August 13, 2019. Upon the commencement of the trading of our common stock on a Securities Exchange, HG Vora had the right to contribute its option to purchase the 26.7% interest in exchange for the number of shares of common stock representing a 2% fully diluted ownership in our common stock (immediately following such exchange). This option was exercised by HG Vora, upon the payment of $50,000, in connection with the Internalization and is no longer outstanding. In addition, we paid a $2.55 million structuring fee to HG Vora in conjunction with our initial offering. We had also entered into an Investor Rights Agreement, Excepted Holder Agreement and Side Letter with HG Vora. In accordance with the Investor Rights Agreement, HG Vora had the right to designate three directors, representing a majority, to our Board of Directors. Prior to our IPO, HG Vora had the right to nominate a majority of our Board of Directors.

 

Merger Agreement

 

In connection with the Merger, we entered into an Investor Rights Agreement. The Investor Rights Agreement provides the stockholders party thereto with certain rights with respect to the nomination of members to our Board of Directors. Prior to the completion of our IPO, pursuant to the Investor Rights Agreement, HG Vora had the right to nominate four directors to our Board of Directors. Following the completion of our IPO, for so long as HG Vora owns (i) at least 9% of our issued and outstanding common stock for 60 consecutive days, HG Vora may nominate two of the members of our Board of Directors, and (ii) at least 5% of our issued and outstanding common stock for 60 consecutive days, HG Vora may nominate one member of our Board of Directors. If HG Vora owns less than 5% of our issued and outstanding common stock for 60 consecutive days, then HG Vora may not nominate any members of our Board of Directors pursuant to the Investor Rights Agreement.

 

 

NEWLAKE CAPITAL PARTNERS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

 

Note 4 - RELATED PARTY TRANSACTIONS (continued)

 

Merger Agreement (continued)

 

Prior to the completion of our IPO, NLCP Holdings, LLC had the right to designate three directors to our Board of Directors. Subsequent to our IPO, NLCP Holdings, LLC no longer had these rights.

 

Prior to the completion of our IPO, West Investment Holdings, LLC, West CRT Heavy, LLC, Gary and Mary West Foundation, Gary and Mary West Health Endowment, Inc., Gary and Mary West 2012 Gift Trust and WFI Co-Investments acting unanimously, collectively referred to as the “West Stockholders,” did not have a director nomination right. Following the completion of our IPO, the West Stockholders may nominate one member of our Board of Directors for so long as the West Stockholders own in the aggregate at least 5% of the issued and outstanding shares of our common stock. If the West Stockholders own in the aggregate less than 5% of our issued and outstanding common stock for 60 consecutive days, then the West Stockholders may not nominate any members of our Board of Directors pursuant to the Investor Rights Agreement.

 

Prior to the completion of our IPO, NL Ventures, LLC (“Pangea”) did not have a director nomination right. Following the completion of our IPO, Pangea may nominate one member of our Board of Directors for so long as Pangea owns at least 4% of our issued and outstanding common stock for 60 consecutive days. If Pangea owns less than 4% of our issued and outstanding common stock for 60 consecutive days, then Pangea may not nominate any members of our Board of Directors pursuant to the Investor Rights Agreement.

 

Option Grants

 

In connection with the closing of the Internalization, the Company and the other parties thereto terminated the Incentive Agreement (described below). In connection therewith the Company issued 791,790 nonqualified stock options (the “Options”), valued at $3,863,935, to purchase shares of the Company’s common stock, subject to the terms and conditions of the applicable Option Grant Agreements, with an exercise price per share of common stock equal to $24.00 and in such amounts as set forth in the Option Grant Agreements. The Options issued represented 3% of the value of the Company at issuance. The shares of common stock issued by the Company upon exercise of such options, shall be duly authorized, validly issued, fully paid and non-assessable upon such issuance. The Options vested on August 31, 2020. The Options are exercisable upon the earliest of (i) the second anniversary of the Grant Date; (ii) termination of the grantee’s employment or service by the Company other than for cause, or by the grantee for “good reason”, the grantee’s death or disability or (iii) a change in control, as defined. As of September 30, 2021, 615,838 of the 791,790 Option Grants issued to the Company’s four employees and a director are exercisable.

 

We had entered into an Incentive Agreement with two former executive officers of the Company, who also have an ownership interest in our former Manager. Pursuant to the Incentive Agreement, the Company had agreed to issue options or provide other performance awards, equal to 5% of the value of the Company after each private placement, merger or public offering, to the management team with each of the two executive officers of the Company party thereto receiving at least 1% of the value of the Company. The Company had also agreed in the Incentive Agreement to enter into an Employment Agreement with such executive officers, upon the internalization of the management, subject to a term of three years at market rate compensation. The Incentive Agreements and all obligations of the Company thereunder were terminated in connection with the Internalization.

 

 

NEWLAKE CAPITAL PARTNERS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

 

 

Note 5 - NONCONTROLLING INTERESTS

 

Operating Partnership Units and Restricted Stock Units

 

The Company’s noncontrolling interests include interests issued by the Operating Partnership and RSUs. See Note 6 for a description of our RSUs.

 

The activity for the Company’s noncontrolling interest issued by the Operating partnership is set forth in the following table:

 

 

 

Note 6 - STOCK BASED COMPENSATION

 

Restricted Stock Units

 

During the nine months ended September 30, 2021, the Company granted 39,849 RSUs to an officer and certain of our directors of the Company. Total outstanding RSUs as of September 30, 2021 are 127,176. All outstanding RSUs became fully vested and expensed upon the IPO. The granting of these restricted stock units are not pursuant to a formal plan. Restricted stock units were subject to restrictions on transfer and were generally subject to a risk of forfeiture if the award recipient ceased to be an employee or director of the Company prior to vesting of the award. Each RSU represents the right to receive one share of common stock. Each RSU is also entitled to receive a dividend equivalent payment equal to the dividend paid on one share of common stock. The amortization of compensation costs for the awards of RSUs are included in stock-based compensation in the accompanying consolidated statements of operations and amount to $1,820,060 and $20,427 for the nine months ended September 30, 2021 and 2020, respectively. The amortization of compensation costs for the awards of RSUs amount to $816,482 and $7,655 for the three months ended September 30, 2021 and 2020, respectively.

 

 

NEWLAKE CAPITAL PARTNERS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

 

Note 6 - STOCK BASED COMPENSATION (continued)

 

Restricted Stock Units (continued)

 

The following table sets forth our unvested restricted stock activity from April 9, 2019 (Inception) through September 30, 2021:

 

 

Stock Options

 

The fair value of each option award was estimated on the date of grant using the Black- Scholes model. Expected volatilities were based on historical daily volatilities of publicly traded guideline companies. The expected term of options granted was based on the “simplified” method for options and represents the period of time that options granted were expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option was based on the U.S. Treasury yield. The stock price at date of issuance and exercise price are $20.00 and $24.00, respectively. The expected volatility was 52.5% and the expected life was 4.5 years. The risk- free interest rate was 1.56% and the expected dividend yield was 6.0%. The options were fully vested at December 31, 2020. No options have been granted or been exercised during the period ended September 30, 2021. The value for Options issued in connection with the Internalization are included in stock-based compensation in the accompanying consolidated statements of operations and amount to $0 and $3,863,935 for the nine months ended September 30, 2021 and 2020, respectively. The value for Options issued in connection with the Internalization amount to $0 and $3,863,935 for the three months ended September 30, 2021 and 2020, respectively. See Note 4.

 

The following table summarizes stock option activity during the nine months ended September 30, 2021 and the year ended December 31, 2020:

 

 

 

NEWLAKE CAPITAL PARTNERS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

 

 

Note 7 - EARNINGS PER SHARE

 

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except share data) :

 

 

The effect of including 791,790 outstanding stock options and 602,392 warrants were excluded from our calculation of weighted average shares of common stock outstanding – diluted for the nine months ended September 30, 2020 and the three months ended September 30, 2020 as their inclusion would have been anti-dilutive. The effect of including 791,790 outstanding stock options and 602,392 warrants were included in our calculation of weighted average shares of common stock outstanding – diluted for the nine months ended September 30, 2021 and the three months ended September 30, 2021. The effect of including 127,176 RSUs and 453,303 OP Units were excluded from our calculation of weighted average shares of common stock outstanding – diluted for all periods presented as their inclusion would have been anti-dilutive.