UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2022
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER 000-55900
MJ HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
| nevada | 20-8235905 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
2580 S. Sorrel St., Las Vegas, NV 89146
(Address of principal executive offices) (Zip Code)
(702) 879-4440
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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). 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 ☒
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||
| Common Stock | MJNE | OTCQB Marketplace |
As of November 21, 2022, there were shares of our Common Stock, par value $0.001 per share, outstanding.
MJ HOLDINGS, INC.
FORM 10-Q
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2022
INDEX
| i |
USE OF MARKET AND INDUSTRY DATA
This Quarterly Report on Form 10-Q includes market and industry data that we have obtained from third-party sources, including industry publications, as well as industry data prepared by our management on the basis of its knowledge of and experience in the industries in which we operate (including our management’s estimates and assumptions relating to such industries based on that knowledge). Management has developed its knowledge of such industries through its experience and participation in these industries. While our management believes the third-party sources referred to in this Quarterly Report on Form 10-Q are reliable, neither we nor our management have independently verified any of the data from such sources referred to in this Quarterly Report on Form 10-Q or ascertained the underlying economic assumptions relied upon by such sources. Furthermore, internally prepared and third-party market prospective information, in particular, are estimates only and there will usually be differences between the prospective and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. Also, references in this Quarterly Report on Form 10-Q to any publications, reports, surveys or articles prepared by third parties should not be construed as depicting the complete findings of the entire publication, report, survey or article. The information in any such publication, report, survey or article is not incorporated by reference in this Quarterly Report on Form 10-Q.
Solely for convenience, we refer to trademarks in this Quarterly Report on Form 10-Q without the ® or the ™ or symbols, but such references are not intended to indicate that we will not assert, to the fullest extent under applicable law, our rights to our own trademarks. Other service marks, trademarks and trade names referred to in this Quarterly Report on Form 10-Q, if any, are the property of their respective owners, although for presentational convenience we may not use the ® or the ™ symbols to identify such trademarks.
OTHER PERTINENT INFORMATION
Unless the context otherwise indicates, when used in this Quarterly Report on Form 10-Q, the terms “MJ Holdings” “we,” “us,” “our,” the “Company” and similar terms refer to MJ Holdings, Inc., a Nevada corporation, and all of our subsidiaries and affiliates.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q for the period ended September 30, 2022 contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements relate to future events including, without limitation, the terms, timing and closing of our proposed acquisitions or our future financial performance. We have attempted to identify forward-looking statements by using terminology such as “anticipates,” “believes,” “expects,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predict,” “should” or “will” or the negative of these terms or other comparable terminology. These statements are only predictions; uncertainties and other factors may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels or activity, performance or achievements expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Our expectations are as of the date this Quarterly Report on Form 10-Q is filed, and we do not intend to update any of the forward-looking statements after the date this Quarterly Report on Form 10-Q is filed to confirm these statements to actual results, unless required by law.
You should not place undue reliance on forward looking statements. The cautionary statements set forth in this Quarterly Report on Form 10-Q identify important factors which you should consider in evaluating our forward-looking statements. These factors include, among other things:
| ● | Our ability to effectively execute our business plan; | |
| ● | Our ability to manage our expansion, growth and operating expenses; | |
| ● | Our ability to protect our brands and reputation; | |
| ● | Our ability to repay our debts; | |
| ● | Our ability to rely on third-party suppliers outside of the United States; | |
| ● | Our ability to evaluate and measure our business, prospects and performance metrics; | |
| ● | Our ability to compete and succeed in a highly competitive and evolving industry; | |
| ● | Our ability to respond and adapt to changes in technology and customer behavior; | |
| ● | Risks in connection with completed or potential acquisitions, dispositions and other strategic growth opportunities and initiatives; | |
| ● | Risks related to the anticipated timing of the closing of any potential acquisitions; | |
| ● | Risks related to the integration with regards to potential or completed acquisitions; or | |
| ● | Various risks related to health epidemics, pandemics and similar outbreaks, such as the coronavirus disease 2019 (“COVID-19”) pandemic, which may have material adverse effects on our business, financial position, results of operations and/or cash flows. |
This Quarterly Report on Form 10-Q also contains estimates and other statistical data made by independent parties and by us relating to market size and growth and other industry data. This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We have not independently verified the statistical and other industry data generated by independent parties and contained in this Quarterly Report on Form 10-Q and, accordingly, we cannot guarantee their accuracy or completeness, though we do generally believe the data to be reliable. In addition, projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including, but not limited to, the possibility that we may fail to preserve our expertise in consumer product development; that existing and potential distribution partners may opt to work with, or favor the products of, competitors if our competitors offer more favorable products or pricing terms; that we may be unable to maintain or grow sources of revenue; that we may be unable maintain profitability; that we may be unable to attract and retain key personnel; or that we may not be able to effectively manage, or to increase, our relationships with customers; that we may have unexpected increases in costs and expenses. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.
| ii |
PART I
INDEX TO FINANCIAL STATEMENTS
| iii |
MJ HOLDINGS, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
September 30, 2022 |
|
December 31, 2021 | |||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 2,021,538 | $ | 4,699,372 | ||||
| Accounts receivable, net | 93,228 | 7,989 | ||||||
| Loan receivable - related party | 182,469 | 40,165 | ||||||
| Prepaid expenses | 156,250 | |||||||
| Convertible note receivable | 500,000 | 500,000 | ||||||
| Total current assets | 2,953,485 | 5,247,526 | ||||||
| Property and equipment, net | 2,543,263 | 2,578,931 | ||||||
| Goodwill | 1,451,815 | |||||||
| Deposits | 1,016,184 | 1,016,184 | ||||||
| Total non-current assets | 5,011,262 | 3,595,115 | ||||||
| Total assets | $ | 7,964,747 | $ | 8,842,641 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 2,147,429 | $ | 1,750,402 | ||||
| Contract liabilities | 1,360,000 | 1,404,444 | ||||||
| Income taxes payable | 277,000 | 277,000 | ||||||
| Current portion of long-term notes payable | 996,010 | 874,728 | ||||||
| Current portion of operating lease obligation | 83,410 | 83,410 | ||||||
| Total current liabilities | 4,863,849 | 4,389,984 | ||||||
| Non-current liabilities | ||||||||
| Operating lease obligation, net of current portion | 686,274 | 686,274 | ||||||
| Total non-current liabilities | 686,274 | 686,274 | ||||||
| Total liabilities | 5,550,123 | 5,076,258 | ||||||
| Commitments and contingencies (Note 10) | ||||||||
| Stockholders’ equity (deficit) | ||||||||
| Preferred stock, $ par value, shares authorized, shares issued; Series A convertible Preferred stock $ stated value, authorized, shares issued and outstanding | ||||||||
| Common stock, $ par value, shares authorized, and shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively | 78,590 | 71,500 | ||||||
| Additional paid-in capital | 22,261,217 | 20,279,897 | ||||||
| Common stock issuable | 84 | 84 | ||||||
| Accumulated deficit | (19,812,798 | ) | (16,472,629 | ) | ||||
| Total stockholders’ equity (deficit) attributable to MJ Holdings, Inc. | 2,527,093 | 3,878,852 | ||||||
| Noncontrolling interests | (112,469 | ) | (112,469 | ) | ||||
| Total shareholders’ equity | 2,414,624 | 3,766,383 | ||||||
| Total liabilities and stockholders’ equity | $ | 7,964,747 | $ | 8,842,641 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 1 |
MJ HOLDINGS, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| For the three months ended | For the nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue, net | $ | 712,856 | $ | 19,580 | $ | 773,462 | $ | 535,961 | ||||||||
| Operating expenses | ||||||||||||||||
| Direct costs of revenue | 40,590 | |||||||||||||||
| General and administrative | 2,780,284 | 583,516 | 4,074,444 | 5,356,540 | ||||||||||||
| Depreciation | 42,930 | 91,781 | 173,110 | 286,038 | ||||||||||||
| Marketing and selling | 2,471 | 47,763 | 7,777 | 55,643 | ||||||||||||
| Total operating expenses | 2,825,685 | 723,060 | 4,255,331 | 5,738,811 | ||||||||||||
| Operating loss | (2,112,829 | ) | (703,480 | ) | (3,481,869 | ) | (5,202,850 | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense | (18,690 | ) | (44,241 | ) | (58,432 | ) | (76,549 | ) | ||||||||
| Interest income | 34,505 | 4,586 | 85,688 | 13,884 | ||||||||||||
| Miscellaneous income | 94,447 | 70,000 | ||||||||||||||
| Loss on conversion of related party note payable | (310,526 | ) | ||||||||||||||
| Gain on sale of luxury box | 44,444 | |||||||||||||||
| Gain on sale of marketable securities | 9,857,429 | |||||||||||||||
| Gain on disposal of subsidiary | 337,551 | 337,551 | ||||||||||||||
| Gain on sale of commercial building | 260,141 | |||||||||||||||
| Other income | 88,888 | 1,494,408 | ||||||||||||||
| Total other income (expense) | 110,262 | 386,784 | 141,700 | 11,576,338 | ||||||||||||
| Net income (loss) before income taxes | (2,002,567 | ) | (316,696 | ) | (3,340,169 | ) | 6,364,315 | |||||||||
| Provision for income taxes | 277,000 | |||||||||||||||
| Net income (loss) | $ | (2,002,567 | ) | $ | (316,696 | ) | $ | (3,340,169 | ) | $ | 6,087,315 | |||||
| Loss (gain) attributable to non-controlling interest | ||||||||||||||||
| Net income (loss) attributable to common stockholders | $ | (2,002,567 | ) | $ | (316,696 | ) | $ | (3,340,169 | ) | $ | 6,087,315 | |||||
| Net income (loss) attributable to common stockholders per share - basic and diluted | $ | (0.03 | ) | $ | (0.00 | ) | $ | (0.04 | ) | $ | 0.09 | |||||
| Weighted average number of shares outstanding: | ||||||||||||||||
| Basic | 78,102,500 | 70,094,440 | 73,701,945 | 65,694,138 | ||||||||||||
| Diluted | 78,102,500 | 70,094,440 | 73,701,945 | 65,694,138 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 2 |
MJ HOLDINGS, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(UNAUDITED)
For the three months ended September 30, 2022 and 2021 | ||||||||||||||||||||||||||||||||
Common Stock Issuable | Common Stock | Additional paid-in | Non Controlling | Accumulated | ||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Interest | Deficit | Total | |||||||||||||||||||||||||
| Balances at June 30, 2022 (Unaudited) | 82,554 | $ | 84 | 71,501,667 | $ | 71,500 | $ | 20,286,607 | $ | (112,469 | ) | $ | (17,810,231 | ) | $ | 2,435,491 | ||||||||||||||||
| Issuance of common stock for the acquisition of MJH research | - | 7,000,000 | 7,000 | 1,949,500 | 1,956,500 | |||||||||||||||||||||||||||
| Issuance of common stock for services | - | 90,000 | 90 | 25,110 | 25,200 | |||||||||||||||||||||||||||
| Net loss for the period ended September 30, 2022 | - | - | (2,002,567 | ) | (2,002,567 | ) | ||||||||||||||||||||||||||
| Balances at September 30, 2022 (Unaudited) | 82,554 | $ | 84 | 78,591,667 | $ | 78,590 | $ | 22,261,217 | $ | (112,469 | ) | $ | (19,812,798 | ) | $ | 2,414,624 | ||||||||||||||||
| Balances at June 30, 2021 (Unaudited) | 198,539 | $ | 199 | 70,660,015 | $ | 70,660 | $ | 20,084,895 | $ | (112,469 | ) | $ | (13,598,949 | ) | $ | 6,444,336 | ||||||||||||||||
| Issuance of common stock for services | - | 302,333 | 302 | 73,687 | 73,989 | |||||||||||||||||||||||||||
| Common stock to be issued for director compensation | (70,985 | ) | (70 | ) | 115,985 | 115 | 24,329 | 24,374 | ||||||||||||||||||||||||
| Net loss for the period ended September 30, 2021 | - | - | (316,696 | ) | (316,696 | ) | ||||||||||||||||||||||||||
| Balances at September 30, 2021 (Unaudited) | 127,554 | $ | 129 | 71,078,333 | $ | 71,077 | $ | 20,182,911 | $ | (112,469 | ) | $ | (13,915,645 | ) | $ | 6,226,003 | ||||||||||||||||
| For the nine months ended September 30, 2022 and 2021 | ||||||||||||||||||||||||||||||||
Common Stock Issuable | Common Stock | Additional paid-in | Non Controlling | Accumulated | ||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Interest | Deficit | Total | |||||||||||||||||||||||||
| Balances at January 1, 2022 | 82,554 | $ | 84 | 71,501,667 | $ | 71,500 | $ | 20,279,897 | $ | (112,469 | ) | $ | (16,472,629 | ) | $ | 3,766,383 | ||||||||||||||||
| Stock based compensation | - | 90,000 | 90 | 31,820 | 31,910 | |||||||||||||||||||||||||||
| Issuance of common stock for the acquisition of MJH research | - | 7,000,000 | 7,000 | 1,949,500 | 1,956,500 | |||||||||||||||||||||||||||
| Net loss for the period ended September 30, 2022 | - | (3,340,169 | ) | (3,340,169 | ) | |||||||||||||||||||||||||||
| Balances at September 30, 2022 | 82,554 | $ | 84 | 78,591,667 | $ | 78,590 | $ | 22,261,217 | $ | (112,469 | ) | $ | (19,812,798 | ) | $ | 2,414,624 | ||||||||||||||||
| Balances at January 1, 2021 | $ | 68,613,541 | $ | 68,613 | $ | 18,748,688 | $ | (112,469 | ) | $ | (20,002,960 | ) | $ | (1,298,128 | ) | |||||||||||||||||
| Issuance of common stock for services | - | 559,333 | 560 | 222,829 | 223,389 | |||||||||||||||||||||||||||
| Issuance of common stock for cash | - | 263,158 | 263 | 49,737 | 50,000 | |||||||||||||||||||||||||||
| Issuance of common stock for loan payable conversion | - | 526,316 | 526 | 410,000 | 410,526 | |||||||||||||||||||||||||||
| Issuance of common stock as per terms of Termination Agreement | - | 1,000,000 | 1,000 | 629,000 | 630,000 | |||||||||||||||||||||||||||
| Common stock to be issued for director compensation | 127,554 | 129 | 115,985 | 115 | 122,657 | 122,901 | ||||||||||||||||||||||||||
| Net income for the period ended September 30, 2021 | - | - | 6,087,315 | 6,087,315 | ||||||||||||||||||||||||||||
| Balances at September 30, 2021 | 127,554 | $ | 129 | 71,078,333 | $ | 71,077 | $ | 20,182,911 | $ | (112,469 | ) | $ | (13,915,645 | ) | $ | 6,226,003 | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 3 |
MJ HOLDINGS, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the nine months ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net income (loss) | $ | (3,340,169 | ) | $ | 6,087,315 | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Amortization of right to use asset | 83,717 | |||||||
| Common stock issued for prepaid services | 135,000 | |||||||
| Depreciation | 173,110 | 286,038 | ||||||
| Gain on sale of marketable securities | (9,857,429 | ) | ||||||
| Gain on disposition of assets | (337,460 | ) | ||||||
| Provision for income taxes | 277,000 | |||||||
| Gain on sale of assets | (364,877 | ) | ||||||
| Stock based compensation | 7,373 | 122,772 | ||||||
| Common stock issued for services | (283 | ) | 88,389 | |||||
| Common stock to be issued for wages payable | 129 | |||||||
| Common stock to be issued for termination of rights participation agreement | 630,000 | |||||||
| Loss on conversion of related party note payable | 310,526 | |||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (85,239 | ) | (15,508 | ) | ||||
| Prepaid expenses | (156,250 | ) | ||||||
| Deposits | (1,010,000 | ) | ||||||
| Accounts payable and accrued liabilities | 324,664 | (606,805 | ) | |||||
| Contract liabilities | 27,919 | 1,621,112 | ||||||
| Other current assets | ||||||||
| Other current liabilities | (1,328,438 | ) | ||||||
| Operating lease liability | (89,348 | ) | ||||||
| Net cash used in operating activities | (3,048,875 | ) | (3,967,867 | ) | ||||
| Cash Flows from Investing Activities | ||||||||
| Purchase of property and equipment | (137,442 | ) | (125,077 | ) | ||||
| Loan receivable - related party | (142,304 | ) | ||||||
| Proceeds from sale of commercial building | 1,627,500 | |||||||
| Acquisition of MJH Research, Inc. | 529,505 | (200,000 | ) | |||||
| Issuance of convertible note receivable | (500,000 | ) | ||||||
| Proceeds from the sale of marketable securities | 10,207,429 | |||||||
| Net cash provided by investing activities | 249,759 | 11,009,852 | ||||||
| Financing activities | ||||||||
| Proceeds from notes payable | 121,282 | 300,000 | ||||||
| Proceeds from notes payable – related party | ||||||||
| Repayment of notes payable | (1,731,278 | ) | ||||||
| Proceeds from common stock issued for cash | 50,000 | |||||||
| Net cash provided by (used in) financing activities | 121,282 | (1,381,278 | ) | |||||
| Net change in cash | (2,677,834 | ) | 5,660,707 | |||||
| Cash, beginning of period | 4,699,372 | 117,536 | ||||||
| Cash, end of period | $ | 2,021,538 | $ | 5,778,243 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Interest paid | $ | $ | 110,918 | |||||
| Income taxes paid | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Common stock issued for prior period debt conversion | $ | $ | ||||||
| Issuance of stock for conversion of related party note payable | $ | $ | 100,000 | |||||
| Common stock issued for stock subscriptions payable | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 4 |
MJ HOLDINGS, INC. and SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
Note 1 — Nature of the Business
MJ Holdings, Inc. (OTCQB: MJNE) is a highly-diversified cannabis holding company providing cultivation management, asset and infrastructure development – currently concentrated in the Las Vegas market. It is the Company’s intention to 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 Las Vegas market and then use that 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 November 17, 2006, as Securitas EDGAR Filings, Inc. under the laws of the State of Nevada. Prior to the formation of Securitas EDGAR Filings Inc., the business was operated as Xpedient EDGAR Filings, LLC, a Florida Limited Liability Company, formed on October 31, 2005. On November 21, 2005, Xpedient EDGAR Filings LLC amended its Articles of Organization to change its name to Securitas EDGAR Filings, LLC. On January 21, 2009, Securitas EDGAR Filings LLC merged into Securitas EDGAR Filings, Inc., a Nevada corporation. On February 14, 2014, the Company amended and restated its Articles of Incorporation and changed its name to MJ Holdings, Inc.
On November 22, 2016, in connection with a plan to divest the Company of its real estate business, the Company submitted to its stockholders an offer to exchange (the “Exchange Offer”) its common stock for shares in MJ Real Estate Partners, LLC, (“MJRE”) a newly formed LLC formed for the sole purpose of effecting the Exchange Offer. On January 10, 2017, the Company accepted for 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 February 1, 2017, the Company transferred its ownership interests in the real 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 February 1, 2017.
MJH Research, Inc. Acquisition
On July 8, 2022, MJ Holdings, Inc. (the “Buyer”) entered into a Common Stock Purchase Agreement (the “Agreement”) with MJH Research, Inc. (the “Company”), a Florida corporation, and Sunstate Futures, LLC (the “Seller”), a Florida limited liability company. Under the terms of the Agreement, the Seller agreed to sale all issued and outstanding shares of common stock ( shares) (the “Common Stock”) of the Company to the Buyer. In consideration of the purchase of the shares of Common Stock, the Buyer agreed to issue the Seller seven million () shares of its common stock. The transaction closed on July 11, 2022. Net assets and liabilities of MJH Research, Inc. were approximately $500,000 and consideration on the acquisition date equated to approximately $1,955,000, most of which would be applied to intellectual property related to research of MJH Research, Inc. Please see Note 6 — Acquisition of MJH Research, Inc. for further information.
COVID-19
COVID-19 has caused and continues to cause significant loss of life and disruption to the global economy, including the curtailment of activities by businesses and consumers in much of the world as governments and others seek to limit the spread of the disease, and through business and transportation shutdowns and restrictions on people’s movement and congregation.
As a result of the pandemic, the Company has experienced, and continues to experience, weakened demand for its products. Many of its customers have been unable to sell its products in customer stores due to government-mandated closures and have deferred or significantly reduced orders for the Company’s products. The Company expects these trends to continue until such closures are significantly curtailed or lifted. In addition, the pandemic has reduced foot traffic in the stores where its products are sold that remain open, and the global economic impact of the pandemic has temporarily reduced consumer demand for its products as they focus on purchasing essential goods.
| 5 |
MJ HOLDINGS, INC. and SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
Note 1 — Nature of the Business (continued)
Given these factors, the Company anticipates that the greatest impact from the COVID-19 pandemic in 2020 occurred in the second and third quarters and resulted in a significant net sales decline in its quarterly results.
In addition, certain of its suppliers and the manufacturers of certain of its products were adversely impacted by COVID-19. As a result, the Company faced delays or difficulty sourcing products, which negatively affected its business and financial results. Even if the Company were able to find alternate sources for such products, it may cost more and cause delays in its supply chain, which could adversely impact its profitability and financial condition.
The Company has taken actions to protect its employees in response to the pandemic, including closing its corporate offices and requiring its office employees to work from home. At its grow facilities, certain practices are in effect to safeguard workers, including a staggered work schedule, and the Company is continuing to monitor direction from local and national governments carefully.
As a result of the impact of COVID-19 on its financial results, and the anticipated future impact of the pandemic, the Company has implemented cost control measures and cash management actions, including:
| ● | Furloughing a significant portion of its employees; and |
| ● | Implementing 20% salary reductions across its executive team and other members of upper-level management; and |
| ● | Executing reductions in operating expenses, planned inventory levels and non-product development capital expenditures; and |
| ● | Proactively managing working capital, including reducing incoming inventory to align with anticipated sales. |
Note 2 — Summary of Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and with Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission (the “SEC”). Accordingly, they do not contain all information and footnotes required by GAAP for annual financial statements. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of September 30, 2022 and the results of operations, changes in stockholders’ equity, and cash flows for the periods presented. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the operating results for the full fiscal year or any future period.
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the Securities and Exchange Commission on June 21, 2022. The Company’s accounting policies are described in the Notes to Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 2021, and updated, as necessary, in this Quarterly Report on Form 10-Q.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, MJH Research, Inc., Icon Management, LLC, Condo Highrise Management, LLC, Prescott Management, LLC, Q Brands, LLC, Farm Road, LLC, Red Earth Holdings, LLC and its majority owned subsidiary, Alternative Hospitality, Inc. Inter-company balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates and assumptions are required in the determination of the fair value of financial instruments and the valuation of stock-based compensation. Some of these judgments can be subjective and complex, and, consequently, actual results may differ from these estimates.
Cash
Cash includes cash on hand and deposits placed with banks or other financial institutions, which are unrestricted as to withdrawal and use and with an original maturity of three months or less. The Company maintains its cash in bank deposit accounts.
The Company, at various times throughout the year, had cash in financial institutions in excess of Federally insured limits. At September 30, 2022, the Company had $1,771,538 in excess. However, the Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on its credit balances.
Fair Value of Financial Instruments
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of September 30, 2022 and December 31, 2021. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, prepaid expenses and accounts payable. Fair values were assumed to approximate carrying values for cash and payables because they are short term in nature and their carrying amounts approximate fair values or they are payable on demand.
The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market.
| 6 |
MJ HOLDINGS, INC. and SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
Note 2 — Summary of Significant Accounting Policies (continued)
Level 1: The preferred inputs to valuation efforts are “quoted prices in active markets for identical assets or liabilities,” with the caveat that the reporting entity must have access to that market. Information at this level is based on direct observations of transactions involving the same assets and liabilities, not assumptions, and thus offers superior reliability. However, relatively few items, especially physical assets, actually trade in active markets.
Level 2: FASB acknowledged that active markets for identical assets and liabilities are relatively uncommon and, even when they do exist, they may be too thin to provide reliable information. To deal with this shortage of direct data, the board provided a second level of inputs that can be applied in these situations.
Level 3: If inputs from levels 1 and 2 are not available, FASB acknowledges that fair value measures of many assets and liabilities are less precise. The board describes Level 3 inputs as “unobservable,” and limits their use by saying they “shall be used to measure fair value to the extent that observable inputs are not available.” This category allows “for situations in which there is little, if any, market activity for the asset or liability at the measurement date”. The FASB explains that “observable inputs” are gathered from sources other than the reporting company and that they are expected to reflect assumptions made by market participants.
Accounts Receivable and Allowance for Doubtful Accounts:
Accounts receivable are recorded at invoiced amount and generally do not bear interest. An allowance for doubtful accounts is established, as necessary, based on past experience and other factors which, in management’s judgment, deserve current recognition in estimating bad debts. Such factors include growth and composition of accounts receivable, the relationship of the allowance for doubtful accounts to accounts receivable and current economic conditions. The determination of the collectability of amounts due from customer accounts requires the Company to make judgments regarding future events and trends. Allowances for doubtful accounts are determined based on assessing the Company’s portfolio on an individual customer and on an overall basis. This process consists of a review of historical collection experience, current aging status of the customer accounts, and the financial condition of the Company’s customers. Based on a review of these factors, the Company establishes or adjusts the allowance for specific customers and the accounts receivable portfolio as a whole.
| September 30, 2022 | December 31, 2021 | |||||||
| Accounts receivable | $ | 135,418 | $ | 50,179 | ||||
| Less allowance | (42,190 | ) | (42,190 | ) | ||||
| Net accounts receivable | $ | 93,228 | $ | 7,989 | ||||
Debt Issuance Costs
Costs associated with obtaining, closing, and modifying loans and/or debt instruments are netted against the carrying amount of the debt instrument, and charged to interest expense over the term of the loan.
Inventory
Inventory is comprised of raw materials, finished goods and work-in-process such as pre-harvested cannabis plants and by-products to be extracted. The costs of growing cannabis, including but not limited to labor, utilities, nutrition and supplies, are capitalized into inventory until the time of harvest. All direct and indirect costs related to inventory are capitalized when incurred, and subsequently classified to cost of goods sold in the Consolidated Statements of Operations. Work-in-process is stated at the lower of cost or net realizable value, determined using the weighted average cost. Raw materials and finished goods inventory are stated at the lower of cost or net realizable value, with cost being determined on the first-in, first-out (“FIFO”) method of accounting. Net realizable value is determined as the estimated selling price in the ordinary course of business less estimated costs to sell. The Company periodically reviews physical inventory for excess, obsolete, and potentially impaired items and reserves. The Company reviews inventory for obsolete, redundant and slow-moving goods and any such inventory is written down to net realizable value. Packaging and supplies are initially valued at cost. The reserve estimate for excess and obsolete inventory is based on expected future use. The reserve estimates have historically been consistent with actual experience as evidenced by actual sale or disposal of the goods.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and any impairment losses. Depreciation is computed using the straight-line method over the useful lives of the assets. Major renewals and betterments are capitalized and depreciated; maintenance and repairs that do not extend the life of the respective assets are expensed as incurred. Upon disposal of assets, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in the consolidated statements of operations.
Construction in progress primarily represents the construction or the renovation costs stated at cost less any accumulated impairment loss, which is not depreciated. Costs incurred are capitalized and transferred to property and equipment upon completion, at which time depreciation commences.
| 7 |
MJ HOLDINGS, INC. and SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
Note 2 — Summary of Significant Accounting Policies (continued)
Property and equipment are depreciated over their estimated useful lives as follows:
| Buildings | 12 years | |
| Land | Not depreciated | |
| Construction in progress | Not depreciated | |
| Leasehold Improvements | Lessor of lease term or 5 years | |
| Machinery and Equipment | 5 years | |
| Furniture and Fixtures | 5 years |
Long–lived Assets
Long-lived assets, including real estate property and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are expected to generate. If the assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair value.
Impairment of Long-lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. The Company conducts its long-lived asset impairment analyses in accordance with ASC 360-10-15, “Impairment or Disposal of Long-Lived Assets.” ASC 360-10-15 requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals. The Company recorded an impairment of its long-lived assets in the amount of $0 and $14,845 for the nine months ended September 30, 2022 and year ended December 31, 2021, respectively.
Contract Balances
The Company receives payments for new Cultivation and Sales Agreements (the “Agreements”) upon signing and defers revenue recognition for these payments until certain milestones are met as per the terms of the Agreements. In addition, the Company sold its luxury suite at the Raiders Stadium and amortizes the income from this sale at each home game. These payments represent contract liabilities and are recorded as such on the balance sheet. As of September 30, 2022 and December 31, 2021, the Company had $1,360,000 and $1,404,444 contract liabilities, respectively.
Non- Controlling Interest
The Company’s non-controlling interest represents the minority shareholder’s ownership interest related to the Company’s subsidiary, Alternative Hospitality, Inc. The Company reports its non-controlling interest in subsidiaries as a separate component of equity in the Consolidated Balance Sheets and reports both net loss attributable to the non-controlling interest and net loss attributable to the Company’s common shareholders on the face of the Consolidated Statements of Operations. The Company’s equity interest in Alternative Hospitality, Inc. is 51% and the non-controlling stockholder’s interest is 49%. This is reflected in the Consolidated Statements of Equity.
| 8 |
MJ HOLDINGS, INC. and SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
Note 2 — Summary of Significant Accounting Policies (continued)
Revenue Recognition
On January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606 – Revenue from Contracts with Customers using the modified retrospective method. There was no impact upon adoption of ASC 606 on our consolidated financial statements. The new revenue standard was applied prospectively in the Company’s consolidated financial statements from January 1, 2018 forward and 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.
Generally, the Company considers all revenues as arising from contracts with customers. Revenue is recognized based on the five-step process outlined in the Accounting Standards Codification (“ASC”) 606:
Step 1 – Identify the Contract with the Customer – A contract exists when (a) the parties to the contract have approved the contract and are committed to perform their respective obligations, (b) the entity can identify each party’s rights regarding the goods or services to be transferred, (c) the entity can identify the payment terms for the goods or services to be transferred, (d) the contract has commercial substance and it is probably that the entity will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.
Step 2 – Identify Performance Obligations in the Contract – Upon execution of a contract, the Company identifies as performance obligations each promise to transfer to the customer either (a) goods or services that are distinct, or (b) a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer. To the extent a contract includes multiple promised goods or services, the Company must apply judgement to determine whether the goods or services are capable of being distinct within the context of the contract. If these criteria are not met, the goods or services are accounted for as a combined performance obligation.
Step 3 – Determine the Transaction Price – When (or as) a performance obligation is satisfied, the Company shall recognize as revenue the amount of the transaction price that is allocated to the performance obligation. The contract terms are used to determine the transaction price. Generally, all contracts include fixed consideration. If a contract did include variable consideration, the Company would determine the amount of variable consideration that should be included in the transaction price based on expected value method. Variable consideration would be included in the transaction price, if in the Company’s judgement, it is probable that a significant future reversal of cumulative revenue under the contract would not occur.
Step 4 – Allocate the Transaction Price – After the transaction price has been determined, the next step is to allocate the transaction price to each performance obligation in the contract. If the contract only has one performance obligation, the entire transaction price will be applied to that obligation. If the contract has multiple performance obligations, the transaction price is allocated to the performance obligations based on the relative standalone selling price (SSP) at contract inception.
Step 5 – Satisfaction of the Performance Obligations (and Recognize Revenue) – Revenue is recognized when (or as) goods or services are transferred to a customer. The Company satisfies each of its performance obligations by transferring control of the promised good or service underlying that performance obligation to the customer. Control is the ability to direct the use of and obtain substantially all of the remaining benefits from an asset. It includes the ability to prevent other entities from directing the use of and obtaining the benefits from an asset. Indicators that control has passed to the customer include: a present obligation to pay; physical possession of the asset; legal title; risks and rewards of ownership; and acceptance of the asset(s). Performance obligations can be satisfied at a point in time or overtime.
| 9 |
MJ HOLDINGS, INC. and SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
Note 2 — Summary of Significant Accounting Policies (continued)
For the nine months ended September 30, 2022, the majority of the Company’s revenue was derived from its newly acquired subsidiary, MJH Research, Inc. The Company’s remaining revenue is derived from its rental property in Nye County, Nevada. Rental revenue for operating leases is recognized on a straight-line basis over the term of the lease. Rental revenue recognition commences when the leased space is available for use by the lessee.
For the nine months ended September 30, 2021, the majority of the Company’s revenue was derived under the agreements, Consulting Agreement and Equipment Lease Agreement, entered into with Acres Cultivation, LLC. Revenue derived from consulting services fees are recognized over the term of the arrangement as services are provided. Revenue is presented net of discounts, fees and other related taxes. Revenue derived from equipment leases is recognized when the lease agreement is entered into and control of the equipment has passed to the customer. The Company’s remaining revenue is derived from its rental property in Nye County, Nevada.
| For the nine months ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenues: | ||||||||
| Rental income (i) | $ | 111,987 | $ | 59,749 | ||||
| Management income from MJH Research, Inc. (ii) | 661,475 | |||||||
| Management income from Acres Cultivation (iii) | 341,398 | |||||||
| Equipment lease income (iii) | 134,814 | |||||||
| Total | $ | 773,462 | $ | 535,961 | ||||
| (i) | The rental income is from the Company’s THC Park. | |
| (ii) | On July 11, 2022, the Company purchased MJH Research, Inc. (“MJH”) through a stock exchange agreement. MJH is a Florida corporation whose operations center around providing consulting services for growing techniques, management and cultivation of crops, as well as licensing support, production and asset and infrastructure development. | |
| (iii) | 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 will not generate any further revenue under the Acres relationship. |
The Company’s share-based payment awards principally consist of grants of common stock. In accordance with the applicable accounting guidance, stock-based payment awards are classified as either equity or liabilities. For equity-classified awards, the Company measures compensation cost based on the grant date fair value and recognizes compensation expense in the consolidated statements of operations over the requisite service or performance period the award is expected to vest. The fair value of liability-classified awards is at each reporting date through the settlement date. Change in fair value during the requisite service period will be remeasured as compensation cost over that period.
The Company utilizes its historical stock price to determine the volatility of any stock-based compensation.
The expected dividend yield is % as the Company has not paid any dividends on its common stock and does not anticipate it will pay any dividends in the foreseeable future.
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant date with a term equal to the expected term of the stock-based award.
For stock-based financial instruments issued to parties other than employees, the Company uses the contractual term of the financial instruments as the expected term of the stock-based financial instruments.
The assumptions used in calculating the fair value of stock-based financial instruments represent its best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and it uses different assumptions, its stock-based compensation expense could be materially different in the future.
| 10 |
MJ HOLDINGS, INC. and SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
Note 2 — Summary of Significant Accounting Policies (continued)
Operating Leases
The Company adopted ASC Topic 842, Leases, on January 1, 2019. The new leasing standard requires recognition of leases on the consolidated balance sheets as right-of-use (“ROU”) assets and lease liabilities. ROU assets represent the Company’s right to use underlying assets for the lease terms and lease liabilities represent the Company’s obligation to make lease payments arising from the leases. Operating lease ROU assets and operating lease liabilities are recognized based on the present value and future minimum lease payments over the lease term at commencement date. As the Company’s leases do not provide an implicit rate, the Company used its estimated incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. A number of the lease agreements contain options to renew and options to terminate the leases early. The lease term used to calculate ROU assets and lease liabilities only includes renewal and termination options that are deemed reasonably certain to be exercised.
The Company recognized lease liabilities, with corresponding ROU assets, based on the present value of unpaid lease payments for existing operating leases longer than twelve months. The ROU assets were adjusted per ASC 842 transition guidance for existing lease-related balances of accrued and prepaid rent, and unamortized lease incentives provided by lessors. Operating lease cost is recognized as a single lease cost on a straight-line basis over the lease term and is recorded in selling, general and administrative expenses. Variable lease payments for common area maintenance, property taxes and other operating expenses are recognized as expense in the period when the changes in facts and circumstances on which the variable lease payments are based occur. The Company has elected not to separate lease and non-lease components for all property leases for the purposes of calculating ROU assets and lease liabilities.
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.
Recent Accounting Pronouncements
Stock Based Compensation: In June 2018, FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share Based Payment Accounting.
The amendments in this Update expand the scope of stock compensation to include share-based payment transactions for acquiring goods and services from nonemployees. The guidance in this Update does not apply to transactions involving equity instruments granted to a lender or investor that provides financing to the issuer. The guidance is effective for fiscal years beginning after December 31, 2018 including interim periods within the fiscal year. The Company adopted with an effective date of January 1, 2019.
| 11 |
MJ HOLDINGS, INC. and SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
Note 3 — Going Concern
The Company has recurring net losses, which have resulted in an accumulated deficit of $19,812,798 as of September 30, 2022. The Company had negative cash flows from operations of $3,048,875 for the nine months ended September 30, 2022. These factors raise substantial doubt about the Company’s ability to continue as a going concern for one year from the issuance of the financial statements. The ability of the Company to continue as a going concern is dependent on the Company’s ability to further implement its business plan, raise capital, and generate revenues. The Financial Statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
The Company’s current capital resources include cash. Historically, the Company has financed its operations principally through equity and debt financing.
Note 4 — Inventory
Inventory at September 30, 2022 and December 31, 2021 consisted of the following:
September 30, 2022 | December 31, 2021 | |||||||
| Inventory – finished goods (i) | $ | 1,271,402 | $ | 1,271,402 | ||||
| Storage inventory (ii)(iii) | 498,675 | 498,675 | ||||||
| Less reserve | (1,770,077 | ) | (1,770,077 | ) | ||||
| Inventory, net | $ | $ | ||||||
| (i) | 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. As part of the termination, the Company was granted the right to retain 3,654 lbs. of cannabis from the Cultivation Facility. |
| (ii) | On April 14, 2021, the Company entered into a storage work order with TapRoot Labs (“TapRoot”). Under the terms of the work order, the Company stored 1827 lbs. of fresh frozen flower (“Product”) with TapRoot at a rate of $6,000/ month. Rent was payable through Product stored with TapRoot at the rate of $175/lb. The work order had a term of 5 months and then continued on a month-to-month basis upon the same terms. At September 30, 2022, the Company had 979.41 lbs. stored with TapRoot. The Company has elected to reserve the full amount of Product stored with TapRoot as it does not anticipate any future sales will be made. |
| (iii) | On April 13, 2021, the Company entered into a Storage & Purchase Agreement (the “Agreement”) with AP Management, LLC (“AP”). Under the terms of the Agreement, the Company stored 1827 lbs. of fresh frozen flower (“Product”) with AP. AP was granted the exclusive right to purchase the Product at a rate of $175/lb for the first 30 days of storage. After 30 days, the Company had the right to make sales to third parties. At September 30, 2022, the Company had 1827 lbs. stored with AP. The Company has elected to reserve the full amount of Product stored with AP as it does not anticipate any future sales will be made. Please see Item 1. Legal Proceedings for further information. |
| 12 |
MJ HOLDINGS, INC. and SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
Note 5 — Note Receivable
Note receivable at September 30, 2022 and December 31, 2021 consisted of the following:
| September 30, 2022 | December 31, 2021 | |||||||
| Note receivable- GeneRx (i) | $ | 500,000 | $ | 500,000 | ||||
| Total | $ | 500,000 | $ | 500,000 | ||||
| i. | On March 12, 2021, the Company (the “Holder”) was issued a Convertible Promissory Note (the “Note”) by GeneRx (the “Borrower”), a Delaware corporation, in the amount of $300,000. The Note has a term of one year (March 12, 2022 Maturity Date) and accrues interest at two percent (2%) per annum. The Note is convertible, at the option of the Holder, into shares of common stock of the Borrower at a fixed conversion price of $1.00 per share. Upon an Event of Default, the Conversion Price shall equal the Alternate Conversion Price (as defined herein) (subject to equitable adjustments for stock splits, stock dividends or rights offerings by the Borrower relating to the Borrower’s securities or the securities of any subsidiary of the Borrower, combinations, recapitalization, reclassifications, extraordinary distributions and similar events). The “Alternate Conversion Price” shall equal the lesser of (i) 80% multiplied by the average of the three lowest daily volume weighted average prices (“VWAP”) during the previous twenty (20) Trading Days (as defined below) before the Issue Date of this Note (representing a discount rate of 20%) or (ii) 80% multiplied by the Market Price (as defined herein) (representing a discount rate of 20%). “Market Price” means the average of the three lowest daily VWAPs for the Common Stock during the twenty (20) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. Any amount of principal or interest on this Note which is not paid when due shall bear interest at the rate of twenty-four percent (24%) per annum from the due date thereof until the same is paid (the “Default Interest”). The Company funded $300,000 on March 15, 2021, $150,000 on April 2, 2021 and $50,000 on April 7, 2021. As of September 30, 2022, $500,000 principal was due on the Note. The Note is currently in default. | |
| ii. | The convertible note receivable is considered available for sale debt securities with a private company that is not traded in active markets. Since observable price quotations were not available at acquisition, fair value was estimated based on cost less an appropriate discount upon acquisition. The discount of each instrument is accreted into interest income over the respective term as shown within the Company’s Condensed Consolidated Statements of Operations. |
Note 6 — Acquisition of MJH Research, Inc.
On July 8, 2022, MJ Holdings, Inc. (the “Buyer”) entered into a Common Stock Purchase Agreement (the “Agreement”) with MJH Research, Inc. (the “Company”), a Florida corporation, and Sunstate Futures, LLC (the “Seller”), a Florida limited liability company. Under the terms of the Agreement, the Seller agreed to sale all issued and outstanding shares of common stock ( shares) (the “Common Stock”) of the Company to the Buyer. In consideration of the purchase of the shares of Common Stock, the Buyer agreed to issue the Seller seven million () shares of its common stock. The acquisition is a provisional estimate and is being further evaluated. The transaction closed on July 11, 2022.
Details regarding the book values and fair values of the net assets acquired are as follows:
| Book Value | Fair Value | Difference | ||||||||||
| Cash | $ | 504,685 | $ | 504,685 | $ | |||||||
| Total | $ | 504,685 | $ | 504,685 | $ | |||||||
Goodwill and Intangibles
Goodwill is recorded when the cost of acquired businesses exceeds the fair value of the identifiable net assets acquired. Intangible assets other than goodwill are recorded at fair value at the time acquired or at cost, if applicable. Intangible assets that do not have indefinite lives are amortized in line with the pattern in which the economic benefits of the intangible asset are consumed. If the pattern of economic benefit cannot be reliably determined, the intangible assets are amortized on a straight-line basis over the shorter of the legal or estimated life. Goodwill and indefinite-lived intangibles assets are not amortized but are tested for impairment in the fourth quarter using the same dates each year or more frequently if changes in circumstances or the occurrence of events indicate potential impairment.
In performing the annual impairment test, the fair value of each indefinite-lived intangible asset is compared to its carrying value and an impairment charge is recorded if the carrying value exceeds the fair value. For goodwill, the Company first assesses qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its’ carrying amount, and whether it is necessary to perform the quantitative goodwill impairment test. The quantitative test is required only if the Company concludes that it is more-likely-than-not that a reporting unit’s fair value is less than its’ carrying amount. For quantitative testing, the Company compares the fair value of each reporting unit with its’ carrying amount. If the carrying amount exceeds the fair value, an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit.
Fair values are determined using established business valuation techniques and models developed by the Company, estimates of market participant assumptions of future cash flows, future growth rates and discount rates to value estimated cash flows. Changes in economic and operating conditions, actual growth below the assumed market participant assumptions or an increase in the discount rate could result in an impairment charge in a future period.
Acquisitions
Upon acquisition of a business, the Company uses the income, market or cost approach (or a combination thereof) for the valuation as appropriate. The valuation inputs in these models and analyses are based on market participant assumptions. Market participants are considered to be buyers and sellers unrelated to the Company in the principal or most advantageous market for the asset or liability.
Fair value estimates are based on a series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. Management values property, plant and equipment using the cost approach supported where available by observable market data, which includes consideration of obsolescence. Management values acquired intangible assets using the relief from royalty method or excess earnings method, forms of the income approach supported by observable market data for peer companies. The significant assumptions used to estimate the value of the acquired intangible assets include discount rates and certain assumptions that form the basis of future cash flows (such as revenue growth rates, customer attrition rates, and royalty rates). Acquired inventories are marked to fair value for valuation of the total purchase price. For certain items, the carrying value is determined to be a reasonable approximation of fair value based on information available to the Company.
| Assets acquired | As of July 11, 2022 | |||
| Cash | $ | 504,685 | ||
| Goodwill (i) | 1,451,815 | |||
| Total purchase price | $ | 1,956,500 | ||
| (i) | Goodwill is recorded when the cost of acquired businesses exceeds the fair value of the identifiable net assets acquired. |
The changes in the carrying amount of goodwill for the period from July 11, 2022 through September 30, 2022 were as follows:
| Balance as of July 11, 2022 | $ | 1,451,815 | ||
| Additions and adjustments | ||||
| Balance as of June 30, 2022 | $ | 1,451,815 |
Note 7 — Property and Equipment
Property and equipment at September 30, 2022 and December 31, 2021 consisted of the following:
| September 30, 2022 | December 31, 2021 | |||||||
| Leasehold Improvements | $ | 257,824 | $ | 654,628 | ||||
| Machinery and Equipment | 780,863 | 244,583 | ||||||
| Building and Land | 1,650,000 | 1,650,000 | ||||||
| Furniture and Fixtures | 561,350 | 566,220 | ||||||
| Total property and equipment | 3,250,037 | 3,115,431 | ||||||
| Less: Accumulated depreciation | (706,774 | ) | (536,500 | ) | ||||
| Property and equipment, net | $ | 2,543,263 | $ | 2,578,931 | ||||
Depreciation expense for the nine months ended September 30, 2022 and 2021 was $173,110 and $286,038, respectively.
| 13 |
MJ HOLDINGS, INC. and SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
Note 8 — Intangible Assets
In October 2016, Red Earth, LLC (“Red Earth”), a Nevada limited liability company, entered into an Asset Purchase and Sale Agreement with the owner of a provisional Medical Marijuana Establishment Registration Certificate (the “Provisional Grow License”) issued by the state of Nevada for the cultivation of medical marijuana for $300,000. To initiate the purchase and transfer the Provisional Grow License, the Company paid a $25,000 deposit to the seller in October 2016.
The Provisional Grow License remains in a provisional status until the Company has completed the buildout of a cultivation facility and obtained approval from the state of Nevada to begin cultivation in the approved facility. Once approval from the state of Nevada is received, the Company begins the cultivation process.
On December 15, 2017, the Company acquired 100% of the outstanding membership interests of Red Earth for 52,732,969 shares of common stock of the Company, par value $ and a Promissory Note in the amount of $900,000. Red Earth became a wholly owned subsidiary (the “Subsidiary”) of the Company.
On or about May 7, 2021, 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.
On July 27, 2021, the Subsidiary entered into a Stipulation and Order for 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 August 31, 2021, a plan pursuant to which the ownership 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 $10,000, which was paid on July 29, 2021.
On August 1, 2021, the Company entered into a Memorandum of Understanding and Agreement for Technical Services and Short-Term Funding (the “Agreement”) with Red Earth, LLC (hereinafter, “Red Earth”), an entity controlled by its Chief Cultivation Officer, Paris Balaouras. Under the terms of the Agreement, the 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 $5,000 to $7,500 per month. As of September 30, 2022, the amount due the Company under the short-term loan is $182,469 and the amount of technical services income (other income) recorded for the nine months ended September 30, 2022 was $70,000.
On August 26, 2021, the Company and the Company’s Chief Cultivation Officer and previous owner of the Subsidiary, 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 the Subsidiary was terminated as of the date of the Termination Agreement resulting in the return of ownership of the Subsidiary to Mr. Balaouras. Neither party shall have any further obligation to one another pursuant to the terms of the Purchase Agreement. Please see Note 14 — Related Party Transactions for further information.
On September 2, 2021, the Company received approval of the Termination Agreement from the CCB.
Note 9 — Deposits
Deposits as of September 30, 2022 and December 31, 2021 consist of the following:
September 30, 2022 | December 31, 2021 | |||||||
| MJ Distributing, Inc. (i) | $ | 1,016,184 | $ | 1,016,184 | ||||
| Total | $ | 1,016,184 | $ | 1,016,184 | ||||
| (i) | 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 agreed 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 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. |
| 14 |
MJ HOLDINGS, INC. and SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
Note 10 — Notes Payable
Notes payable as of September 30, 2022 and December 31, 2021 consist of the following:
| (i) | On January 17, 2019, the Company executed a promissory note for $750,000 with FR Holdings LLC (the “Holder”), a Wyoming limited liability company. The Noted Secured by Deed of Trust (the “Secured Note”) accrues interest at 5.0% per annum, payable in regular monthly installments of $3,125, due on or before the same day of each month beginning February 1, 2019 until January 31, 2022 at which the entire principal and any then accrued interest thereon shall be due and payable. As of December 31, 2021, $750,000 principal and $0 interest remain due. On February 4, 2022, the Company entered into a Note Modification Agreement (the “Agreement”) with the Holder amending the terms of the Secured Note. The Parties agree that the maturity date of the Secured Note being January 31, 2022, had passed and that the balance of the Secured Note is now due (currently Seven-Hundred and Fifty-Thousand Dollars ($750,000.00), and the parties also agree that the conditions in the Secured Note requiring the assessment of the additional Five-Hundred Thousand Dollars ($500,000.00) consulting fee was triggered bringing the total amount owed by the Company under the terms of the Secured Note to One-Million Two-Hundred Fifty-Thousand Dollars ($1,250,000.00). Under the terms of the Agreement, the Company made a payment in the amount of $357,342.88 bringing the new principal balance to $900,000. The interest rate shall be 7% per annum. Future payments shall be calculated on a 20-year amortization with a balloon payment in three years. The first monthly payment of $6,977.69 was made on March 25, 2022 with the final balloon payment due on February 1, 2025. As of September 30, 2022, $885,893 principal remains due. | |
| (ii) | On April 1, 2019, the Company executed a promissory note for $250,000 with John T. Jacobs and Teresa D. Jacobs. The note accrues interest at 6.5% per annum, payable in regular monthly installments of $2,178, due on or before the same day of each month beginning May 1, 2019 until March 31, 2020 at which time a principal reduction of $50,000 shall be due, the payments shall be re-amortized (15-year amortization). On or before March 31, 2021, a second principal reduction of $50,000 shall be due, the payments shall be re-amortized (15-year amortization). Payments shall continue to be paid until March 31, 2022, at which time the entire sum of principal and accrued interest shall be due and payable. As of September 30, 2022, $110,117 principal remains due. |
| Amount | ||||
| Fiscal year ending December 31: | ||||
| 2022 (excluding the nine months ended September 30, 2022) | $ | 996,010 | ||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| Total minimum loan payments | $ | 996,010 | ||
| 15 |
MJ HOLDINGS, INC. and SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
Note 11 — Commitments and Contingencies
Employment Agreements
On September 1, 2020, the Company entered into an Employment Agreement (the “Agreement”) with Paris Balaouras (the “Employee”). Under the terms of the Agreement, the Employee shall serve as the Company’s Chief Cultivation Officer for a term of three (3) years (the “Term”) commencing on September 15, 2020. The Employee shall receive a base salary of $105,000 annually, shall be eligible to receive an annual discretionary bonus during the Term, based on performance criteria determined by the board of directors of the Company in its sole discretion, in amount equal to up to 100% of Employee’s base salary for the then current fiscal year, shall be eligible to receive an annual discretionary stock grant during the Term which shall be vested in equal increments of 1/3rd each over a three year period beginning on the first anniversary of employment, shall be eligible to receive a compensatory stock grant of 667,000 shares for and in consideration of past compensation ($224,000 at September 15, 2020) foregone by Employee; such grant exercisable at Employee’s option as such time as Employer is profitable at the NOI level on a trailing twelve (12) month basis or upon other commercial reasonable terms as the Board may determine and shall be awarded options to purchase shares of the Company’s common stock, exercisable at a price of $per share. Effective upon the resignation of Mr. Bloss as the Company’s Chief Executive Officer, Mr. Balaouras assumed the role of Interim Chief Executive Officer.
On September 1, 2020, the Company entered into an Employment Agreement (the “Agreement”) with Roger Bloss. Under the terms of the Agreement, the Employee shall serve as the Company’s Interim Chief Executive Officer for a term of six (6) months and the Chief Executive Officer and for an additional two (2) years and six (6) months as the Chief Executive Officer for a total of three (3) years (the “Term”) commencing on September 15, 2020. The Employee shall receive a base salary of $105,000 annually, shall be eligible to receive an annual discretionary bonus during the Term, based on performance criteria determined by the board of directors of the Company in its sole discretion, in amount equal to up to 100% of Employee’s base salary for the then current fiscal year, shall be eligible to receive an annual discretionary stock grant during the Term which shall be vested in equal increments of 1/3rd each over a three year period beginning on the first anniversary of employment and shall be awarded options to purchase shares of the Company’s common stock, exercisable at a price of $ per share. On September 24, 2022, Mr. Bloss submitted his resignation as the Company’s Chief Executive Officer and Director effective as of September 24, 2022. On September 24, 2022, the Company and Mr. Bloss entered into a Settlement and Mutual Release, whereby Mr. Bloss would receive $ as compensation upon his resignation and the Company’s 51% equity interest in Alternative Hospitality, Inc. As of September 30, 2022, the Company had not paid Mr. Bloss the $ in compensation nor had it transferred its equity interest in Alternative Hospitality, Inc.
On September 1, 2020, the Company entered into an Employment Agreement (the “Agreement”) with Bernard Moyle. Under the terms of the Agreement, the Employee shall serve as the Company’s Secretary/Treasurer for a term of three (3) years (the “Term”) commencing on September 15, 2020. The Employee shall receive a base salary of $60,000 annually, shall be eligible to receive an annual discretionary bonus during the Term, based on performance criteria determined by the board of directors of the Company in its sole discretion, in amount equal to up to 200% of Employee’s base salary for the then current fiscal year, shall, at commencement of the Term receive a grant of stock of 500,000 shares and shall be eligible to receive an annual discretionary stock grant during the Term which shall be vested in equal increments of 1/3rd each over a three year period beginning on the first anniversary of employment and shall be awarded options to purchase shares of the Company’s common stock, exercisable at a price of $ per share. On March 16, 2021, Mr. Moyle assumed the role of interim Chief Financial Officer upon the resignation of Mr. Kelly. The terms of Mr. Moyle’s Agreement did not change. On September 12, 2022, Mr. Moyle submitted his resignation effective as of September 9, 2022.
Board of Directors Services Agreements
On September 15, 2020, the Company entered into a Board of Directors Services Agreement (the “Agreement”) with Messrs. Bloss, Dear and Balaouras (collectively, the “Directors”). Under the terms of the Agreement, each of the Directors shall provide services to the Company as a member of the Board of Directors for a period of not less than one year. Each of the Directors shall receive compensation as follows: (i) Fifteen Thousand and no/100 dollars ($15,000.00), paid in four (4) equal installments on the last calendar day of each quarter, and (ii) Fifteen Thousand () shares of the Company’s common stock on the last calendar day of each quarter. The Agreement for each of the Directors is effective as of October 1, 2020.
On March 26, 2021, the Company’s Board of Directors elected to revise the terms of the Board of Directors Services Agreement for each director. Section 2 (Compensation) was revised such that the directors’ cash compensation was revised to stock compensation in the following manner: $3,750 divided by the closing stock price on the last business day of each quarter multiplied by 1.10. The remainder of Section 2 is unchanged.
On September 30, 2021, the Company’s Board of Directors elected to revise Section 2 (Compensation) of the Agreement back to the original terms. Each of the Directors shall receive compensation as follows: (i) Fifteen Thousand and no/100 dollars ($15,000.00), paid in four (4) equal installments on the last calendar day of each quarter, and (ii) Fifteen Thousand () shares of the Company’s common stock on the last calendar day of each quarter. The revision became effective on September 30, 2021.
On October 17, 2022, the Company’s Board of Directors elected to revise Section 2 (Compensation) of the Agreement such that each Director shall receive $1,500 of cash compensation per quarter and no shares of the Company’s common stock.
On September 22, 2022, David Dear submitted his resignation as a director effective as of September 22, 2022.
On October 26, 2022, the Company’s Board of Directors appointed two new directors, Tom Valensuela and Timothy Luff, effective as of October 26, 2022.
On October 27, 2022, the Company changed the composition of its Compensation Committee to include Messrs. Valensuela, Luff, Balaouras and Radcliffe. Mr. Balaouras will serve as the committee’s Chairman.
Please see Note 16 — Subsequent Events for further information.
| 16 |
MJ HOLDINGS, INC. and SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
Note 11 — Commitments and Contingencies (continued)
Operating Leases
The Company leases a two production / warehouse facility under a non-cancelable operating lease that expires in June 2027 and September 2029, respectively.
As of September 30, 2022, the Company recorded operating lease liabilities of $769,684 and right of use assets for operating leases of $0. During the nine months ended September 30, 2021, operating cash outflows relating to operating lease liabilities was $0. As of September 30, 2022, the Company’s operating leases had a weighted-average remaining term of 3.6 years.
Rent expense, incurred pursuant to operating leases for the nine months ended September 30, 2022 and 2021, was $144,000 and $203,242, respectively.
Litigation
From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. When the Company is aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, the Company will record a liability for the loss. In addition to the estimated loss, the liability includes probable and estimable legal cost associated with the claim or potential claim. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm the Company business.
MJ Holdings, Inc. Complaint
On December 14, 2021, MJ Holdings, Inc. (the “Plaintiff”) filed a Complaint against NCMM, LLC, AP Management, LLC and Valerie Small (collectively, the “Defendants”)( together, the “Parties”). In the Complaint, the Plaintiff alleges that the Defendants have refused to return the cannabis that was being stored for Plaintiff under a Storage and Purchase Agreement entered into with AP Management. By failing to return the cannabis to Plaintiff, or Plaintiff’s designee, the Defendants have deprived Plaintiff of the ability to sell, transfer or market the product. In addition, the Defendants have sought to unlawfully extort the Plaintiff for illicit payments of thousands of dollars in money and/or cannabis in exchange for returning the cannabis. The Parties are in active discussions to settle the dispute.
Gappy and Shaba Compliant
On December 3, 2021, a Complaint was filed against MJ Holdings, Inc., HDGLV, LLC, Red Earth, LLC (collectively, the “Defendants”) by Ziad Gappy and David Shaba (collectively, the “Plaintiffs”). In the Complaint, the Plaintiffs allege the Defendants made misleading statements and/or omissions relating to the Company in the Plaintiffs’ negotiation to purchase shares of MJ Holdings, Inc. In addition, the Plaintiffs allege that the Defendants have not honored the 2018 Agreements negotiated between the Plaintiffs and Defendants and that MJ Holdings, Inc. has failed to issue an additional $125,000 in stock due to the Plaintiffs as was agreed to in writing and the Defendants have failed to start the Western Project.
DGMD Complaint
On March 19, 2021, a Complaint was filed against the Company, Jim Mueller, John Mueller, MachNV, LLC, Acres Cultivation, Paris Balaouras, Dimitri Deslis, ATG Holdings, LLC and Curaleaf, Inc. (collectively, the “Defendants”) by DGMD Real Estate Investments, LLC, ARMPRO, LLC, Zhang Springs LV, LLC, Prodigy Holdings, LLC and Green Organics, LLC (collectively, the “Plaintiffs”) in the District Court of Clark County, Nevada.
In the Complaint, the Plaintiffs allege that the Defendants: (i) intended to fraudulently obtain money from the Plaintiffs in order to put that money towards the Acres dispensary and to make Acres look more appealing to potential buyers as well as pay off Defendants’ agents, and (ii) the Defendants acted together in order to find investors to invest money into the Acres and MJ Holdings “Investment Schemes”, and (iii) the Defendants intended to fraudulently obtain Plaintiffs’ money for the purpose of harming the Plaintiffs to benefit the Defendants, and (iv) the Defendants committed unlawful fraudulent misrepresentation in the furtherance of the agreement to defraud the Plaintiffs. The Plaintiffs allege that damages are in excess of $15,000.
As the complaint pleads only the statutory minimum of damages, the Company is unable to estimate the potential exposure, if any, resulting from this matter but believes it is without merit as to liability and otherwise deminimis as to damages. Thus, the Company does not expect this matter to have a material effect on the Company’s consolidated financial position or its results of operations. The Company will vigorously defend itself against this action and has filed an appropriate and timely answer to the Complaint including a lengthy and comprehensive series of affirmative defenses and liability and damage avoidances. As of the date of this filing, discovery has commenced and written discovery has been exchanged between the parties.
Tierney Arbitration
On March 9, 2021, Terrence Tierney (“Claimant”), the Company’s former President and Secretary, who was terminated by the Company for Cause on August 7, 2020, filed for arbitration with the American Arbitration Association for: (i) breach of contract, (i) breach of the implied covenant of good faith and fair dealing, and (iii) NRS 608 wage claim. Mr. Tierney demanded payment in the amount of $501,085 for unpaid base pay and unpaid deferred business compensation (which was not earned nor due), expenses paid on behalf of the Company, accrued vacation and severance pay. On April 7, 2021, the Company made payment of unpaid base pay against the wage claim in the amount of $62,392, inclusive of $59,583 for wages and $2,854 for accrued vacation plus $8,307.60 for statutory penalties. As such, the Company posits that any compensation claims that Claimant may have had have been paid in full and that the Company otherwise has no liability. The Company filed a counterclaim in the action declaring that Tierney breached the contract of employment, committed fraud, malfeasance and other nefarious acts causing substantial damage to the Company with estimated monetary damages well in excess of any monetary claim made by Tierney. On May 4, 2022, the Arbitrator issued a ruling concluding that the Arbitrator did not have jurisdiction over Claimant’s statutory wage claim under NRS 608. On September 19, 2022, Claimant filed a complaint in state court seeking compensation under NRS 608.020. The Company asserts that the 2-year statute of limitations bars Claimant’s complaint, and further asserts that Claimant has been paid in full pursuant to the payments issued to Claimant on April 7, 2021. The arbitration is currently scheduled to take place in January 2023.
| 17 |
MJ HOLDINGS, INC. and SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
Note 12 — Stockholders’ Equity (Deficit)
General
The Company is currently authorized to issue up to shares of Common Stock and shares of preferred stock, par value $ per share.
Common Stock
Of the shares of Common Stock authorized by the Company’s Articles of Incorporation, shares of Common Stock are issued and outstanding as of September 30, 2022. Each holder of Common Stock is entitled to one vote per share on all matters to be voted upon by the stockholders and are not entitled to cumulative voting for the election of directors. Holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the board of directors out of funds legally available therefor subject to the rights of preferred stockholders. The Company has not paid any dividends and does not intend to pay any cash dividends to the holders of Common Stock in the foreseeable future. The Company anticipates reinvesting its earnings, if any, for use in the development of its business. In the event of liquidation, dissolution, or winding up of the Company, the holders of Common Stock are entitled, unless otherwise provided by law or the Company’s Articles of Incorporation, including any certificate of designations for a series of preferred stock, to share ratably in all assets remaining after payment of liabilities and the preferences of preferred stockholders. Holders of the Company’s Common Stock do not have preemptive, conversion, or other subscription rights. There are no redemptions or sinking fund provisions applicable to the Company’s Common Stock.
Common Stock Issuances
For the nine months ended September 30, 2022, the Company issued and/or sold the following unregistered securities:
On July 8, 2022, the Company issued shares of common stock as per the terms of the Common Stock Purchase Agreement for the purchase of MJH Research, Inc.
On July 15, 2022, the Company issued a total of shares of common stock with a fair market value of $13,072 to three directors for services rendered during the first quarter of 2022.
On August 2, 2022, the Company issued a total of shares of common stock with a fair market value of $12,128 to three directors for services rendered during the second quarter of 2022.
| 18 |
MJ HOLDINGS, INC. and SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
Note 12 — Stockholders’ Equity (Deficit) (continued)
At September 30, 2022 and December 31, 2021, there are and shares of Common Stock issued and outstanding, respectively.
Preferred Stock
The Board is authorized, without further approval from our stockholders, to create one or more series of preferred stock, and to designate the rights, privileges, preferences, restrictions, and limitations of any given series of preferred stock. Accordingly, the Board may, without stockholder approval, issue shares of preferred stock with dividend, liquidation, conversion, voting, or other rights that could adversely affect the voting power or other rights of the holders of Common Stock. The issuance of preferred stock could have the effect of restricting dividends payable to holders of our Common Stock, diluting the voting power of our Common Stock, impairing the liquidation rights of our Common Stock, or delaying or preventing a change in control of us, all without further action by our stockholders. Of the shares of preferred stock, par value $ per share, authorized in our Articles of Incorporation, shares are designated as Series A Convertible Preferred Stock.
Series A Convertible Preferred Stock
Each share of Series A Preferred Stock is convertible, at the option of the holder, into that number of shares of Common Stock determined by dividing the stated value of each share of Series A Preferred Stock (currently, $) by the conversion price (currently, $0.75). The stated value and the conversion price are subject to adjustment as provided for in the Certificate of Designation. We are prohibited from effecting a conversion of the Series A Preferred Stock to the extent that, after giving effect to the conversion, the holder (together with such holder’s affiliates and any persons acting as a group with holder or any of such holder’s affiliates) would beneficially own in excess of 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion. A holder, upon notice to us, may increase or decrease this beneficial ownership limitation; provided, that, in no event can the holder increase the beneficial ownership limitation in excess of 9.99% of the number of shares of Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon the conversion of the Series A Preferred Stock then held by holder. Such increase of the beneficial ownership limitation cannot be effective until the 61st day after such notice is given to us and shall apply only to such holder. The Series A Preferred Stock has no voting rights; however, as long as any shares of Series A Preferred Stock are outstanding, we are not permitted, without the affirmative vote of the holders of a majority of the then outstanding shares of the Series A Preferred Stock to (i) alter or change adversely the powers, preferences, or rights given to the Series A Preferred Stock or alter or amend the Series A Preferred Stock Certificate of Designation, (ii) amend our Articles of Incorporation or other charter documents in any manner that adversely affects any rights of the holders, (iii) increase the number of authorized shares of Series A Preferred Stock, or (iv) enter into any agreement with respect to any of the forgoing.
| 19 |
MJ HOLDINGS, INC. and SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
Note 12 — Stockholders’ Equity (Deficit) (continued)
Preferred Stock Issuances
For the nine months ended September 30, 2022
None
At September 30, 2022 and December 31, 2021, there were and shares of Series A Preferred Stock issued and outstanding, respectively.
Basic earnings (loss) per share is computed by dividing the net income or net loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is calculated using the treasury stock method and reflects the potential dilution that could occur if warrants were exercised and were not anti-dilutive.
For the nine months ended September 30, 2022, basic and diluted loss per common share were the same since there were no potentially dilutive shares outstanding during the respective periods. The outstanding options as of September 30, 2022, to purchase shares of common stock were not included in the calculations of diluted loss per share because the impact would have been anti-dilutive.
For the nine months ended September 30, 2022, basic and diluted income per common share were based on and shares, respectively.
Warrants and Options
A summary of the warrants and options issued, exercised and expired are below:
Stock Options
On September 15, 2020, the Company issued an option to purchase shares of common stock to each of Messrs. Balaouras, Bloss and Moyle as per the terms of their employment agreements. The options have an exercise price of $ and expire on the three-year anniversary date.
| Options: | Shares | Weighted Avg. Exercise Price | Remaining Contractual Life in Years | |||||||||
| Balance at December 31, 2021 | 1,500,000 | $ | 0.75 | |||||||||
| Issued | - | |||||||||||
| Exercised | - | |||||||||||
| Expired | - | |||||||||||
| Balance at September 30, 2022 | 1,500,000 | $ | 0.75 | |||||||||
| Exercisable at September 30, 2022 | 1,500,000 | $ | 0.75 | |||||||||
Options outstanding as of September 30, 2022 and December 31, 2021 were and , respectively.
Warrants
On January 11, 2021, the Company issued an accredited investor a Common Stock Purchase Warrant Agreement in conjunction with the July 2020 Securities Purchase Agreement granting the holder the right to purchase up to 250,000 shares of the Company’s common stock at an exercise price of $0.10 for a term of 4-years.
A summary of the warrants issued, exercised and expired are below:
| Warrants: | Shares | Weighted Avg. | Remaining Life in Years | |||||||||
| Balance at December 31, 2021 | 250,000 | $ | 0.10 | |||||||||
| Issued | - | |||||||||||
| Exercised | - | |||||||||||
| Expired | - | |||||||||||
| Balance at September 30, 2022 | 250,000 | $ | 0.10 | |||||||||
Warrants outstanding as of September 30, 2022 and December 31, 2021 were 250,000 and 250,000, respectively.
| 20 |
MJ HOLDINGS, INC. and SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
Note 15 — Related Party Transactions
On August 1, 2021, the Company entered into a Memorandum of Understanding and Agreement for Technical Services and Short-Term Funding (the “Agreement”) with Red Earth, LLC (hereinafter, “Red Earth”), an entity controlled by its Chief Cultivation Officer, Paris Balaouras. Under the terms of the Agreement, the 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 $5,000 to $7,500 per month. As of September 30, 2022, the amount due the Company under the short-term loan is $182,469 and the amount of technical services income (other income) recorded for the nine months ended September 30, 2022 was $70,000.
On September 5, 2022, the Company entered into an Amendment (the “Amendment”) with Highland Brothers, LLC (together, the “Parties’) to amend the original agreement (the “Agreement”) between the Parties dated February 15, 2019. Under the terms of the Amendment, the term of the Agreement has been extended to fifteen years and the Company shall pay Highland Brothers, LLC $150,000 as cash consideration within 10 days of execution of the Amendment. The Company made the $150,000 payment on October 6, 2022.
Note 16 — Subsequent Events
The Company has evaluated events subsequent to the balance sheet through the date the financial statements were issued and noted the following events requiring disclosure:
On October 26, 2022, the Company’s board of directors appointed two new directors, Tom Valensuela and Timothy Luff, effective as of October 26, 2022.
On October 27, 2022, the Company changed the composition of its Compensation Committee to include Messrs. Valensuela, Luff, Balaouras and Radcliffe. Mr. Balaouras will serve as the committee’s Chairman.
On November 9, 2022, David Radcliffe submitted his resignation as a director effective as of November 9, 2022.
On November 10, 2022, the Company’s board of directors elected a new director, Christopher Reasonover, effective as of November 10, 2022.
Note 17 — Restatement
The Company reversed a $500,000 consulting fee expense for the three months ended March 31, 2022. The reversal of the expense decreased the Company’s Accumulated Deficit by $500,000 at March 31, 2022.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our Management’s Discussion and Analysis should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this quarterly report.
Forward-Looking Statements
This Quarterly Report contains forward-looking statements and information relating to us that are based on the beliefs of our management as well as assumptions made by, and information currently available to, our management. When used in this report, the words “believe,” “anticipate,” “expect,” “will,” “estimate,” “intend”, “plan” and similar expressions, as they relate to us or our management, are intended to identify forward-looking statements. Although we believe that the plans, objectives, expectations and prospects reflected in or suggested by our forward-looking statements are reasonable, those statements involve risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements, and we can give no assurance that our plans, objectives, expectations and prospects will be achieved. Important factors that might cause our actual results to differ materially from the results contemplated by the forward-looking statements are contained in the “Risk Factors” section of and elsewhere in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, and in our subsequent filings with the SEC, and include, among others, the following: marijuana is illegal under federal law, the marijuana industry is subject to strong competition, our business is dependent on laws pertaining to the marijuana industry, the marijuana industry is subject to government regulation, our business model depends on the availability of private funding, we will be subject to general real estate risks, if debt payments to note holder are not made we could lose our investment in our real estate properties, terms and deployment of capital. The terms “MJ Holdings, Inc.,” “MJ Holdings,” “MJ,” “we,” “us,” “our,” and the “Company” refer to MJ Holdings, Inc., individually, or as the context requires, collectively with its subsidiaries on a consolidated basis.
Company Overview
MJ Holdings, Inc. (OTCQB: MJNE) is a highly-diversified cannabis holding company providing cultivation management, asset and infrastructure development – currently concentrated in the Las Vegas market. It is the Company’s intention to 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 Las Vegas market and then use that anticipated success as a template for replicating the concept in other developing states through a combination of strategic partnerships, acquisitions and opening new operations.
Current Initiatives include:
| ● | 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-acre farm located in the Amargosa Valley of Nevada. During the 4th quarter of 2021 and 1st quarter of 2021, 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-acre farm. 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. |
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| ● | 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 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. | |
| ● | 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 agreed 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. On April 12, 2022, the CCB issued an Adult-Use Production License to MJ Distributing P133, LLC and an Adult-Use Cultivation License to MJ Distributing C202, LLC. The Company is currently awaiting its business license to be issued by Nye County, Nevada. |
MJH Research, Inc. Acquisition
On July 8, 2022, MJ Holdings, Inc. (the “Buyer”) entered into a Common Stock Purchase Agreement (the “Agreement”) with MJH Research, Inc. (the “Company”), a Florida corporation, and Sunstate Futures, LLC (the “Seller”), a Florida limited liability company. Under the terms of the Agreement, the Seller agreed to sale all issued and outstanding shares of common stock (100,000 shares) (the “Common Stock”) of the Company to the Buyer. In consideration of the purchase of the shares of Common Stock, the Buyer agreed to issue the Seller seven million (7,000,000) shares of its common stock. The transaction closed on July 11, 2022. Net assets and liabilities of MJH Research, Inc. were approximately $500,000 and consideration on the acquisition date equated to approximately $1,956,500, most of which would be applied to intellectual property related to research of MJH Research, Inc.
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Cultivation and Sales Agreements
MKC Development Group, LLC Agreement
On January 22, 2021 (the “effective Date”), MJ Holdings, Inc. (“MJNE”) entered into a Cultivation and Sales Agreement (the “Agreement”) with MKC Development Group, LLC (the “Company”). Under the terms of the Agreement, MJNE shall retain the Company to provide oversight and management of MJNE’s cultivation and sale of products at MJNE’s Amargosa Valley, NV farm. The Agreement shall commence on the Effective Date, continue for a period of ten (10) years and automatically renew for a period of five (5) years.
As deposits, security and royalty, the Company shall pay to MJNE:
| (i) | a $600,000 non-refundable deposit upon execution of the Agreement; | |
| (ii) | a security deposit of $10,000 to be applied against the last month’s obligations and a $10,000 payment to be applied against the first month’s rent; | |
| (iii) | $10,000 on the first of each month for security and compliance; | |
| (iv) | a royalty of 10% of gross revenue less applicable taxes (hereinafter “Net Sales Revenue”) on all sales of product by the Company; and | |
| (v) | the Company shall, after the first two (2) years from execution of the Agreement, be responsible to pay to MJNE a minimum royalty of $83,000.00 per month. |
As compensation, MJNE shall pay to the Company:
| (i) | 90% of Net Sales Revenue on all sales of product by the Company under this Agreement as the Management Fee. |
The transaction closed on January 27, 2021. As of the date of this filing, the Company has made all required payments to MJNE. The Company’s business license was approved and issued by Nye County, Nevada in September 2022. The CCB has approved cultivation based on the approved management agreement between the Company and MJ Distributing, LLC. Seeds were planted in mid-September and harvest is anticipated by the end of the fourth quarter of 2022.
Natural Green, LLC Agreement
On March 26, 2021 (the “effective Date”), MJ Holdings, Inc. (“MJNE”) entered into a Cultivation and Sales Agreement (the “Agreement”) with Natural Green, LLC (the “Company”). Under the terms of the Agreement, MJNE shall retain the Company to provide oversight and management of MJNE’s cultivation and sale of products at MJNE’s Amargosa Valley, NV farm. The Agreement shall commence on the Effective Date, continue for a period of ten (10) years and automatically renew for a period of five (5) years. The Company shall be responsible for compliance, standard of care, packaging, insurance, labor matters, policies and procedures, testing, record keeping, security and marketing.
As deposits, security and royalty, the Company shall pay to MJNE:
| (i) | a $500,000 Product Royalty deposit to be applied to the first Product Royalty or Product Royalties; | |
| (ii) | a deposit of $20,000 to be applied against the first and last month’s Security and Compliance fee; | |
| (iii) | $10,000 on the first of each month for Security and Compliance; | |
| (iv) | a royalty of 10% of gross revenue less applicable taxes (hereinafter “Net Sales Revenue”) on all sales of product by the Company; and | |
| (v) | the Company shall, after the first two (2) years from execution of the Agreement, be responsible to pay to MJNE a minimum royalty of $50,000.00 per month. |
As compensation, MJNE shall pay to the Company:
| (i) | 90% of Net Sales Revenue on all sales of product by the Company under this Agreement as the Management Fee. |
On March 26, 2021, MJNE and the Company entered into an Amendment to the Agreement whereby MJNE waived the Company’s requirement to obtain liability insurance and required the Company to pay MJNE $40,000 for capital expenditures costs. The transaction closed on April 7, 2021. As of the date of this filing, the Company has made all required payments to MJNE. The Company’s business license was approved and issued by Nye County, Nevada in September 2022. The CCB has approved cultivation based on the approved management agreement between the Company and MJ Distributing, LLC. Seeds were planted in mid-September and harvest is anticipated by the end of the fourth quarter of 2022.
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Green Grow Investments Agreement
On May 7, 2021 (the “Effective Date”), MJ Holdings, Inc. (“MJNE”) entered into a Cultivation and Sales Agreement (the “Agreement”) with Green Grow Investments Corporation (the “Company”). Under the terms of the Agreement, MJNE shall retain the Company to provide oversight and management of MJNE’s cultivation and sale of products at MJNE’s Amargosa Valley, NV farm. The Agreement shall commence on the Effective Date, continue for a period of ten (10) years and automatically renew for a period of five (5) years. The Company shall be responsible for compliance, standard of care, packaging, insurance, labor matters, policies and procedures, testing, record keeping, security and marketing.
As deposits, security and royalty, the Company shall pay to MJNE:
| (i) | a $600,000 Product Royalty of which $50,000 is due upon signing, $150,000 upon MJNE obtaining the licenses from MJ Distributing, Inc. and affiliates and $200,000 for each of the first and second years’ harvests; | |
| (ii) | a deposit of $20,000 to be applied against the first and last month’s Security and Compliance fee; | |
| (iii) | $10,000 on the first of each month for Security and Compliance; | |
| (iv) | a royalty of 10% of gross revenue less applicable taxes (hereinafter “Net Sales Revenue”) on all sales of product by the Company; and | |
| (v) | the Company shall, after the first two (2) years from execution of the Agreement, be responsible to pay to MJNE a minimum royalty of $50,000.00 per month. |
As compensation, MJNE shall pay to the Company:
| (i) | a Management Fee that is based upon the net sales price (after taxes) and further subject to all contractual expenses. |
As of the date of this filing, the Company has made all required payments to MJNE. The Company’s business license was approved and issued by Nye County, Nevada in September 2022. The CCB has approved cultivation based on the approved management agreement between the Company and MJ Distributing, LLC. Seeds were planted in mid-September and harvest is anticipated by the end of the fourth quarter of 2022.
RK Grow, LLC Agreement
On June 22, 2021 (the “Effective Date”), MJ Holdings, Inc. (“MJNE”) entered into a Cultivation and Sales Agreement (the “Agreement”) with RK Grow, LLC (the “Company”). Under the terms of the Agreement, MJNE shall retain the Company to provide oversight and management of MJNE’s cultivation and sale of products at MJNE’s Amargosa Valley, NV farm. The Agreement shall commence on the Effective Date, continue for a period of fifteen (15) years and automatically renew for one fifteen (15) year period. The Company shall be responsible for compliance, standard of care, packaging, insurance, labor matters, policies and procedures, testing, record keeping, security and marketing. The Agreement is for a designated 40 acres for cultivation.
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As deposits, security and royalty, the Company shall pay to MJNE:
| (i) | a Product Royalty Deposit of $3,000,000.00 to be applied to the first Product Royalty or Product Royalties; | |
| (ii) | a deposit of $20,000 to be applied against the first and last month’s Security and Compliance fee; | |
| (iii) | $10,000 on the first of each month for Security and Compliance; | |
| (iv) | a royalty of 10% of gross revenue less applicable taxes (hereinafter “Net Sales Revenue”) on all sales of product by the Company; | |
| (v) | Minimum Monthly Product Royalty: Minimum Monthly Product Royalty (MMPR) shall be calculated on a per annum basis. Therefore, Company will have satisfied all MMPR obligations for the year upon remitting $1,080,000.00 to MJNE; and | |
| (vi) | MJNE agrees to provide access to water for the Designated Acreage without charge to the Company. However, Company will be responsible for any construction required to have the water actually delivered to its Designated Acreage from the source. |
As compensation, MJNE shall pay to the Company:
| (i) | a Management Fee that is based upon the net sales price (after taxes) and further subject to all contractual expenses. |
As of the date of this filing, the Company has made all required payments to MJNE. The Company’s business license was approved and issued by Nye County, Nevada in September 2022. The CCB has approved cultivation based on the approved management agreement between the Company and MJ Distributing, LLC. Seeds were planted in mid-September and harvest is anticipated by the end of the fourth quarter of 2022.
Termination of Acres Cultivation, LLC Agreement
On January 21, 2021, the Company received a Notice of Termination (the “Notice”), effective immediately, from Acres Cultivation, LLC (“Acres”) on the following three (3) agreements (collectively, herein the “Cooperation Agreement”):
| (i) | The Cultivation and Sales Agreement entered into by and between MJNE and Acres, dated as of January 1, 2019 (the “Cultivation and Sales Agreement” or “CSA”), pursuant to Sections 5.3, and 16.20 (cross-default); |
| (ii) | The Consulting Agreement, by and between Acres and MJNE, made as of January 1, 2019 (the “Consulting Agreement”), pursuant to Sections 10 and 11.10 (cross-default); and | |
| (iii) | The Equipment Lease Agreement between Acres and MJNE, dated as of January 1, 2019 (the “Equipment Lease Agreement”), pursuant to Sections 8(ii), 8(iv), and 29 (cross-default). |
The Company initiated relocating its equipment to its 260-acre farm at the end of the first quarter and does not anticipate that it will generate any further revenue under the Acres relationship.
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 Nevada. Numerous other companies have also been granted 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. The Company still faces challenges engaging and retaining senior managers.
The Company presently occupies an office suite located at 2580 S. Sorrel St., Las Vegas, NV 89146. The Company plans on remaining at its current location for the next 3-6 months until it can identify a new corporate office.
Consulting Agreements
On September 14, 2022, the Company’s wholly owned subsidiary, MJH Research, Inc., entered into a Consulting Agreement (the “Agreement”) with Viridis Biotechnology, LLC (the “Consultant”). Under the terms of the Agreement, the Consultant shall provide agricultural and commercial consulting through December 31, 2022. As compensation, the Consultant shall receive a Management fee of $200,000. The initial payment of $100,000 shall be made within ten days of execution of the Agreement with the balance due payable through the issuance of thirty three thousand shares of the Company’s common stock or through a second payment of $100,000 no later than February 15, 2023. The Company made the initial $100,000 payment on September 15, 2022.
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Corporate Advisory Agreement (M&A and Funding)
Under the terms of the M&A and Funding Agreement (the “M&A Agreement”), GYB, LLC (the “Advisor”) shall identify prospective funding sources, identify potential companies for acquisition within the cannabis industry, identify pertinent technology companies that drive-up point of sale solutions and other such services the parties agree upon. The M&A Agreement has a term of two years and begins on May 18, 2021. As compensation for the services provided, the Company shall pay the Advisor $290,000 upon execution of the M&A Agreement.
Corporate History
The Company was incorporated on November 17, 2006, as Securitas EDGAR Filings, Inc. under the laws of the State of Nevada. Prior to the formation of Securitas EDGAR Filings Inc., the business was operated as Xpedient EDGAR Filings, LLC, a Florida Limited Liability Company, formed on October 31, 2005. On November 21, 2005, Xpedient EDGAR Filings LLC amended its Articles of Organization to change its name to Securitas EDGAR Filings, LLC. On January 21, 2009, Securitas EDGAR Filings LLC merged into Securitas EDGAR Filings, Inc., a Nevada corporation. On February 14, 2014, the Company amended and restated its Articles of Incorporation and changed its name to MJ Holdings, Inc.
On November 22, 2016, in connection with a plan to divest the Company of its real estate business, the Company submitted to its stockholders an offer to exchange (the “Exchange Offer”) its common stock for shares in MJ Real Estate Partners, LLC, (“MJRE”) a newly-formed LLC formed for the sole purpose of effecting the Exchange Offer. On January 10, 2017, the Company accepted for 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 February 1, 2017, the Company transferred its ownership interests in the real 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 February 1, 2017.
Acquisition/Disposition of Red Earth
On December 15, 2017, the Company acquired all of the issued and outstanding membership interests of Red Earth, LLC, a Nevada limited liability company (“Red Earth”) established in October 2016, in exchange for 52,732,969 shares of its Common Stock and a promissory note in the amount of $900,000. The acquisition 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 SEC. Red Earth is the holder of a Nevada Marijuana Establishment Certificate for the cultivation of marijuana.
On or about May 7, 2021, the Company’s wholly owned subsidiary, Red Earth, LLC (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 $20,000.
On July 27, 2021, the Subsidiary entered into a Stipulation and Order for 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 August 31, 2021, a plan pursuant to which the ownership 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 $10,000, which was paid on July 29, 2021.
On August 1, 2021, the Company entered into a Memorandum of Understanding and Agreement for Technical Services and Short-Term Funding (the “Agreement”) with Red Earth, LLC (hereinafter, “Red Earth”), an entity controlled by its Chief Cultivation Officer, Paris Balaouras. Under the terms of the Agreement, the 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 $5,000 to $7,500 per month. As of September 30, 2022, the amount due the Company under the short-term loan is $182,469 and the amount of technical services income (other income) recorded for the six months ended September30, 2022 was $70,000.
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. On September 2, 2021, the Company received approval of the Termination Agreement from the CCB. Please see Note 14 — Related Party Transactions for further information.
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Our Business
We commenced cultivation activities on our three-acre managed cultivation facility in August of 2018, harvesting more than 5400 pounds of marijuana through December of 2018. In the fourth quarter of 2019, we completed our 2019 harvest of approximately 4,800 marijuana plants with expected yield of more than 3,300 pounds of marijuana flower and trim. As of the time of this filing, we have completed our 2020 harvest of approximately 7,600 marijuana plants with expected yield of more than 4,700 pounds of marijuana flower and trim. It is our intention to grow our business through the acquisition of existing companies and/or through the development of new opportunities that can provide a 360-degree spectrum of infrastructure (dispensaries), cultivation and production management, and consulting services in the regulated cannabis industry.
The Company currently operates through the following entities:
| MJ Holdings, Inc. | This entity, the Parent, serves as a holding company for all of the operating businesses/assets. | |
| Prescott Management, LLC | Prescott Management is a wholly owned subsidiary of the Company that provides day-to-day management and operational oversight to the Company’s operating subsidiaries. | |
| Icon Management, LLC | Icon is a wholly owned subsidiary of the Company that provides Human Resource Management (“HR”) services to the Company. Icon is responsible for all payroll activities and administration of employee benefit plans and programs. | |
| Farm Road, LLC | Farm Road, LLC is a wholly owned subsidiary of the Company that owns 260 acres of farmland in Amargosa, NV. The Company acquired all of the membership interests of Farm Road in January of 2019. | |
| Condo Highrise Management, LLC | Condo Highrise Management is a wholly owned subsidiary of the Company that manages the Company owned Trailer Park in Amargosa, Nevada. | |
| Red Earth Holdings, LLC | Red Earth Holdings, LLC is a wholly owned subsidiary of the Company that will eventually be the holder of the Company’s primary cannabis license assets. As of the date of this report, Red Earth Holdings has no operations and holds no assets. |
| Red Earth, LLC | Red Earth, established in 2016, was a wholly owned subsidiary of the Company from December 15, 2017 until August 30, 2019 prior to the Company selling a forty-nine percent (49%) interest in Red Earth to Element NV, LLC, an unrelated third party (See further description of the transaction hereinabove). Red Earth’s assets consist of: (i) a cultivation license to grow marijuana within the City of Las Vegas in the State of Nevada, and (ii) all of the outstanding membership interests in HDGLV, which holds a triple net leasehold interest in a 17,298 square-foot building in Las Vegas, Nevada, which it expects to operate as an indoor marijuana cultivation facility. In July 2018, the Company completed the first phase of construction on this facility, and it received a City of Las Vegas Business License to operate a marijuana cultivation facility. On August 26, 2021, the Company and the Company’s Chief Cultivation Officer and previous owner of the Subsidiary, 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 the Red Earth was terminated as of the date of the Termination Agreement resulting in the return of ownership of Red Earth to Mr. Balaouras. Please see Note 7 — Intangible Assets and Note 14 — Related Party Transactions for further information. | |
| HDGLV, LLC | HDGLV is a wholly owned subsidiary of Red Earth, LLC and is the holder of a triple net lease on a commercial building in Las Vegas, Nevada which is being developed to house the Company’s indoor grow facility. | |
| Alternative Hospitality, Inc. | Alternative Hospitality is a Nevada corporation formed in November of 2018. MJ Holdings owns fifty-one percent (51%) of the company and the remaining forty-nine percent (49%) is owned by TVK, LLC, a Florida limited liability company. Please see Note 11 — Commitments and Contingencies for further information. | |
| MJH Research, Inc. | MJH Research Inc. is a Florida corporation whose operations center around providing consulting services for growing techniques, management and cultivation of crops, as well as licensing support, production and asset and infrastructure development. |
Critical Accounting Policies, Judgments and Estimates
There were no material changes to the Company’s critical accounting policies and estimates during the interim period ended September 30, 2022.
Please see our Annual Report on Form 10-K for the year ended December 31, 2021 filed on June 21, 2022, for a discussion of our critical accounting policies and estimates and their effect, if any, on the Company’s financial results.
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Results of Operations
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
Revenues
The Company’s revenue was $712,856 for the three months ended September 30, 2022, compared to $19,580 for the three months ended September 30, 2021. The increase in revenue for the three months ended September 30, 2022 versus the nine months ended September 30, 2021 was largely attributable to the revenue recognized through its acquisition of MJH research, Inc. Revenue, by class, is as follows:
| For the three months ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenues: | ||||||||
| Rental income (i) | $ | 51,381 |
$ | 19,580 | ||||
| Management income (ii) | 661,475 | - | ||||||
| Total | $ | 712,856 | $ | 19,580 | ||||
| (i) | The rental income is from the Company’s THC Park. | |
| (ii) | On July 11, 2022, the Company purchased MJH Research, Inc. (“MJH”) through a stock exchange agreement. MJH is a Florida corporation whose operations center around providing consulting services for growing techniques, management and cultivation of crops, as well as licensing support, production and asset and infrastructure development. |
Operating Expenses
Direct costs of revenues were $- and $- for the three months ended September 30, 2022 and 2021, respectively.
| For the three months ended | ||||||||
| Direct costs of revenue: | September 30, | |||||||
| 2022 | 2021 | |||||||
| Management and equipment lease income | $ | - | $ | - | ||||
| Total | $ | - | $ | - | ||||
The direct costs of revenue of $- for the three months ended September 30, 2022 and 2021 would have been attributable to: labor, compliance, testing and others related expenses – all of which were directly related to the Consulting and Equipment Lease Agreements with the Licensed Operator.
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General and administrative
For the three months ended September 30, 2022, our general and administrative expenses were $2,780,284 compared to $583,516 for the three months ended September 30, 2021, resulting in an increase of $2,196,768. The increase was largely attributable to an increase in consulting fees, legal fees and professional services.
Other Income/(Expense)
For the three months ended September 30, 2022, our other income/(expense) were $110,262 compared to $386,714 for the three months ended September 30, 2021, resulting in a decrease in other income of $276,452. The decrease was largely attributable to the gain on sale of subsidiary recognized for the three months ended September 30, 2021.
Net Income (Loss)
Net income (loss) attributable to common shareholders was ($2,002,567) for the three months ended September 30, 2022, compared to a net loss of ($316,696) for the three months ended September 30, 2021. The increase in net loss for the three months ended September 30, 2022 as compared to the same period in 2021 is largely attributable to the Company’s increase in general and administrative expenses during the three months ended September 30, 2022.
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
Revenues
The Company’s revenue was $773,462 for the nine months ended September 30, 2022, compared to $535,961 for the nine months ended September 30, 2021. The increase in revenue for the nine months ended September 30, 2022 versus the nine months ended September 30, 2021 was largely attributable to the revenue recognized through its acquisition of MJH research, Inc. Revenue, by class, is as follows:
| For the nine months ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenues: | ||||||||
| Rental income (i) | $ | 111,987 | $ | 59,749 | ||||
| Management income from MJH Research, Inc. (ii) | 661,475 | - | ||||||
| Management income from Acres Cultivation (iii) | - | 341,398 | ||||||
| Equipment lease income (iii) | - | 134,814 | ||||||
| Total | $ | 773,462 | $ | 535,961 | ||||
| (i) | The rental income is from the Company’s THC Park. |
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| (ii) | On July 11, 2022, the Company purchased MJH Research, Inc. (“MJH”) through a stock exchange agreement. MJH is a Florida corporation whose operations center around providing consulting services for growing techniques, management and cultivation of crops, as well as licensing support, production and asset and infrastructure development. | |
| (iii) | 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 will not generate any further revenue under the Acres relationship. |
Operating Expenses
Direct costs of revenues were $- and $40,590 for the nine months ended September 2022 and 2021, respectively. Direct costs of revenues, by class, is as follows:
| For the nine months ended | ||||||||
| September 30, | ||||||||
| Direct costs of revenue: | 2022 | 2021 | ||||||
| Management and lease equipment income | $ | - | $ | 40,590 | ||||
| Total | $ | - | $ | 40,590 | ||||
The direct costs of revenue of $40,590 for the nine months ended September 30, 2021 was attributable to: labor, compliance, testing and others related expenses – all of which are directly related to the Consulting and Equipment Lease Agreements with the Licensed Operator. The decrease in direct costs of revenue for the nine months ended September 30, 2022 versus the nine months ended September 30, 2021 was largely attributable to the termination of the management agreement with Acres Cultivation, LLC during the year ended December 31, 2021.
General and administrative
For the nine months ended September 30, 2022, our general and administrative expenses were $4,074,444 compared to $5,356,540 for the nine months ended September 30, 2021, resulting in a decrease of $1,282,096. The decrease was largely attributable to a decrease in employee-related expenses and professional fees associated with the Company’s various business development activities.
Other Income/(Expense)
For the nine months ended September 30, 2022, our other income was $141,700 compared to $11,567,165 for the nine months ended September 30, 2021, resulting in a decrease of $11,425,465. The decrease was largely attributable to the Company’s liquidation of its marketable securities held for sale during the nine months ended September 30, 2021 as compared to no liquidation of marketable securities in the nine months ended September 30, 2022.
Net Income (Loss)
Net (loss) income was ($3,340,169) for the nine months ended September 30, 2022, compared to net income of $6,087,315 for the nine months ended September 30, 2021. The decrease in net income for the nine months ended September 30, 2022 as compared to the same period in 2021 is largely attributable to the Company’s liquidation of its marketable securities held for sale during the nine months ended September 30, 2021 as compared to no liquidation of marketable securities in the nine months ended September 30, 2022.
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Liquidity and Capital Resources
The following table summarizes the cash flows for the nine months ended September 30, 2022 and 2021:
| 2022 | 2021 | |||||||
| Cash Flows: | ||||||||
| Net cash (used in) operating activities | (3,048,875 | ) | (3,967,867 | ) | ||||
| Net cash provided by (used in) investing activities | 249,759 | 11,009,852 | ||||||
| Net cash provided by (used in) financing activities | 121,282 | (1,381,278 | ) | |||||
| Net increase (decrease) in cash | (2,677,834 | ) | 5,660,707 | |||||
| Cash at beginning of period | 4,699,372 | 117,536 | ||||||
| Cash at end of period | $ | 2,021,538 | $ | 5,778,243 | ||||
The Company had cash of $2,021,538 at September 30, 2022 compared with cash of $5,778,243 at September 30, 2021.
Operating Activities
Net cash (used in) operating activities for the nine months ended September 30, 2022, was ($3,048,875) versus ($3,967,867) for the nine months ended September 30, 2021. The decrease in cash used in operating activities in 2022 included a net loss of $3,340,169 offset by a gain on depreciation of $130,180, accounts payable and accrued expenses of $324,664 and stock-based compensation of $7,373.
Investing Activities
Net cash provided by investing activities during the nine months ended September 30, 2022, was $249,759 as compared to $11,009,852 for the nine months ended September 30, 2021. The net cash provided by investing activities for the nine months ended September 30, 2022 was largely attributable to the acquisition of MJH Research, Inc. The decrease in cash provided by investing activities for the nine months ended September 30, 2022 is largely attributable to the proceeds from the sale of its marketable securities held for sale related to the sale of the Company’s equity holding in the common stock of Healthier Choice Management Corporation (“HCMC”) during the nine months ended September 30, 2021 as compared to no liquidation of marketable securities in the nine months ended September 30, 2022.
Financing Activities
Net cash provided by (used in) financing activities during the nine months ended September 30, 2022, was $121,282 as compared to ($1,381,278) for the nine months ended September 30, 2021. The increase in cash flow from financing activities for the nine months ended September 30, 2022 is entirely attributable to the proceeds from notes payable.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Seasonality
We do not consider our business to be seasonal.
Commitments and Contingencies
We are subject to the legal proceedings described in “Part II, Item 1. Legal Proceedings” of this report. There are no legal proceedings which are pending or have been threatened against us or any of our officers, directors or control persons of which management is aware.
Inflation and Changing Prices
Neither inflation nor changing prices for the nine months ended September 30, 2022 had a material impact on our operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not required for smaller reporting companies.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Form 10-Q, management performed, with the participation of our principal executive officer and principal financial officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures. Based on the evaluation, our principal executive officer and principal financial officer concluded that, as of June 30, 2022, our disclosure controls and procedures were not effective.
Due to resource constraints, material weaknesses are evident to management regarding our inability to generate all the necessary disclosure for inclusion in our filings with the Securities and Exchanges Commission, which is due to the lack of resources and segregation of duties. We lack sufficient personnel with the appropriate level of knowledge, experience and training in GAAP to meet the demands for a public company, including the accounting skills and understanding necessary to fulfill the requirements of GAAP-based reporting. This weakness causes us to not fully identify and resolve accounting and disclosure issues that could lead to a failure to perform timely internal control and reviews. In addition, the Company has not established an audit committee, does not have any independent outside directors on the Company’s Board of Directors, and lacks documentation of its internal control processes.
Changes in Internal Control over Financial Reporting
There was no change to our internal controls or in other factors that could affect these controls during the period ended September 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. However, our Board is currently seeking to improve our controls and procedures to remediate the deficiency described above.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. When the Company is aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, the Company will record a liability for the loss. I addition to the estimated loss, the liability includes probable and estimable legal cost associated with the claim or potential claim. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm the Company business.
MJ Holdings, Inc. Complaint
On December 14, 2021, MJ Holdings, Inc. (the “Plaintiff”) filed a Complaint against NCMM, LLC, AP Management, LLC and Valerie Small (collectively, the “Defendants”)( together, the “Parties”). In the Complaint, the Plaintiff alleges that the Defendants have refused to return the cannabis that was being stored for Plaintiff under a Storage and Purchase Agreement entered into with AP Management. By failing to return the cannabis to Plaintiff, or Plaintiff’s designee, the Defendants have deprived Plaintiff of the ability to sell, transfer or market the product. In addition, the Defendants have sought to unlawfully extort the Plaintiff for illicit payments of thousands of dollars in money and/or cannabis in exchange for returning the cannabis. The Parties are in active discussions to settle the dispute.
Gappy and Shaba Compliant
On December 3, 2021, a Complaint was filed against MJ Holdings, Inc., HDGLV, LLC, Red Earth, LLC (collectively, the “Defendants”) by Ziad Gappy and David Shaba (collectively, the “Plaintiffs”). In the Complaint, the Plaintiffs allege the Defendants made misleading statements and/or omissions relating to the Company in the Plaintiffs’ negotiation to purchase shares of MJ Holdings, Inc. In addition, the Plaintiffs allege that the Defendants have not honored the 2018 Agreements negotiated between the Plaintiffs and Defendants, MJ Holdings, Inc. has failed to issue an additional $125,000 in stock due to the Plaintiffs as was agreed to in writing and the Defendants have failed to start the Western Project. The Defendants will vigorously defend themselves against this action and will file an appropriate and timely answer to the Complaint including a lengthy and comprehensive series of affirmative defenses and liability and damage avoidances. As of the date of this filing, the Defendants have yet to file an answer.
DGMD Complaint
On March 19, 2021, a Complaint was filed against the Company, Jim Mueller, John Mueller, MachNV, LLC, Acres Cultivation, Paris Balaouras, Dimitri Deslis, ATG Holdings, LLC and Curaleaf, Inc. (collectively, the “Defendants”) by DGMD Real Estate Investments, LLC, ARMPRO, LLC, Zhang Springs LV, LLC, Prodigy Holdings, LLC and Green Organics, LLC (collectively, the “Plaintiffs”) in the District Court of Clark County, Nevada.
In the Complaint, the Plaintiffs allege that the Defendants: (i) intended to fraudulently obtain money from the Plaintiffs in order to put that money towards the Acres dispensary and to make Acres look more appealing to potential buyers as well as pay off Defendants’ agents, and (ii) the Defendants acted together in order to find investors to invest money into the Acres and MJ Holdings “Investment Schemes”, and (iii) the Defendants intended to fraudulently obtain Plaintiffs’ money for the purpose of harming the Plaintiffs to benefit the Defendants, and (iv) the Defendants committed unlawful fraudulent misrepresentation in the furtherance of the agreement to defraud the Plaintiffs. The Plaintiffs allege that damages are in excess of $15,000.
As the complaint pleads only the statutory minimum of damages, the Company is unable to estimate the potential exposure, if any, resulting from this matter but believes it is without merit as to liability and otherwise deminimis as to damages. Thus, the Company does not expect this matter to have a material effect on the Company’s consolidated financial position or its results of operations. The Company will vigorously defend itself against this action and has filed an appropriate and timely answer to the Complaint including a lengthy and comprehensive series of affirmative defenses and liability and damage avoidances. As of the date of this filing, discovery has commenced and written discovery has been exchanged between the parties.
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Tierney Arbitration
On March 9, 2021, Terrence Tierney (“Claimant”), the Company’s former President and Secretary, who was terminated by the Company for Cause on August 7, 2020, filed for arbitration with the American Arbitration Association for: (i) breach of contract, (i) breach of the implied covenant of good faith and fair dealing, and (iii) NRS 608 wage claim. Mr. Tierney demanded payment in the amount of $501,085 for unpaid base pay and unpaid deferred business compensation (which was not earned nor due), expenses paid on behalf of the Company, accrued vacation and severance pay. On April 7, 2021, the Company made payment of unpaid base pay against the wage claim in the amount of $62,392, inclusive of $59,583 for wages and $2,854 for accrued vacation plus $8,307.60 for statutory penalties. As such, the Company posits that any compensation claims that Claimant may have had have been paid in full and that the Company otherwise has no liability. The Company filed a counterclaim in the action declaring that Tierney breached the contract of employment, committed fraud, malfeasance and other nefarious acts causing substantial damage to the Company with estimated monetary damages well in excess of any monetary claim made by Tierney. On May 4, 2022, the Arbitrator issued a ruling concluding that the Arbitrator did not have jurisdiction over Claimant’s statutory wage claim under NRS 608. On September 19, 2022, Claimant filed a complaint in state court seeking compensation under NRS 608.020. The Company asserts that the 2-year statute of limitations bars Claimant’s complaint, and further asserts that Claimant has been paid in full pursuant to the payments issued to Claimant on April 7, 2021. The arbitration is currently scheduled to take place in January 2023.
Item 1A. Risk Factors
Not required for smaller reporting companies.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In connection with the foregoing, the Company relied upon the exemptions from registration provided by Rule 701 and Section 4(a)(2) under the Securities Exchange Act of 1933, as amended:
Issuance of common stock for the nine months ended September 30, 2022
On July 8, 2022, the Company issued 7,000,000 shares of common stock as per the terms of the Common Stock Purchase Agreement for the purchase of MJH Research, Inc.
On July 15, 2022, the Company issued a total of 45,000 shares of common stock with a fair market value of $13,072 to three directors for services rendered during the first quarter of 2022.
On August 2, 2022, the Company issued a total of 45,000 shares of common stock with a fair market value of $12,128 to three directors for services rendered during the second quarter of 2022.
Issuance of common stock year ended December 31, 2021
On March 8, 2021, the Company issued 526,316 shares of common stock with a fair market value of $410,000 in satisfaction of $100,000 principal and all accrued interest for a note payable to a related party as per the terms of the Debt Conversion and Stock Purchase Agreement dated January 14, 2021.
On March 8, 2021, the Company issued 263,158 shares of common stock with a fair market value of $205,263 to a related party for the purchase of $50,000 of common stock as per the terms of the Debt Conversion and Stock Purchase Agreement dated January 14, 2021.
On March 29, 2021, the Company issued 225,000 shares of common stock with a fair market value of $135,000 to a consultant as per the terms of the Consulting Agreement dated February 25, 2021.
On April 24, 2021, the Company issued 1,000,000 shares of common stock with a fair market value of $630,000 as per the terms of the Termination Agreement with Blue Sky Companies, LLC and Let’s Roll Nevada, LLC.
On June 4, 2021, the Company issued 32,000 shares of common stock with a fair market value of $13,514 to its former Chief Financial Officer as final compensation for services previously rendered on behalf of the Company.
On July 14, 2021, the Company issued 29,495 shares of common stock, previously recorded as common stock issuable in the period ended June 30, 2021, with a fair market value of $12,093 to a Director as compensation per the terms of the Board of Directors Services Agreement.
On July 14, 2021, the Company issued 43,245 shares of common stock, previously recorded as common stock issuable in the period ended June 30, 2021, with a fair market value of $17,730 to a director as compensation per the terms of the Board of Directors Services Agreement.
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On July 14, 2021, the Company issued 43,245 shares of common stock, previously recorded as common stock issuable in the period ended June 30, 2021, with a fair market value of $17,730 to a Director as compensation per the terms of the Board of Directors Services Agreement.
On July 21, 2021, the Company issued 62,333 shares of common stock with a fair market value of $25,089 to a consultant for services rendered on behalf of the Company.
On July 21, 2021, the Company issued 30,000 shares of common stock with a fair market value of $12,075 to a consultant for services rendered on behalf of the Company.
On July 21, 2021, the Company issued 120,000 shares of common stock with a fair market value of $48,300 to an employee for past due wages.
On July 21, 2021, the Company issued 60,000 shares of common stock with a fair market value of $24,150 to an employee for past due wages.
On July 21, 2021, the Company issued 30,000 shares of common stock with a fair market value of $12,075 to an employee for past due wages.
On July 30, 2021, the Company’s prior President, Richard S. Groberg, returned 300,000 shares of common stock to be retired as per the terms of the Cooperation and Release Agreement dated May 12, 2021. As of the date of this filing, the Company has yet to submit the shares to its transfer agent.
On December 31, 2021, the Company issued 333,334 shares of common stock with a fair market value of $96,501 to an officer for shares purchased in 2018 under the Company’s Regulation D offering.
On December 31, 2021, the Company issued a total of 90,000 shares of common stock with a fair market value of $24,300 to three directors for services rendered during the third and fourth quarters of 2021.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None
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Item 6. Exhibits
The documents set forth below are filed, incorporated by reference or furnished herewith as indicated.
Index to Exhibits
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| * | Filed herewith. |
| ** | Furnished herewith. |
| + | Denotes a management compensatory plan, contract or arrangement |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this amended report to be signed on its behalf by the undersigned thereunto duly authorized.
| MJ HOLDINGS, INC. | ||
| By: | /s/ Paris Balaouras | |
| Paris Balaouras | ||
| Interim Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: | November 21, 2022 | |
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