The accompanying notes are an integral
part of these unaudited consolidated financial statements.
The accompanying notes are an integral
part of these unaudited consolidated financial statements.
The accompanying notes are an integral
part of these unaudited consolidated financial statements.
Notes to the
Consolidated Financial Statements
For the three and nine months ended
September 30, 2018 and 2017
(Unaudited)
Note 1 — Nature of the Business
MJ
Holdings, Inc. (“the Company”) is a holding company whose subsidiaries provide cultivation management,
infrastructure, and consulting services to the regulated cannabis industry, in addition to holding, and managing third party
Nevada state issued cultivation and production licenses.
In April 2018,
the State of Nevada finalized and approved the provisional Medical Marijuana Establishment Registration Certificate (the “Certificate”)
held by our wholly owned subsidiary, Red Earth, LLC (“Red Earth”) . The Certificate, when perfected, will allow the
Company to commence legal marijuana cultivation activities in the State of Nevada. HDGLV, LLC (“HDGLV”), a wholly
owned subsidiary of Red Earth, holds a triple-net leasehold interest, with an option to buy, in a 17,298 square-foot building,
which we expect will be the home to our indoor cultivation facility. Phase 1 of this facility was completed in July of 2018. We
received final approval from the State of Nevada, Department of Taxation with respect to the Certificate, and Red Earth was issued
a Business License by the City of Las Vegas during the quarter ended September 30, 2018. We expect to complete additional modifications
and open the facility in January of 2019.
In April 2018,
the Company entered into a management agreement with a Nevada company (the “Licensed Operator”) that holds a license,
for the legal cultivation of marijuana for sale under the laws of the State of Nevada. The Licensed Operator has engaged us to
develop, manage, and operate a licensed cultivation facility on property owned by the Licensed Operator. At our sole cost and expense,
we completed the construction of a 120,000 square-foot outdoor grow facility, including the construction of an 8,000 square-foot
building and installation of required security fencing, meeting the State of Nevada building codes and regulations. Operation of
this facility commenced in August, 2018 and the Company expects to harvest the initial three acres of crop in late November and
early December of 2018. We expect yields of 8,000 to 10,000 pounds of marijuana from this initial harvest.
In September of 2018 the Company, through
its wholly owned subsidiary, Red Earth applied for five Recreational Marijuana Establishment Licenses to operate up to five retail
marijuana stores within the state of Nevada. The Company’s goal is to open a store within the City of Las Vegas, as well
as additional dispensaries in Washoe County near Lake Tahoe, in North Las Vegas, unincorporated Clark County and Henderson, Nevada.
The Company expects to receive notice of the status of these applications in early December, 2018.
We intend 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/production management, and consulting services in the regulated
cannabis industry.
Note 2 —
Summary of Significant Accounting Policies
The accompanying
unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in
the United States of America (“GAAP”) for interim financial information and with the rules and regulations of the
U.S. Securities and Exchange Commission (“SEC”). Accordingly, these consolidated financial statements do not include
all of the information and footnotes required for audited annual financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary to make the consolidated financial statements not misleading have
been included. The balance sheet at December 31, 2017, has been derived from the Company’s audited consolidated financial
statements as of that date.
Rental Expense
Rental expense is accounted for on the straight-line method.
Deferred rent payable as of September 30, 2018 represents the excess of rent recognized in the financial statements over scheduled
lease payments.
The unaudited
consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements
and the notes thereto that are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017,
that was filed with the SEC on July 27, 2018. The results of operations for the nine months ended September 30, 2018, are not
necessarily indicative of the results to be expected for the full year or any further periods.
The unaudited
consolidated financial statements include the accounts of the Company and its whollyowned subsidiaries. Intercompany balances
and transactions have been eliminated in consolidation.
The significant
accounting policies followed by the Company for interim reporting are consistent with those included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2017. There were no material changes to our significant accounting policies
during the interim period ended September 30, 2018.
Note 3 —
Going Concern
Our financial
statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities
and commitments in the normal course of business.
The Company’s
primary asset is a Certificate issued by the State of Nevada for the cultivation of
medical marijuana. The Company has an accumulated deficit of $2,208,331 from inception (October 17, 2016) to September 30, 2018.
These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.
In the event
the Company experiences liquidity and capital resource constraints because of unanticipated operating losses, we may need to raise
additional capital in the form of equity and/or debt financing. If such additional capital is not available on terms acceptable
to us or at all, then we may need to curtail our operations and/or take additional measures to conserve and manage our liquidity
and capital resources, any of which would have a material adverse effect on our financial position, results of operations, and
our ability to continue in existence. These financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
Note 4 —
Prepaid Expenses and Management Agreement
Prepaid Inventory
On August 13, 2018 (the “Effective
Transaction Date”), the Company closed the transactions contemplated by an Exclusive Distribution Agreement (the “Exclusive
Distribution Agreement”) dated August 13, 2018. The Exclusive Distribution Agreement is between the Company and Healthier
Choices Management Corporation (“Healthier Choices”), a designer and seller of cannabis consumption Q-Cups, which are
designed to consume cannabis products by vaporizing oil. The Company has the exclusive right to distribute Q-Cups in Nevada. The
Exclusive Distribution Agreement further requires the Company to advertise and market Q-Cups in Nevada.
Pursuant to the terms of the Agreement,
the Company purchased Q-Cups from Healthier Choices and tendered the sum of two million dollars ($2,000,000). The funds were transferred
to Healthier Choices on the Effective Transaction Date. Healthier Choices has applied for and has been granted a patent with respect
to the Q-Cup.
The initial term of the Exclusive Distribution
Agreement is for one year, with additional successive one-year renewals, subject to certain standard termination provisions. The
Exclusive Distribution Agreement is subject to standard termination provisions; however, Healthier Choices has the option to terminate
the Exclusive Distribution Agreement, on 30 days’ written notice, if the Company fails to purchase a sufficient minimum quantity
of Q-Cups from Healthier Choices. The Company has met its obligations for the first year of the Exclusive Distribution Agreement
through the payment of $2,000,000. Thereafter, for each renewal term, the Company’s minimum purchase obligation for Q-Cups
is currently $500,000, subject to a good faith negotiation at the end of each year. Notwithstanding the exclusivity provided by
the Exclusive Distribution Agreement, Healthier Choices reserves the right to sell Q-Cups, directly or indirectly, to a specific
retail group (the “Excluded Account”). In such event, Healthier Choices shall pay to the Company a fee equivalent to
5% of the gross sales of Q-Cups that Healthier Choices sold to an Excluded Account in Nevada. The Company, however, does not have
the right to appoint sub-distributors or sell Q-Cups through any third party. In connection with the transactions contemplated
by the Exclusive Distribution Agreement, Healthier Choices granted to the Company a non-exclusive, non-transferrable, and non-sub-licensable
fully paid license agreement. The Exclusive Distribution Agreement provides standard cross-indemnity provisions.
The Company also entered into a Stock
Exchange Agreement (the “Stock Exchange Agreement”) with Healthier Choices in August 2018. Please see Note 7,
Investment
in Equity,
for additional information.
Prepaid
Expenses (Green Houses)
In February 2018, the Company began
discussions with an unrelated third-party regarding designing, purchasing, and reselling green houses. The Company provided expertise
in constructing green houses, and the other party advised that it would enter into agreement to design, procure, and operate green
houses. In April 2018, the third party notified the Company and the purchasers of the green houses that it could not continue
with the construction of the green houses because of unrelated hardships. However, the Company, after subsequent conversations
with the purchasers, agreed to complete the construction and installation of six (6) green houses to four (4) separate purchasers.
As of September 30, 2018 the Company
had received $386,416 in deposits from the purchasers which were recorded as customer deposits on the balance sheet, and has paid
$335,083 expenses related to the design, purchase and resale of green houses, which expenses were recorded as prepaid expenses.
Management Agreement
On
April 18, 2018, the Company entered into a management agreement with the Licensed Operator that holds a cultivation license,
so
that it can lawfully engage in the cultivation of marijuana for sale under the laws of the State of Nevada. The term of the agreement
is for 8 years. The Licensed Operator has engaged the Company to develop, manage, and operate a licensed cultivation facility on
3 acres of property owned by the Licensed Operator. The Company, at its sole cost and expense, has agreed to complete the construction
of an outdoor cultivation facility meeting the local and state building codes and regulations to cultivate marijuana.
Upon completion of the construction of
the outdoor cultivation facility and receipt of the appropriate approvals from the local and state authorities, the Company can
begin cultivating marijuana. Pursuant to the terms of the management agreement, the Company agreed to generate sales of at least
$5 million per year from product cultivated from the outdoor cultivation facility. The Licensed Operator may terminate the agreement,
in accordance with the terms of the management agreement, if it does not generate at least $5 million in annual revenues. Prior
to the termination of the management agreement by the Licensed Operator, the Company may cure a breach of this provision by paying
10% of the revenue shortfall to the Licensed Operator.
Pursuant to the management agreement, the
Licensed Operator will (i) retain 15% of the net revenues generated from product cultivated from the outdoor cultivation facility
and (ii) pay 85% of the net revenues to the Company. Upon execution of the management agreement, the Company paid $300,000 to the
Licensed Operator as consideration for the opportunity to construct and manage the outdoor cultivation facility on the Licensed
Operator’s property. In exchange for the initial consideration, the Licensed Operator agreed not to retain 15% of the first
$2 million of net revenues generated from the outdoor cultivation facility. In addition, once the outdoor cultivation facility
begins production, the Company has agreed to pay the Licensed Operator $7,000 per month for compliance, security, and other administration
costs incurred by the Licensed Operator during the term of the agreement.
As of September
30, 2018 the Company recorded the $300,000 paid to the Licensed Operator as prepaid expenses.
Note 5 —
Leasehold Improvements
On April 18, 2018,
the Company entered into a management agreement as described in Note 4,
Prepaid Expenses
. Pursuant to that management agreement,
the Company commenced construction of the outdoor cultivation facility. As of September 30, 2018, the Company had incurred and
capitalized $1,154,842 in costs associated with the construction of this facility.
During the
quarter ended September 30, 2018, the Company incurred costs associated with the construction of an indoor cultivation facility
to be located at 2310 Western Avenue in Las Vegas, Nevada. The Company, through its indirect wholly owned-subsidiary, HDGLV, holds
a triple net leasehold interest in a 17,298 square-foot building. In addition, in April 2018, the State of Nevada finalized and
approved the Certificate held by Red Earth to grow marijuana within the City of Las Vegas in the State of Nevada, which will allow
the Company to commence legal marijuana cultivation. Once ongoing construction is completed, the Company intends to operate the
facility as an indoor marijuana cultivation and an agritourism destination. This facility is intended to serve as a draw for tourists
who desire to visit, see, and learn about the inner-workings of a cannabis cultivation facility. Completion of this facility is
expected in January 2019.
As of September 30, 2018 the Company had
incurred and capitalized $74,832 in costs associated with the construction of this facility.
Note 6 —
Intangible Assets
In October 2016,
Red Earth entered into an Asset Purchase and Sale Agreement to purchase the Certificate from the seller for $300,000. To initiate
the purchase and transfer of the Certificate, Red Earth paid a $25,000 deposit to the seller in October 2016. In February 2017,
an investor advanced the Company $350,000 to fund the purchase of the Certificate.
The Nevada
Department of Taxation approved the Certificate in April 2018. Once the Company completes the construction of the cultivation
and agritourism destination facility, and obtains the required state and city approvals, it will begin cultivating marijuana.
At that point, the intangible asset will be amortized over its useful life.
Note 7 —
Investment in Equity
On August 13,
2018, the Company entered into a Stock Exchange Agreement with Healthier Choices to acquire 1,500,000,000 shares of Healthier
Choices’ common stock in exchange for 85,714 shares of the Company’s common stock. The value of the stock exchanged
by each party on the date of exchange was $150,000. This represents a less than 5% ownership interest for each company
in the others’ company, and the shares issued are restricted. Please see note 4, Prepaid Inventory, for further discussion
of the Company’s additional business interests with Healthier Choices. The Company accounted for this purchase of shares
using the cost method and intends to mark the value to market each reporting period based on the then current market value of
its held shares in Healthier Choices. The Company is relying on ASC 325-20, Cost Method Investments. As of the transaction date
the price as quoted on the OTC Markets for Healthier Choices common stock was $0.0001 per share.
Note 8 —
Convertible Note Payable Due to Related Party
On December 15,
2017, the Company issued a convertible note payable in the amount of $900,000 to the members of Red Earth. The managing partner
and 50% owner of Red Earth at the time of the transaction was Paris Balaouras, the Company’s current Chief Executive Officer.
The convertible note payable was due October 15, 2018. The note was convertible into shares of the Company’s common stock
at the holder’s discretion at a conversion price of $0.75 per share. The note accrues interest, commencing nine months from
the issuance date, at a rate equal to one half of one percent (0.50%) per annum. Interest was payable on the maturity date or the
conversion date, if applicable.
The Company assessed
the embedded conversion feature of the note payable and determined that the fair value of the underlying common stock at inception
did not exceed the conversion price of the convertible note. Since, at the time the convertible note was issued, the Company’s
common stock had limited publicly traded volume, the Company based the fair value of the Company’s common stock on the sales
of the Company’s common stock, which were sold at $0.75 per share.
The Company repaid
the note in full in January 2018.
Note 9 —
Preferred Stock
On August 9, 2018 (the “Transaction
Date”), the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”), pursuant
to which the Company sold and issued 2,500 shares of its Series A Convertible Preferred Stock (the “Preferred Stock”)
to a single institutional, accredited investor for $1,000 per share or an aggregate subscription of $2,500,000. Subject to a standard
“4.99% Beneficial Ownership Limitation blocker,” the Preferred Stock is convertible into 3,335,000 shares of the Company’s
Common Stock at a conversion price of $0.75 per share, subject to adjustment as described in the Certificate of Designation.
The Company also entered into a Registration
Rights Agreement (the “Registration Rights Agreement”) with the purchaser, pursuant to which the Company is obligated
to file a registration statement with the SEC within 30 calendar days of the Transaction Date, to register for resale the shares
of common stock underlying the Preferred Stock. The Company filed the required registration statement on October 5, 2018. If the
SEC has not declared the registration statement effective by the 60th calendar day following the Transaction Date (or, in the event
of a “full review” by the SEC, the 90th calendar day following the Transaction Date), or upon the occurrence of other
events, then the Company was obligated to pay to the purchaser an amount in cash, as partial liquidated damages and not as a penalty,
equal to the product of 4.0% multiplied by the aggregate subscription amount paid by the purchaser pursuant to the Securities Purchase
Agreement on a monthly basis until the event has been cured. On October 24, 2018 the Company was notified by the SEC that
its registration was deemed effective on this date. Accordingly the Company is not subject to any further fees or damages related
to this provision.
On August 13, 2018, the Company filed
a Certificate of Designation of its Series A Convertible Preferred Stock with the Secretary of State of the State of Nevada to
designate a series of its convertible preferred stock, consisting of 2,500 shares. The stated value of each share of Preferred
Stock is $1,000. Subject to a standard “4.99% Beneficial Ownership Limitation blocker,” each share of Preferred Stock
is convertible into shares of the Company’s common stock at any time or from time to time at a conversion price equivalent
of $0.75 per share, subject to adjustment as described in Certificate of Designation.
Note 10 —
Capital Stock
During the nine months ended September
30, 2018, the Company issued an aggregate of 4,384,664 shares of the Company’s common stock at $0.75 per share for gross
proceeds of $3,288,498, $597,000 of which were received in October 2018, and $400,000 was received prior to January 1, 2018.
During the nine months ended
September 30, 2018, the Company issued 91,177 shares of the Company’s restricted common stock for gross proceeds
of $232,500 under a License agreement with the third party. (See Note 12, Commitment and Contingencies, Memorandum of Understanding).
During the nine months ended September
30, 2018, the Company issued an aggregate of 60,518 shares of the Company’s common stock in exchange for professional services
valued at $99,992.
During the nine months ended September
30, 2018, the Company issued 85,714 shares of the Company’s restricted common stock valued at $150,000 under a Stock Exchange
Agreement. For additional information, see Note 7,
Investment,
to these unaudited consolidated financial statements.
Note 11 — Warrants and Options
Warrants
Prior to the reverse merger with Red Earth,
the Company had issued warrants as compensation for consulting services. The warrants expire between June 2019 and October 2019.
The following table summarizes all stock warrant activity of the Company for the nine months ended September 30, 2018:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Avg.
|
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
Balance at December 31, 2017
|
|
|
166,665
|
|
|
$
|
5.88
|
|
Issued
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
Balance at September 30, 2018
|
|
|
166,665
|
|
|
$
|
5.88
|
|
Options
On July 1, 2018 the Company entered into
a Corporate Advisory Agreement (“Advisory Agreement”) with a New York City based consulting company (the
“Consultant”) to provide business management, corporate compliance and related services to the Company and its subsidiaries.
The Advisory Agreement granted to the Consultant an option to acquire up to 10,000 additional shares of the Company’s common
stock at an exercise price of $1.20. The options have term of 3 years. The fair value of these stock options was determined to
be $6,738 using the Black-Scholes-Merton option-pricing model based on the following assumptions: (i) volatility rate of 199%,
(ii) discount rate of 0%, (iii) zero expected dividend yield, and (iv) expected life of 3 years. The following table summarizes
all stock option activity of the Company for the nine months ended September 30, 2018:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Avg.
|
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
Balance at December 31, 2017
|
|
|
---
|
|
|
$
|
---
|
|
Issued
|
|
|
10,000
|
|
|
|
1.20
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
Balance at September 30, 2018
|
|
|
10,000
|
|
|
$
|
1.20
|
|
Note 12 —
Commitments and Contingencies
Operating
Leases
The Company leases
an office facility and a production / warehouse facility under two non-cancelable operating leases that expire in May 2019 and
June 2027, respectively. Future minimum rental and lease commitments under non-cancelable operating leases with terms in excess
of one year as of September 30, 2018, are as follows:
|
|
Amount
|
|
Fiscal year ending December 31:
|
|
|
|
2018
|
|
$
|
69,960
|
|
2019
|
|
|
249,090
|
|
2020
|
|
|
230,640
|
|
2021
|
|
|
230,640
|
|
2022
|
|
|
230,755
|
|
Thereafter
|
|
|
1,043,315
|
|
Total minimum lease payments
|
|
$
|
2,054,400
|
|
Rent expense,
including deferred rent expense of $203,754, incurred pursuant to operating leases for the nine months ended September 30, 2018
and 2017, was $99,188 and $0, respectively.
Application
Services Memorandum of Understanding
The Company entered
into a memorandum of understanding (the “MOU”) with an unrelated party (the “Party”) for consulting services
related to the application for up to three (3) medical marijuana licenses during the period September 7, 2018 and September 20,
2018. The Company will receive $1,000,000 once the state of Nevada grants such license or a provisional license. Upon receipt of
the $1,000,000 the Company will issue to the Party restricted common stock with a market value equal to $1,000,000 using a 30-day
moving average price as the denominator to calculate the number of shares issued. During the three months ended September 30, 2018
the Party paid the Company $232,500 for the application services and issued 91,177 shares of its restricted common stock.
Litigation
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.
Note 13 — Subsequent Events
Termination of Advisory Agreement
In September
2018, the Company terminated the Advisory Agreement pursuant to its terms and paid to the Consultant compensation consisting of
25,000 shares of the Company’s common stock and a $6,000.00 cash payment.
Filing of Registration Statement on
Form S-1
On October 5, 2018, in accordance with
the Company’s obligations under the Registration Rights Agreement, the Company filed a Registration Statement on Form S-1
(File No. 333-227735) (the “Registration Statement”) with the SEC to register 3,335,000 shares of the Company’s
stock for resale. The Company filed Amendment No. 1 to the Registration Statement in response to comments received by the SEC.
The SEC declared the Registration Statement effective on October 24, 2018.
Purchase of Office Building
In September 2018, the Company entered
into a contract, through its wholly owned subsidiary, to purchase an approximately 10,000 square foot office building located
at 1300 South Jones Boulevard, Las Vegas, Nevada for $1,500,000, subject to seller financing in the amount of $1,100,000, at an
interest rate of 6% per annum. The Company closed on the purchase on October 18, 2018. The building will be home to the Company’s
business operations. In addition, the Company intends to lease the available portions of the building to other entities engaged
in the regulated cannabis business. The Company intends to occupy the premises beginning in the middle of the fourth quarter of
2018.