Item 1. Consolidated Financial Statements
MJ HOLDINGS, INC.
Consolidated Balance Sheets
(Unaudited)
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Assets
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash
|
|
$
|
934,296
|
|
|
$
|
2,513,863
|
|
Prepaid expenses
|
|
|
635,163
|
|
|
|
5,500
|
|
Total Current Assets
|
|
|
1,569,459
|
|
|
|
2,519,363
|
|
Fixed assets
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
|
378,237
|
|
|
|
17,535
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
38,633
|
|
|
|
42,383
|
|
Intangible asset (net)
|
|
|
300,000
|
|
|
|
300,000
|
|
Noncurrent assets held for disposition
|
|
|
584
|
|
|
|
584
|
|
Total Assets
|
|
$
|
2,286,913
|
|
|
$
|
2,879,865
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
4,250
|
|
|
$
|
70,382
|
|
Customer deposits
|
|
|
386,416
|
|
|
|
-
|
|
Convertible notes payable due to related party
|
|
|
-
|
|
|
|
900,000
|
|
Total Current Liabilities
|
|
|
390,666
|
|
|
|
970,382
|
|
|
|
|
|
|
|
|
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
|
Deferred rent
|
|
|
209,881
|
|
|
|
104,565
|
|
Total noncurrent liabilities
|
|
|
209,881
|
|
|
|
104,565
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
600,547
|
|
|
|
1,074,947
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Preferred stock, par value $0.001, 5,000,000 shares authorized; 0 shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, par value $0.001,
95,000,000 shares authorized; 63,477,188 and 62,675,407 shares issued and outstanding as of June 30, 2018 and December 31, 2017,
respectively
|
|
|
63,477
|
|
|
|
62,675
|
|
Additional paid in capital
|
|
|
2,305,299
|
|
|
|
1,704,764
|
|
Common stock to be issued
|
|
|
600,000
|
|
|
|
400,000
|
|
Stock subscription receivable
|
|
|
(125,000
|
)
|
|
|
-
|
|
Accumulated deficit
|
|
|
(1,157,410
|
)
|
|
|
(362,521
|
)
|
Total Stockholders’ Equity
|
|
|
1,686,366
|
|
|
|
1,804,918
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
2,286,913
|
|
|
$
|
2,879,865
|
|
The accompanying notes are
an integral part of these unaudited consolidated financial statements.
MJ HOLDINGS, INC.
Consolidated Statements of Operations
(Unaudited)
|
|
Three months ended
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
419,233
|
|
|
|
35,479
|
|
|
|
610,998
|
|
|
|
35,479
|
|
Sales and marketing
|
|
|
174,741
|
|
|
|
-
|
|
|
|
184,256
|
|
|
|
-
|
|
Total operating expenses
|
|
|
593,974
|
|
|
|
35,479
|
|
|
|
795,254
|
|
|
|
35,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(593,974
|
)
|
|
|
(35,479
|
)
|
|
|
(795,254
|
)
|
|
|
(35,479
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Expenses (Income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (income)
|
|
|
(161
|
)
|
|
|
11,103
|
|
|
|
(365
|
)
|
|
|
13,743
|
|
Total other expenses (income)
|
|
|
(161
|
)
|
|
|
11,103
|
|
|
|
(365
|
)
|
|
|
13,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(593,813
|
)
|
|
|
(46,582
|
)
|
|
|
(794,889
|
)
|
|
|
(49,222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(593,813
|
)
|
|
$
|
(46,582
|
)
|
|
$
|
(794,889
|
)
|
|
$
|
(49,222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share:
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
63,159,497
|
|
|
|
52,732,969
|
|
|
|
63,071,079
|
|
|
|
52,732,969
|
|
The accompanying notes are an integral part
of these unaudited consolidated financial statements.
MJ HOLDINGS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
|
|
Six months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
Net loss
|
|
$
|
(794,889
|
)
|
|
$
|
(49,222
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Amortization of debt issuance cost
|
|
|
-
|
|
|
|
6,600
|
|
Amortization of deferred rent expense
|
|
|
105,315
|
|
|
|
-
|
|
Common stock issued for services
|
|
|
4,836
|
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
(629,663
|
)
|
|
|
-
|
|
Deposits
|
|
|
3,750
|
|
|
|
-
|
|
Accounts payable and accrued liabilities
|
|
|
(66,132
|
)
|
|
|
7,143
|
|
Customer deposits
|
|
|
386,416
|
|
|
|
-
|
|
Net cash used in operating activities
|
|
|
(990,367
|
)
|
|
|
(35,479
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchase of growth license
|
|
|
-
|
|
|
|
(300,000
|
)
|
Payments for leasehold improvements
|
|
|
(360,701
|
)
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
(360,701
|
)
|
|
|
(300,000
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
471,501
|
|
|
|
-
|
|
Proceeds from common stock to be issued
|
|
|
200,000
|
|
|
|
-
|
|
Proceeds from notes payable
|
|
|
-
|
|
|
|
335,479
|
|
Repayment of convertible note due to related party
|
|
|
(900,000
|
)
|
|
|
-
|
|
Net cash provided by (used in) financing activities
|
|
|
(228,499
|
)
|
|
|
335,479
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(1,579,567
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Cash, beginning of period
|
|
|
2,513,863
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period
|
|
$
|
934,296
|
|
|
$
|
-
|
|
The accompanying notes are an integral part
of these unaudited consolidated financial statements.
MJ HOLDINGS,
INC.
Notes to the
Consolidated Financial Statements
For the three and six months ended June
30, 2018 and 2017
(Unaudited)
Note 1 — Nature of the
Business
MJ Holdings, Inc.
(“the Company”) is a holding company whose subsidiaries provide infrastructure, consulting and construction services,
in addition to holding, and managing third party state issued cultivation and production licenses.
Our wholly owned subsidiary, Red Earth,
LLC (“Red Earth”) is the holder of provisional Medical Marijuana Establishment Registration Certificate (the “Certificate”).
In April 2018,
the State of Nevada finalized and approved the transfer of the provisional Medical Marijuana Establishment Registration Certificate
(the “Certificate”) from our wholly owned subsidiary, Red Earth, LLC (“Red Earth”) to the Company. The
Certificate, when perfected, will allow the Company to commence legal marijuana cultivation activities in the State of Nevada.
HDGLV, LLC, a wholly owned subsidiary of Red Earth, holds a triple-net leasehold, with an option to buy, on a 17,298 square-foot
building, which will be home to our cultivation facility. We expect Phase 1 of this facility to be completed in the third quarter
of 2018. We expect final approval by the State of Nevada, Department of Taxation of our Certificate and issuance of a Business
License from the City of Las Vegas in the third quarter of 2018.
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 have agreed to complete the construction of a 120,000 square-foot outdoor grow facility, including the construction of an 8,000
square-foot building and installation of security fencing, meeting the State of Nevada building codes and regulations. We expect
to receive all necessary state and local approvals and complete construction of the facility to commence operations in the latter
part of the third quarter of 2018.
It is the Company’s
intention to grow its 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.
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 six months ended June 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 wholly owned 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 June 30, 2018.
Note 3 —
Going Concern
The Company’s
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 provisional Medical Marijuana Establishment Registration Certificate issued by the State of Nevada for the cultivation
of medical marijuana. There is no assurance on the receipt and/or timing of final approvals from the appropriate authorities. The
Company has not generated any revenues from inception (October 17, 2016) to June 30, 2018 and has an accumulated deficit of $1,157,410.
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
Green Houses
On February 8, 2018 the Company entered
into an agreement with an unrelated third party for the purpose of designing, purchasing and reselling green houses for sale. Under
the agreement the Company was to contribute its expertise in construction, and the other party their expertise in designing, procuring
and operating green houses. In April of 2018 the third party informed the Company that it was unable to satisfy their duties
under the agreement due to unrelated hardships. Upon their departure the Company agreed with the purchasers to complete the agreement,
which includes the design, purchase and installation of six (6) green houses to four (4) separate purchasers.
As of June 30, 2018 the Company had received
$386,416 in deposits from the purchasers which were recorded as customer deposits on the balance sheet, and had prepaid for the
manufacture and sale of the green houses $335,163 as prepaid expenses related to the design, purchase and resale of green houses.
Management Agreement
On April 18, 2018 the Company entered into
a management agreement with a Nevada company (the “Licensed Operator”) that holds a cultivation license, such 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 grow facility meeting the local and state building codes and regulations to cultivate marijuana.
Upon completion of the build-out of the
outdoor grow facility and obtaining the appropriate approvals from the local and state authorities, the Company has agreed to generate
sales of at least $5 million per year from product cultivated from the outdoor grow facility. The Licensed Operator may terminate
the agreement if annual sales fall below the $5 million minimum requirement as defined in the agreement. Prior to the termination
of the agreement by the Licensed Operator, the Company may cure any applicable deficiency by paying 10% of the deficiency to the
Licensed Operator.
Pursuant to the management agreement, the
Licensed Operator will retain 15% of the net revenues generated from product cultivated from the outdoor grow facility and pay
85% of the net revenues to the Company. Upon execution of the agreement, the Company paid $300,000 to the Licensed Operator as
consideration for the opportunity to construct and manage the outdoor grow facility on the Licensed Operator’s property.
In exchange for the initial consideration, the Licensed Operator has agreed not to retain 15% of the first $2 million of net revenues
generated from the outdoor grow facility. In addition, once the outdoor grow 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 June 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, Management Agreement. Pursuant to that agreement the Company
commenced construction of the outdoor grow facility.
As of June 30,
2018 the Company had incurred and capitalized $296,735 in costs associated with the construction of this facility.
During the quarter
ended June 30, 2018 the Company incurred costs associated with the development of an indoor grow facility located at 2310 Western
Avenue in Las Vegas, which holds a triple net leasehold interest in a 17,298 square-foot building where a provisional cultivation
license to grow marijuana within the City of Las Vegas in the State of Nevada has been obtained. Once completed the Company intends
to operate as an indoor marijuana cultivation and an agritourism destination. Completion of this facility is expected in the third
quarter of 2018. 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.
As of June 30,
2018 the Company had incurred and capitalized $81,502 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 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. In February 2017, an investor advanced the Company $350,000 to fund the purchase of the Provisional
Grow License.
The Provisional
Grow License remains in a provisional status until the Company has completed the build out 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
and the Company begins the cultivation process, the intangible asset will be amortized over its useful life.
Note 7 —
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 Chief Executive Officer. The
convertible note payable is due October 15, 2018. The note is 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 six months from the issuance
date, at a rate equal to one half of one percent (0.50%) per annum. Interest shall be 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.
In January 2018,
the $900,000 convertible note payable due to a related party was repaid in full.
Note 8 —
Capital Stock
During the six months ended June 30,
2018, the Company sold and issued an aggregate of 795,333 shares of the Company’s common stock at $0.75 per share for
gross proceeds of $596,500, $125,000 of which were received in July 2018. In addition, the Company received $200,000 pursuant
to stock subscription agreements to purchase 266,667 shares of common stock at $0.75 per share, but the shares had not been
issued as of August 24, 2018.
During the six months ended June 30, 2018,
the Company issued an aggregate of 6,448 shares of the Company’s common stock in exchange for professional services valued
at $4,836.
Note 9 — Warrants
Prior to the Reverse Merger, 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 six months ended June 30, 2018:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Avg.
|
|
|
|
|
|
|
Exercise
|
|
Warrants:
|
|
Shares
|
|
|
Price
|
|
Balance at December 31, 2017
|
|
|
166,665
|
|
|
$
|
5.88
|
|
Issued
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
Balance at June 30, 2018
|
|
|
166,665
|
|
|
$
|
5.88
|
|
Note 10 —
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 June 30, 2018, are as follows:
|
|
Amount
|
|
Fiscal year ending December 31:
|
|
|
|
2018
|
|
$
|
139,920
|
|
2019
|
|
|
249,090
|
|
2020
|
|
|
230,640
|
|
2021
|
|
|
230,640
|
|
2022
|
|
|
230,755
|
|
Thereafter
|
|
|
1,043,315
|
|
Total minimum lease payments
|
|
$
|
2,124,360
|
|
Rent expense,
including deferred rent expense of $209,881, incurred pursuant to operating leases for the six months ended June 30, 2018 and
2017, was $105,316 and $0, respectively.
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 11 — Subsequent Events
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 MJ Holdings and its subsidiaries.
The Advisory Agreement is for a term of 12 months and provides for payment for services to be rendered, pursuant to the Advisory
Agreement, by the issuance of 14,444 shares of the Company’s common stock during the term of the Advisory Agreement. These
shares are exempt from registration pursuant to Rule 144 of the Securities Act and such shares shall be restricted for a period
of two years from the date of issuance unless otherwise registered. The Advisory Agreement also grants to the Consultant an option
to acquire up to 10,000 additional shares of the Company’s common stock at a strike price to be determined.
On August 9, 2018 (the “Transaction
Date”), the Company entered into a 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 3,333,334 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 with the purchaser, pursuant to which the Company is obligated to file a registration statement with the Securities
and Exchange Commission (the “Commission”), within 30 calendar days of the Transaction Date, to register for resale
the shares of common stock underlying the Preferred Stock. If the Commission 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 Commission, the
90th calendar day following the Transaction Date), or upon the occurrence of other events, then the Company shall 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 Purchase Agreement on a monthly basis until the event has been cured.
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.
On August 13, 2018 (the “Effective
Transaction Date”), the Company closed the transactions contemplated by an Exclusive Distribution Agreement (the “Agreement”).
The Agreement is between the Company and a designer and seller (the “Seller”) of a series of related products, all
of which are designed to be utilized to consume cannabis products by vaporizing oil and other products related thereto (the “Goods”).
The Company has the exclusive right to distribute the Goods in the territory of Nevada (the “Territory”). The Agreement
further requires the Company to advertise and market the Goods in the Territory.
Pursuant to the terms of the Agreement,
the Company purchased certain Goods from the Seller and tendered the sum of two million dollars ($2,000,000). The funds were transferred
to the Seller on the Effective Transaction Date. The Seller has applied for patent protection in respect of one of the products.
As of the date of this Current Report, the patent application is still pending.
The initial term of the Agreement is for
one year with additional successive one-year renewals, subject to certain standard termination provisions. The Agreement is subject
to standard termination provisions; however, the Seller has the option to terminate the Agreement, on 30 days’ written notice,
if the Company fails to purchase a sufficient minimum quantity of Goods from the Seller. The Company has met its obligations for
the first year of the Agreement ($2,000,000). Thereafter, for each renewal term, the Company’s minimum purchase obligation
for the Goods is currently $500,000, subject to good faith negotiation at the end of each year. Notwithstanding the exclusivity
provided by the Agreement, the Seller reserves the right to sell Goods, directly or indirectly, to a specific retail group (the
“Excluded Account”). In such event, the Seller shall pay to the Company a fee equivalent to 5% of the gross sales
of the Goods that the Seller sold to an Excluded Account in Nevada. The Company, however, does not have the right to appoint sub-distributors
or sell Goods through any third party. In connection with the transactions contemplated by the Agreement, the Seller granted to
the Company a non-exclusive, non-transferrable, and non-sub licensable fully paid license agreement. The Agreement provides standard
cross-indemnity provisions.
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, 2017, and in our subsequent filings with
the SEC, and include, among others, the following: marijuana is illegal under federal law, competition, our business is dependent
on laws pertaining to the marijuana industry, government regulation, our business model depends on the availability of private
funding, we will be subject to general real estate risks and the availability, 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.
Company Background
MJ Holdings, Inc. is a holding company
whose subsidiaries provide infrastructure, consulting and construction services, in addition to holding, and managing third party
state issued cultivation and production licenses.
MJ Holdings, Inc. was originally 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, we amended and restated our Articles of Incorporation and changed our name to MJ Holdings, Inc.
From February 2014 to January 2017, we
owned and leased real estate properties zoned for legalized marijuana operations to licensed marijuana operators.
On November 22, 2016, in connection with
a plan to divest ourselves of our real estate business, we submitted to our shareholders an offer to exchange (the “Exchange
Offer”) our 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 the Company’s
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 holds 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.
Reverse Merger
On December 15, 2017, we 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 common stock of the Company, par value $0.001 and a Promissory
Note in the amount of $900,000. The merger was accounted for as a reverse merger, whereby Red Earth was considered the accounting
acquirer and became a wholly-owned subsidiary of the Company. As a result of the acquisition, the members of Red Earth became the
beneficial owners of approximately 88% of the Company’s common stock immediately following the acquisition, obtained controlling
interest of the Company, and retained key management positions of the Company. 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 U.S. Securities and Exchange Commission (the “SEC”). The consolidated financial statements
after completion of the reverse merger will include the assets, liabilities and results of operations of the combined company from
and after the closing date of the reverse merger.
Our corporate headquarters is located at
3275 South Jones Blvd., Las Vegas, Nevada, 89146, and our telephone number is (702) 879-4440. Our website address is: www.MJHoldingsinc.com.
No information available on or through our websites shall be deemed to be incorporated into this Form 10-K. Our common stock, par
value $0.001, is quoted on the OTC Markets Group, Inc.’s listing service under the symbol “MJNE.”
Our Business
Through our acquisition of Red Earth and
their wholly owned subsidiary, HDGLV, LLC (“HDGLV”) we expect to commence legal marijuana cultivation activities in
the third quarter of 2018 upon approval by the Nevada Department of Taxation of the transfer of a Provisional Cultivation License
to Red Earth and the required state and city approvals for our cultivation facility. 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.
We hold a provisional State of Nevada issued cannabis cultivation
license, and through HDGLV, we hold a triple-net leasehold, with an option to buy, on a 17,298 square-foot building, which will
be home to our cultivation facility.
Critical Accounting Policies, Judgments
and Estimates
There were no material changes to our critical accounting policies
and estimates during the interim period ended June 30, 2018.
Please see our Annual Report on Form 10-K
for the year ended December 31, 2017, for a discussion of our critical accounting policies and estimates and their effect, if any,
on the Company's financial results.
Results of Operations for the Three
Months Ended June 30, 2018 and 2017
Revenue
The Company has not generated any revenues
during the three months ended June 30, 2018 and 2017. During the first two quarters of 2018, we began accepting customer deposits
for the sale, design, installation and/or construction of greenhouse solutions to be used in the cultivation process in the cannabis
industry. We expect to generate revenues from these greenhouse projects in the third quarter of 2018.
Operating Expenses
General and administrative expenses were
$419,233 for the three months ended June 30, 2018, as compared to
$35,479
during
the three months ended June 30, 2017. The general and administrative expenses for the three months ended June 30, 2018 consisted
mainly of professional fees of $143,533 and rent expense of $96,068. The general and administrative expenses for the three months
ended June 30, 2017 consisted of professional fees of $35,479.
Sales and marketing expenses were $174,741
for the three months ended June 30, 2018, as compared to
$0
during the three
months ended June 30, 2017.
Interest Expense (Income)
The Company recorded $161 of interest
income during the three months ended June 30, 2018, as compared to $
11,103 of interest expense
during the three months ended June 30, 2017. The interest expense was associated with an investor’s advance of $350,000
to fund the acquisition of a Provisional Grow License in February 2017.
Net Loss
For the three months ended June 30, 2018,
we recorded a net loss of $593,813 compared to a net loss of $46,582 for the three months ended June 30, 2017.
Results of Operations for the Six Months
Ended June 30, 2018 and 2017
Revenue
The Company has not generated any revenues
during the six months ended June 30, 2018 and 2017. During the first two quarters of 2018, we began accepting customer deposits
for the sale, design, installation and/or construction of greenhouse solutions to be used in the cultivation process in the cannabis
industry. We expect to generate revenues from these greenhouse projects in 2018.
Operating Expenses
General and administrative expenses were
$610,998 for the six months ended June 30, 2018, as compared to
$35,479
during
the six months ended June 30, 2017. The general and administrative expenses consisted mainly of professional fees of $257,463 and
rent expense of $171,100. The general and administrative expenses for the six months ended June 30, 2017 consisted of professional
fees of $35,479.
Sales and marketing expenses were $184,256
for the six months ended June 30, 2018, as compared to
$0
during the six months
ended June 30, 2017.
Interest Expense (Income)
The Company recorded $365 of interest
income during the six months ended June 30, 2018, as compared to $
13,743 of interest expense
during the six months ended June 30, 2017. The interest expense was associated with an investor’s advance of $350,000
to fund the acquisition of a Provisional Grow License in February 2017.
Net Loss
As a result of the foregoing, for the six
months ended June 30, 2018, we recorded a net loss of $794,889 compared to a net loss of $49,222 for the six months ended June
30, 2017.
Liquidity and Capital Resources
The Company had cash of $934,296 at June
30, 2018, compared with cash of $2,513,863 at December 31, 2017.
Operating Activities
During the six months ended June 30, 2018,
we used $990,367 of cash in operating activities primarily as a result of our net loss of $794,889, offset by amortization of deferred
rent expense of $105,315, common stock issued for services valued at $4,836, and net changes in operating assets and liabilities
of $305,629.
During the six months ended June 30, 2017,
we used $35,479 of cash in operating activities primarily as a result of our net loss of $49,222, offset by amortization of debt
discount of $6,600, and net changes in operating assets and liabilities of $7,143
Investing Activities
Net cash used in investing activities during
the six months ended June 30, 2018, was $360,701, which consisted of the payments for leasehold improvements.
Net cash used in investing activities during
the six months ended June 30, 2017, was $300,000, which consisted of the purchase of a provisional grow license issued in the State
of Nevada.
Financing Activities
During the six months ended June 30, 2018,
financing activities provided $471,501 in proceeds from the issuance of common stock, $200,000 in proceeds from common stock to
be issued. The Company used $900,000 in repayments of convertible notes payable.
During the six months ended June 30, 2017,
financing activities provided $335,479 in proceeds from notes payable.
The Company expects to begin generating
revenues during the fourth quarter of 2018 but will likely incur additional net losses during this time period. Although we can
provide no assurances, we believe our cash on hand and our ability to raise additional capital will provide sufficient liquidity
and capital resources to fund our business for the next twelve months.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Seasonality
We do not consider our business to be seasonal.
Commitments and Contingencies
We are subject to the legal proceedings
described in “Item 3. 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 six months ended June 30, 2018 had a material impact on our operations.