Notes
to the Condensed Consolidated Financial Statements
For
the Nine Months Ended September 30, 2020 and 2019
(Unaudited)
Note
1 — Nature of the Business
MJ
Holdings, Inc. (OTCPK: 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.
On
August 25, 2020, the Company entered into a Consulting Agreement (the “Agreement”) with Sylios Corp (the “Consultant”).
Under the terms of the Agreement, the Consultant shall prepare the Company’s filings with the Securities and Exchange Commission
(the “SEC”) including its Annual report on Form 10-K and Quarterly Reports on Form 10-Q. The Consultant shall receive
$20,000 in cash compensation plus 100,000 shares of the Company’s common stock. The Agreement has a term of six (6) months
or until the Company’s Quarterly report for the period ended September 30, 2020 is filed with the SEC. Please see
Note 12 — Subsequent Events for further information.
Certain
information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America (“US GAAP”) have been condensed or omitted. These condensed consolidated
financial statements should be read in conjunction with the Company’s audited financial statements contained in its Annual
Report on Form 10-K for the year ended December 31, 2019 (“Form 10-K”). The results of operations for the three and
nine months ended September 30, 2020 and 2019 are not necessarily indicative of the operating results for the full years.
Note
2 — Summary of Significant Accounting Policies
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Red Earth, LLC, HDGLV,
LLC, Icon Management, LLC, Alternative Hospitality, LLC, Condo Highrise Management, LLC and Prescott Management, LLC. 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.
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, 2020 and December 31, 2019. 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. In general, fair values determined by Level 1 inputs utilize
quoted prices (unadjusted) for identical instruments that are highly liquid, observable and actively traded in over-the-counter
markets. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable
for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active
markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose
inputs are observable and can be corroborated by market data. Level 3 inputs are unobservable inputs that are supported by little
or no market activity and that are significant to the fair value of the assets or liabilities. In certain cases, the inputs used
to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy
within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant
to the fair value measurement in its entirety. 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.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Nine Months Ended September 30, 2020 and 2019
(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.
As
of September 30, 2020 and December 31, 2019, the Company’s investment in marketable securities – available for sale
was determined to be a level 1 investment.
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 had $8,385 cash at September 30, 2020.
The
Company, at various times throughout the year, had cash in financial institutions in excess of Federally insured limits. 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.
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, 2020
|
|
|
December
31, 2019
|
|
Accounts
receivable
|
|
$
|
29,338
|
|
|
$
|
23,675
|
|
Less:
allowance
|
|
|
(12,000
|
)
|
|
|
(12,000
|
)
|
Net
accounts receivable
|
|
$
|
17,338
|
|
|
$
|
11,675
|
|
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
Inventories
consist of finished goods as of September 30, 2020. Inventories are valued at the lower of cost or net realizable value. The Company
determines cost on the basis of the first in first out method. The Company periodically reviews inventories for obsolescence and
any inventories identified as obsolete are reserved or written off. The Company has performed a valuation and has established
a reserve against its finished goods inventory.
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.
Property
and equipment are depreciated over their estimated useful lives as follows:
Buildings
|
|
12
years
|
Land
|
|
Not
depreciated
|
Leasehold
Improvements
|
|
Lessor
of lease term or 5 years
|
Machinery
and Equipment
|
|
5
years
|
Furniture
and Fixtures
|
|
5
years
|
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Nine Months Ended September 30, 2020 and 2019
(Unaudited)
Note
2 — Summary of Significant Accounting Policies (continued)
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.
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.
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 over time.
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. 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.
Other
Current Liabilities
The
Company’s other current liabilities consisted of amounts due under the management agreement and performance guarantee with
Acres Cultivation, LLC. As of September 30, 2020 and December 31, 2019, other current liabilities were $432,006 and $-,
respectively.
Stock-Based
Compensation
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 0% 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.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Nine Months Ended September 30, 2020 and 2019
(Unaudited)
Note
2 — Summary of Significant Accounting Policies (continued)
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.
Convertible
Instruments
The
Company evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC 815, Derivatives
and Hedging Activities.
Applicable
GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free-standing derivative
financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics
and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks
of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is
not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate
instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
The
Company accounts for convertible instruments (when it has been determined that the embedded conversion options should not be bifurcated
from their host instruments) as follows: The Company records, when necessary, discounts to convertible notes for the intrinsic
value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common
stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under
these arrangements are amortized over the term of the related debt to their stated date of redemption.
Operating
Leases
The
Company leases production and warehouse facilities and office space under operating leases. Operating lease agreements may contain
rent escalation clauses, rent holidays or certain landlord incentives, including tenant improvement allowances. Rent expense with
scheduled rent increases or landlord incentives are recognized on a straight-line basis over the lease term, beginning with the
effective lease commencement date, which is generally the date in which the Company takes possession of or controls the physical
use of the property.
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.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Nine Months Ended September 30, 2020 and 2019
(Unaudited)
Note
2 — Summary of Significant Accounting Policies (continued)
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
Leases:
In February 2016, FASB issued ASU. 2016-02: Leases (Topic 842) which requires a lessee to recognize a right-of-use
(ROU) asset and lease liability on the balance sheet for all leases with a term longer than 12 months and provide enhanced disclosures.
The Company will adopt the new standard effective January 1, 2019 using a modified retrospective method and will not restate comparative
periods. The Company expects to elect the ‘package of practical expedients,’ which permits the Company not to reassess
under the new standard the Company’s prior conclusions about lease identification, lease classification and initial direct
costs. While the Company continues to assess all of the effects of adoption, the Company currently believes the most significant
effects relate to (1) the recognition of new ROU assets and lease liabilities on the Company’s balance sheet for its real
estate operating leases; and (2) providing significant new disclosures about the Company’s leasing activities.
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.
Note
3 — Going Concern
The
Company has recurring net losses, which have resulted in an accumulated deficit of $18,241,114 and negative working capital
of $2,930,125 as of September 30, 2020. The Company incurred a net loss of $2,209,544 for the nine months ended
September 30, 2020. At September 30, 2020, the Company had cash and cash equivalents of $8,385. 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.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Nine Months Ended September 30, 2020 and 2019
(Unaudited)
Note
3 — Going Concern (continued)
The
Company’s current capital resources include cash and investments. Historically, the Company has financed its operations
principally through equity and debt financing.
Note
4 — Property and Equipment
Property
and Equipment at September 30, 2020 and December 31, 2019 consisted of the following:
|
|
September
30,
2020
|
|
|
December
31,
2019
|
|
Leasehold
Improvements
|
|
|
323,281
|
|
|
|
323,281
|
|
Machinery
and Equipment
|
|
|
1,052,203
|
|
|
|
1,052,203
|
|
Building
and Land
|
|
|
3,150,000
|
|
|
|
3,150,000
|
|
Furniture
and Fixtures
|
|
|
578,844
|
|
|
|
543,366
|
|
Total
property and equipment
|
|
|
5,104,328
|
|
|
|
5,068,850
|
|
|
|
|
|
|
|
|
|
|
Less:
Accumulated depreciation
|
|
|
(831,231
|
)
|
|
|
(494,768
|
)
|
Property
and equipment, net
|
|
|
4,273,097
|
|
|
|
4,574,082
|
|
Depreciation
expense for the nine months ended September 30, 2020 and 2019 was $336,462 and $257,834, respectively.
Note
5— 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.
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, the Company begins the cultivation process.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Nine Months Ended September 30, 2020 and 2019
(Unaudited)
Note
6 — Notes Payable
Notes
payable as of September 30, 2020 and December 31, 2019 consist of the following:
|
|
September
30,
2020
|
|
|
December
31,
2019
|
|
Note
payable bearing interest at 6.50%, originated November 1, 2018, due on October 31, 2023, originally $1,100,000 (i)
|
|
$
|
1,026,438
|
|
|
$
|
1,086,662
|
|
Note
payable bearing interest at 5.0%, originated January 17, 2019, due on January 31, 2022, originally $750,000 (ii)
|
|
|
750,000
|
|
|
|
750,000
|
|
Note
payable bearing interest at 9.0%, originated January 17, 2019, due on January 16, 2020, originally $150,000 (iii)
|
|
|
100,000
|
|
|
|
100,000
|
|
Note
payable bearing interest at 6.5% originated April 1, 2019, due on March 31, 2022, originally $250,000 (iv)
|
|
|
237,167
|
|
|
|
242,425
|
|
Notes
payable, related party, bearing interest at 9.0%, originated February 20, 2020, due on February 19, 2021, originally $110,405
(v)
|
|
|
110,405
|
|
|
|
-
|
|
Notes
payable, related party, bearing interest at 9.0%, originated April 3, 2020, due on March
30, 2021, originally $90,000 (vi)
|
|
|
90,000
|
|
|
|
-
|
|
Total
notes payable
|
|
$
|
2,314,010
|
|
|
$
|
2,179,087
|
|
Less:
current portion
|
|
|
(380,343
|
)
|
|
|
(1,249,561
|
)
|
Long-term
notes payable
|
|
$
|
1,933,667
|
|
|
$
|
929,526
|
|
|
(i)
|
On
September 21, 2018, the Company, through its wholly-owned subsidiary Prescott Management,
LLC, entered into a contract to purchase an approximately 10,000 square foot office building
located at 1300 South Jones Boulevard, Las Vegas, Nevada 89146 for $1,500,000, subject
to seller financing in the amount of $1,100,000, amortizing over 30 years at an interest
rate of 6.5% per annum with monthly installments of $6,952.75 beginning on November 1,
2018, and continuing on the same day of each month thereafter until October 31, 2019.
Upon the one-year anniversary of the note, a principal reduction payment of $50,000 is
due, and provided that the monthly payments and the principal reduction payment have
been made, the payments will be recalculated and re-amortized on the same terms with
a new scheduled monthly payment of $6,559 beginning on November 1, 2019 and continuing
until October 31, 2023, at which time the entire sum of principal in the amount of $986,438,
plus any accrued interest, is due and payable. The Company closed the purchase on October
18, 2018. The building is home to the Company’s business operations. As of September
30, 2020, $1,026,438 principal and $11,736 interest remain due. Please
see Note 12 — Subsequent Events for further information.
|
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Nine Months Ended September 30, 2020 and 2019
(Unaudited)
Note
6 — Notes Payable (continued)
|
(ii)
|
On
January 17, 2019, the Company executed a promissory note for $750,000 with FR Holdings LLC, a Wyoming limited liability company.
The 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 September 30, 2020, $750,000 principal and $29,583 interest remain due.
|
|
|
|
|
(iii)
|
On
January 17, 2019, the Company executed a short-term promissory note for $150,000 with Let’s Roll Holdings, LLC, and
entity controlled by the Company’s Chief Cultivation Officer and a director. The note accrues interest at 9.0% per annum
and is due on January 16, 2020. Principal payments in the amount of $50,000 were made during the year ended December 31, 2019.
As of September 30, 2020, $100,000 principal and $17,526 interest remain due.
|
|
|
|
|
(iv)
|
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, 2020, $237,167
principal and $10,807 interest remain due.
|
|
|
|
|
(v)
|
On
February 20, 2020, the Company’s subsidiary, Alternative Hospitality, Inc. (the “Borrower”), issued a Short-Term
Promissory Note (the “Note”) to Pyrros One, LLC (the “Holder”), an entity controlled by a relative
of a director of the Company, in the amount of $110,405 that matures on February 19, 2021. The Note shall bear interest at
a rate of 9% per annum with interest-only payments in the amount of $825 due on or before the twentieth day of each month
commencing on April 20, 2020. The Borrower was required to make an interest and principal reduction payment in the amount
of $1,233 on or before March 20, 2020. The Holder is granted a security interest in that certain real property located at
1300 S. Jones Blvd, Las Vegas, NV 89146, which is owned by the Borrower. As of September 30, 2020, $110,405 principal and
$1,125 interest remain due.
|
|
|
|
|
(vi)
|
On
March 31, 2020, the Company’s subsidiary, Condo Highrise Management, LLC (the “Borrower”), issued a Short-Term
Promissory Note (the “Note”) to Pyrros One, LLC (the “Holder”), an entity controlled by a relative
of a director of the Company, in the amount of $90,000 that matures on March 30, 2021. The Note shall bear interest at a rate
of 9% per annum with interest-only payments in the amount of $675 due on or before the first day of each month commencing
on May 1, 2020. The Holder is granted a security interest in that certain real property located at 4295 Hwy 343, Amargosa,
NV 89020. which is owned by the Borrower. The transaction closed on April 3, 2020. As of September 30, 2020, $90,000 principal
and $4,050 interest remain due.
|
|
|
Amount
|
|
Fiscal
year ending December 31:
|
|
|
|
|
2020
|
|
|
7,070
|
|
2021
|
|
|
376,593
|
|
2022
|
|
|
915,613
|
|
2023
|
|
|
1,014,734
|
|
2024
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
Total
minimum loan payments
|
|
$
|
2,314,010
|
|
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Nine Months Ended September 30, 2020 and 2019
(Unaudited)
Note
7 — Commitments and Contingencies
Employment
Agreements
On
October 15, 2018, the Company entered into an employment agreement (the “Tierney Employment Agreement”) with Terrence
M. Tierney. Pursuant to the Tierney Employment Agreement, the Company appointed Mr. Tierney, to the position of Chief Administrative
Officer, in addition to his previous role as Secretary. The initial term of employment is for a three-year period (or until September
30, 2021), unless extended or otherwise terminated in accordance with its terms. The effective date of The Tierney Employment
Agreement automatically renews for successive periods of three (3) years unless either party gives written notice to the other
party that it does not wish to automatically renew. Mr. Tierney’s annual salary is equal to or greater than any other senior
executive of the Company with the exception of the Chief Executive Officer. The Tierney Employment Agreement defers salary of
$10,000 per month of Mr. Tierney’s salary until such time as the Company has achieved gross annual sales of $20,000,000
or net annual profits (as defined in the Tierney Employment Agreement) of $5,000,000 or has raised a total of $50,000,000 in equity
or debt financing. In addition, the Company agreed to issue 500,000 shares of common stock pursuant to a stock award agreement
within thirty (30) days of adoption of an omnibus benefit plan. Such shares have not yet been issued. On January 22, 2020, the
Board appointed Mr. Tierney to the additional position of interim President. There are no changes to Mr. Tierney’s current
employment agreement other than his additional duties as President. Mr. Tierney will have day-to-day oversight of the Company’s
operations and continue to advise the Board on strategic initiatives and business development. On August 7, 2020, the Company’s
Board of Directors terminated, with cause, the employment of Terrence M. Tierney, JD, effective immediately. At the time of termination,
Mr. Tierney served as the Company’s Secretary, Chief Administrative Officer and interim President. Under the terms of Mr.
Tierney’s Employment Agreement, the Company shall be under no further obligation to the Executive, except to pay all accrued
but unpaid base salary and accrued vacation to the date of termination thereof.
On
February 18, 2019, the Company entered into an employment agreement (the “Balaouras Employment Agreement”) with Paris
Balaouras. Mr. Balaouras was appointed Chief Executive Officer of the Company on December 15, 2017. The initial term of employment
was for a five-year period (or until December 31, 2022), unless extended or otherwise terminated in accordance with its terms.
The effective date of the Balaouras Employment Agreement was January 1, 2019, and continues until the earlier of: (i) the effective
date of any subsequent employment agreement between Mr. Balaouras and us; (ii) the effective date of any termination of employment
as provided for in the Balaouras Employment Agreement; or (iii) five (5) years from the effective date; provided, that the Balaouras
Employment Agreement automatically renews for successive periods of three (3) years unless either party gives written notice to
the other party that it does not wish to automatically renew, which written notice must be received by the other party no less
than ninety (90) days and no more than one hundred eighty (180) days prior to the expiration of the applicable term. Mr. Balaouras
elected to waive any 2018 salary, which was recorded as an expense and additional to paid-in capital in 2018, and defer 52% of
his 2019 salary; which such deferment shall continue until such time as the Company has operated on a positive cash flow basis
for a period of not less than three months. At that time, all deferred compensation shall be payable in equal monthly installments
for a period of 24 months. At the sole election of Mr. Balaouras, he may be paid any deferred compensation in cash or in the Company’s
common stock.
On
June 1, 2019, the Company entered in an employment agreement with Mr. Laurence Ruhe to serve as the Company’s Chief Financial
Officer. Mr. Ruhe shall serve a two-year term, effective June 1, 2019, with annual base compensation of $100,000 plus 46,296 of
Stock to vest in twelve equal monthly installments of 3,858 shares commencing on July 1, 2019. Mr. Ruhe’s compensation will
be reviewed annually and may be adjusted as determined by the Company’s Compensation Committee or Board. Additionally, Mr.
Ruhe shall be entitled to receive an annual discretionary bonus as determined by the Board. On March 2, 2020, Mr. Ruhe tendered
his resignation to the Company’s Board of Directors (the “Board”). The Board accepted Mr. Ruhe’s resignation
effective immediately. Mr. Ruhe also stepped down as an advisor to the Company’s Audit Committee. Additionally, pursuant
to the terms of Mr. Ruhe’s employment contract with the Company, Mr. Ruhe forfeited 11,709 shares of unvested common stock
previously issued to Mr. Ruhe. The Company elected to allow Mr. Ruhe to retain the shares that had yet to vest at the time of
his resignation.
On
July 15, 2019 the Company’s Board of Directors (the “Board”) appointed Richard S. Groberg to be the President
of the Company. Mr. Groberg shall initially serve a three-year term effective July 15, 2019 pursuant to a written employment agreement
(the “Employment Agreement”) with an annual base compensation of $180,000, of which $5,000 per month shall be deferred
until January 15, 2020 or such earlier date pursuant to the terms of the Employment Agreement and then shall be payable in cash
or shares of the Company’s common stock (the “Stock”). The Employment Agreement provides for a restricted stock
award of 400,000 shares of the Company’s Stock to vest: 25% six months after the effective date of the Employment Agreement;
25% on the first anniversary after the effective date of the Employment Agreement, 25% on the second anniversary after the effective
date of the Employment Agreement and 25% on the third anniversary after the effective date of the Employment Agreement. On January
22, 2020, Mr. Groberg, tendered his resignation to the Company’s Board of Directors (the “Board”). The Board
accepted Mr. Groberg’s resignation effective immediately. The Company and Mr. Groberg executed a mutual Separation Agreement.
The Company elected to allow Mr. Groberg to retain the shares that had yet to vest at the time of his resignation.
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 500,000 shares of the Company’s common stock, exercisable at a price of $.75 per share.
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 500,000 shares of the Company’s common stock, exercisable at a price
of $.75 per share.
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 500,000 shares of the Company’s
common stock, exercisable at a price of $.75 per share.
Board
of Directors Services Agreements
On
September 1, 2020, the Board appointed David C. Dear as a director of the Company.
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 (15,000) 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.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Nine Months Ended September 30, 2020 and 2019
(Unaudited)
Note
7 — Commitments and Contingencies (continued)
Operating
Leases
The
Company leases a production / warehouse facility under a non-cancelable operating lease that expires in June 2027.
As
of September 30, 2020, the Company recorded operating lease liabilities of $2,191,558 and right of use assets for operating
leases of 2,034,071. During the nine months ended September 30, 2020, operating cash outflows relating to operating lease
liabilities was $177,088, and the expense for right of use assets for operating leases was $160,207. As of September
30, 2020, the Company’s operating leases had a weighted-average remaining term of 8.13 years.
Future
minimal rental and lease commitments under non-cancelable operating leases with terms in excess of one year as of September 30,
2020, are as follows:
|
|
Amount
|
|
Fiscal year
ending December 31:
|
|
|
|
|
2020
(excluding the nine months ended September 30, 2020)
|
|
|
87,660
|
|
2021
|
|
|
350,640
|
|
2022
|
|
|
350,755
|
|
2023
|
|
|
350,986
|
|
2024
|
|
|
351,333
|
|
Thereafter
|
|
|
1,150,995
|
|
Total
minimum lease payments
|
|
$
|
2,642,369
|
|
Rent
expense, incurred pursuant to operating leases for the nine months ended September 30, 2020 and 2019, was $262,980
and $323,754, 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. There is no pending litigation involving the Company at this time.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Nine Months Ended September 30, 2020 and 2019
(Unaudited)
Note
8 — Capital Stock
General
The
Company is currently authorized to issue up to 95,000,000 shares of Common Stock and 5,000,000 shares of preferred stock, par
value $0.001 per share.
Common
Stock
Of
the 95,000,000 shares of Common Stock authorized by the Company’s Articles of Incorporation, 65,756,262 shares of Common
Stock are issued and outstanding as of September 30, 2020. 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, 2020 and year ended December 31, 2019, the Company issued and/or sold the following unregistered
securities:
For
the nine months ended September 30, 2020:
On
February 11, 2020, the Company issued 250,000 shares of common stock to its former Secretary and President for services rendered
on behalf of the Company.
On
March 31, 2020, the Company issued 31,251 shares of common stock to its former Chief Financial Officer for services rendered on
behalf of the Company.
On
March 31, 2020, the Company issued 18,562 shares of common stock to its current Interim Chief Executive Officer for services rendered
on behalf of the Company.
On
April 7, 2020, the Company issued 20,000 shares of common stock to an accredited investor for purchasing shares through the Company’s
Regulation D offering. The shares were issued in full satisfaction of the previously recorded stock subscription payable for
funds received by the Company on October 13, 2018 in the amount of $10,000.
On
July 22, 2020, the Company entered into a Securities Purchase Agreement (the “Agreement”) with an accredited investor
(the “Investor”). Under the terms of the Agreement, the Investor agreed to purchase 4,500,000 shares of the Company’s
common stock at $0.0888 per share for a total purchase price of $400,000. The Investor was also to be issued a warrant granting
the Investor the right to acquire 1,000,000 shares of the Company’s common stock at an exercise price of $0.10. The warrant
was to be dated August 3, 2020 and have a term of three years. The Investor funded $250,000 of the purchase amount on July 31,
2020. On August 10, the Company returned $125,465 of the funds to the Investor for a net investment of $124,535. The Company is
to issue the Investor 1,402,279 shares of common stock and a warrant granting the Investor the right to purchase 250,000 shares
of common stock under the revised terms of the Agreement. Please see Note 12 — Subsequent Events for further
information.
For
the year ended December 31, 2019:
Between
January 1, 2019 and December 2019, the Company issued 1,845,635 shares of Common Stock to approximately 15 persons in exchange
for services rendered on behalf of the Company valued at approximately $896,229. The issuances were made pursuant to the exemptions
for registration afforded by Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D, promulgated under the Securities
Act.
Between
January 1, 2019 and December 31, 2019, the Company sold an aggregate of 12,130,000 shares of Common Stock for $6,075,000 to approximately
20 investors all of whom were accredited investors. The issuances were made pursuant to the exemptions for registration afforded
by Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D, promulgated under the Securities Act.
On
February 10, 2019, the Company’s largest shareholder, Red Dot Development, LLC (“Red Dot”), returned 20,000,000
shares of the Company’s common stock to the Company for cancellation in exchange for a payment of $20,000, which as of December
31, 2019 has been accrued as a payable by the Company.
On
April 1, 2019, the Company issued 66,667 shares of common stock to the Sellers of THC park as per the terms of the Sales Agreement.
On
July 15, 2019, the Company issued 500,000 shares of common stock for the conversion of a $250,000 note payable.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Nine Months Ended September 30, 2020 and 2019
(Unaudited)
Note
8 — Capital Stock (continued)
At
September 30, 2020 and December 31, 2019, there are 65,756,262 and 65,436,449 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 5,000,000 shares of preferred stock, par value $0.001 per share, authorized in our Articles
of Incorporation, 2,500 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, $1,000) 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.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Nine Months Ended September 30, 2020 and 2019
(Unaudited)
Note
8 — Capital Stock (continued)
Preferred
Stock Issuances
For
the nine months ended September 30, 2020:
None
For
the year ended December 31,2019:
None
At
September 30, 2020 and December 31, 2019, there are 0 and 0 shares of Series A Preferred Stock issued and outstanding, respectively.
Note
9 — Basic and Diluted Earnings (Loss) per Common Share
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, 2020, basic and diluted loss per common share were the same since there were no potentially
dilutive shares outstanding during the respective periods. The outstanding warrants and options as of September 30, 2020, to purchase
1,243,000 shares of common stock were not included in the calculations of diluted loss per share because the impact would have
been anti-dilutive.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Nine Months Ended September 30, 2020 and 2019
(Unaudited)
Note
10 — Stock Based Compensation
A
summary of the warrants and options issued, exercised and expired are below:
Stock
Options
On
June 22, 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. Pursuant to the Advisory Agreement, the Company granted 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 a term of 3
years. A summary of the options issued, exercised and expired are below:
Options:
|
|
Shares
|
|
|
Weighted
Avg.
Exercise Price
|
|
|
Remaining
Contractual
Life
in Years
|
|
Balance
at December 31, 2019
|
|
|
10,000
|
|
|
$
|
1.20
|
|
|
|
1.5
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance
at September 30, 2020
|
|
|
10,000
|
|
|
$
|
1.20
|
|
|
|
1.0
|
|
Options
outstanding as of September 30, 2020 and December 31, 2019 were 10,000 and 10,000, respectively.
Warrants
In
June of 2019, in conjunction with the Company’s offering under Rule 506 of Regulation D of the Securities Act (the “Offering”),
the Company granted warrants to each participant in the Offering upon the following terms and conditions: (a) each participant
has the right to acquire additional shares of the Company’s Common Stock equal to ten (10%) of the shares purchased in the
offering (the “Warrants”); (b) one-half of the Warrants granted to each participant have an exercise price of $0.65
and the other one-half have an exercise price of $1.00, and (c) the Warrants shall be exercisable between June 5, 2019, the date
of grant and June 4, 2021 the date of expiration of the Warrants. A summary of the warrants issued, exercised and expired are
below:
Warrants:
|
|
Shares
|
|
|
Weighted
Avg.
Exercise Price
|
|
|
Remaining
Contractual
Life
in Years
|
|
Balance
at December 31, 2019
|
|
|
1,233,000
|
|
|
$
|
0.83
|
|
|
|
1.5
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance
at September 30, 2020
|
|
|
1,233,000
|
|
|
$
|
0.83
|
|
|
|
0.8
|
|
Warrants
outstanding as of September 30, 2020 and December 31, 2019 were 1,233,000 and 1,233,000, respectively.
Note
11 — Related Party Transactions
On
February 20, 2020, the Company’s subsidiary, Alternative Hospitality, Inc. (the “Borrower”), issued a Short-Term
Promissory Note (the “Note”) to Pyrros One, LLC (the “Holder”), an entity controlled by a relative of
a director of the Company, in the amount of $110,405 that matures on February 19, 2021. The Note shall bear interest at a rate
of 9% per annum with interest-only payments in the amount of $825 due on or before the twentieth day of each month commencing
on April 20, 2020. The Borrower was required to make an interest and principal reduction payment in the amount of $1,233 on or
before March 20, 2020. The Holder is granted a security interest in that certain real property located at 1300 S. Jones Blvd,
Las Vegas, NV 89146, which is owned by the Borrower.
On
March 31, 2020, the Company’s subsidiary, Condo Highrise Management, LLC (the “Borrower”), issued a Short-Term
Promissory Note (the “Note”) to Pyrros One, LLC (the “Holder”), an entity controlled by a relative of
a director of the Company, in the amount of $90,000 that matures on March 30, 2021. The Note shall bear interest at a rate of
9% per annum with interest-only payments in the amount of $675 due on or before the first day of each month commencing on May
1, 2020. The Holder is granted a security interest in that certain real property located at 4295 Hwy 343, Amargosa, NV 89020 which
is owned by the Borrower. The transaction closed on April 3, 2020.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Nine Months Ended September 30, 2020 and 2019
(Unaudited)
Note 12 — Subsequent Events
The following material events occurred
subsequent to the quarter ended September 30, 2020:
On
October 1, 2020, the Company entered into an Employment Agreement (the “Agreement”) with Jim Kelly. The Agreement
became effective as of October 1, 2020. Under the terms of the Agreement, the Employee shall serve as the Company’s Interim
Chief Financial Officer for a term of (i) the sooner of six (6) months, or (ii) the completion of all regulatory filings, including
but not limited to the Company’s 2019 Annual Report on Form 10-K, the March 31, 2020 Quarterly Report on Form 10-Q, the
June 30, 2020 Quarterly Report on Form 10-Q, the September 30, 2020 Quarterly Report on Form 10-Q and all required Current Reports
on Form 8-K, with the Securities and Exchange Commission (“SEC”) to bring the Company current with the SEC. The Employee
shall receive a base salary of $24,000 annually, shall be eligible to receive an annual discretionary bonus during the Term, based
on performance criteria determined by the C-Suite of the Company in its sole discretion, in an amount equal to up to 400% of the
Employee’s base salary for the then current fiscal year, and at commencement of the Term the Employee shall receive a grant
of stock of 500,000 restricted shares of the Company’s common stock.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Nine Months Ended September 30, 2020 and 2019
(Unaudited)
Note
12 — Subsequent Events (continued)
On
October 13, 2020, the Company’s former President and Secretary filed a lien in Clark County, Nevada in the net amount of
$501,085 against the Company’s property located at 1300 S. Jones Blvd, Unit 110, Las Vegas, NV 89146 for unpaid compensation,
expense reimbursement, accrued leave, severance pay and penalties. Additionally, on November 6, 2020, the Company’s former
President and Secretary filed two liens in Nye County, NV in the net amount of $501,085 against the Company’s property located
at 4295 Highway 73, Armagosa, NV 89020, also known as the Company’s THC park, and one lien in Nye County, NV in the net
amount of $501,085 against the property owned by Acres Cultivation, LLC and the site of the Company’s three (3) acre grow.
On
December 8, 2020, the Company entered into Amendment No. 1 (the “Amendment”) to the Revenue Participation Rights Agreement
previously entered into with Blue Sky Companies, LLC and Let’s Roll NV, LLC. Under the terms of the Amendment, the new effective
Date of the Agreement shall be revised to the date that the first payment shall be due in 2021 from the 2020 3-acre grow. In addition,
(i) the Company’s 2020 obligation under the original Agreement for the 2019 grow is deemed satisfied in full, (ii) on or
before April 30, 2027, the Company shall pay a $26,000 exit fee.
On
December 10, 2020, the Company received a short-term loan in the amount $100,000 from a director of the Company. The loan bears
no interest and is due on demand.
On
December 14, 2020, the Company issued 500,000 shares of restricted common stock to its Secretary as per the terms of the Employment
Agreement dated September 15, 2020.
On
December 14, 2020, the Company issued 500,000 shares of restricted common stock to its Interim Chief Financial Officer as per
the terms of the Employment Agreement dated October 1, 2020.
On
December 14, 2020, the Company issued 250,000 shares of restricted common stock to its Interim Chief Executive Officer for services
rendered on behalf of the Company.
On
December 14, 2020, the Company issued 1,402,279 shares of restricted common stock to an accredited investor as per the terms of
the Securities Purchase Agreement dated July 22, 2020.
On
December 14, 2020, the Company issued 2,500 shares of restricted common stock for services rendered on behalf of the Company.
On
December 14, 2020, the Company issued 2,500 shares of restricted common stock for services rendered on behalf of the Company.
On
December 14, 2020, the Company issued 200,000 shares of restricted common stock to a Consultant for consulting services rendered
on behalf of the Company.
On
December 14, 2020, the Company and Sylios Corp entered into an Amendment to the Consulting Agreement (the “Amendment”)
dated August 25, 2020. Under the terms of the Amendment, the parties agreed to amend the compensation due the Consultant to as
follows: Consultant shall receive a total of $10,000 cash compensation and 200,000 shares of the Company’s common stock.
As of the date of the Amendment, the Consultant had received all cash compensation.
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.
On
January 11, 2021, the Company (as “Purchaser”) entered into a Letter of Intent (“LOI”) with MJ Distributing,
Inc. (the “Seller”) to define the terms for the purchase of MJ Distributing C202, LLC and MJ Distributing P133, LLC
inclusive of two cultivation licenses and two production licenses. The parties had previously entered into a Membership Interest
Purchase Agreement (the “MIPA 1”) dated April 2, 2019 to facilitate the same proposed transaction. The parties did
not close on MIPA 1. Under the terms of the new Membership Interest Purchase Agreement (“MIPA 2”), the Purchaser is
to make a non-refundable payment in the amount of $300,000 upon execution of the LOI, a second payment in the amount of $200,000
on or before January 31, 2021, a third payment in the amount of $100,000 on or before February 12, 2021 and subsequent payments
in the amount of $100,000 on or before the 12th day of each month thereafter until the balance is paid in full. The
Seller shall also receive 200,000 shares of common stock issued by the Purchaser.
On
January 12, 2021, the Company closed on the sale of its corporate office building located at 1300 S. Jones Blvd, Las Vegas, NV
89146 for the sales price of $1,627,500.
On
January 14, 2021, the Company entered into a Debt Conversion and Stock Purchase Agreement (the “Agreement”) with David
Dear (the “Investor”), a director of the Company. Under the terms of the Agreement, the Company shall issue 526,316
shares of common stock to the Investor in satisfaction of the $100,000 short term loan made to the Company by the Investor on
December 10, 2020. In addition, the Investor elected to purchase an additional 263,148 shares of common stock at a per share price
of $0.19 for a total of $50,000.
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”):
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1)
|
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);
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|
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|
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2)
|
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
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|
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3)
|
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).
|
Within
the Notice, Acres makes claims that the Company and its subsidiaries failed to perform in accordance with the terms and conditions
of the Cooperation Agreement. The Company and Acres (the “Parties”) are in active discussions in an effort to
remedy the alleged breaches noted within the Notice. There is no guarantee that the Parties will reach a resolution satisfactory
to the Company.
On
January 22, 2021 (the “effective Date”), the 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:
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(i)
|
a $600,000 non-refundable
deposit upon execution of the Agreement, and;
|
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(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, and;
|
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(iii)
|
$10,000 on the
first of each month for security and compliance, and;
|
|
(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 to the Company as the Management Fee.
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The
transaction closed on January 27, 2021.