Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§
232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files). Yes þ No
☐
The aggregate market value of the voting and
non-voting shares of the Company’s Common Stock held by non-affiliates based on the last sale of the Common Stock on September
30, 2019, the last business day of the registrant’s most recently completed fiscal quarter, was $15,937,098.
PART
I
Item
1. Business
Company
Overview
MJ
Holdings Inc. (OTC Pink: MJNE) is a highly-diversified, publicly-traded, cannabis holding company providing cultivation management,
licensing support, production management, asset and infrastructure development – concentrated in the Las Vegas market. It
is our intention to grow our business and provide a 360-degree spectrum of infrastructure (including: cultivation, production
management, dispensaries and consulting services) through: the acquisition of existing companies; joint ventures with existing
companies possessing complementary expertise, and/or through the development of new opportunities. We intend 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’s assets and operations have expanded significantly over the past year; and, the Company recently received more
than $6,000,000, from the sale of common stock previously returned to the Company, to facilitate further expansion of its cultivation
footprint as well as to launch seed generation and production facilities and the rollout of its Highland Brothers brand of cannabis
products for consumption in the United States, Canada and European markets.
Under
the leadership of our CEO, Paris Balaouras, the Company has assembled a senior management team possessing significant experience
in building, acquiring and operating high-growth, multi-division businesses in a public company setting. The Company also has
retained operating level employees, directly and through strategic relationships, possessing significant experience in marijuana
cultivation and production.
Current
Initiatives include:
|
●
|
a
three-acre, hybrid, outdoor, marijuana-cultivation facility (the “Three Acre Facility”) in the Amargosa Valley
of Nevada. We have the contractual right to cultivate marijuana on this property until 2026, for which we receive eighty-five
percent (85%) of the net revenues produced from our management of this facility.
|
|
●
|
260
acres of farmland for the purpose of cultivating additional marijuana (the “260 Acres”) purchased in January
of 2019. This property, on which we intend to utilize a state-of-the-art cultivation system for growing, initially, an additional
five acres of marijuana in 2020, is contiguous to the property that we manage in Amargosa. This cultivation system should
allow us to harvest two full crops per year. The land also has more than 180-acre feet of permitted water rights, which will
provide more than sufficient water to markedly increase the Company’s marijuana cultivation capabilities.
|
|
●
|
a
nearby commercial trailer and RV park (the “Trailer Park”) that can supply necessary housing for our farm
employees. After our 2018 harvest, which yielded approximately 5,400 lbs. of marijuana, we came to realize that we would need
to find a more efficient method of bringing our cultivation team to our facilities every day. In April of 2019, we consummated
the purchase of the 50-acre plus Trailer Park for $600,000 in cash and $50,000 of the Company’s restricted common stock
(see further description of this transaction hereinbelow). This property also has sufficient land and water to locate our
hemp seed genetics lab; we are in the process of securing the necessary permits to commence construction of the facility.
|
|
●
|
a
definitive agreement to acquire an additional cultivation license and production license, both currently located in Nye
County Nevada. On April 2, 2019 we executed a membership interest purchase agreement to acquire all of the outstanding membership
interests of MJ Distributing C202, LLC and MJ Distributing P133, LLC, the holders of a State of Nevada provisional cultivation
license and provisional production license, respectively (see further description of this transaction hereinbelow). We expect
to consummate this transaction in the fourth quarter of 2019 after receipt of all necessary regulatory approvals.
|
|
●
|
indoor
cultivation facility build-out in the City of Las Vegas (the “Indoor Facility”). Through our wholly owned
subsidiary, Red Earth, LLC, we hold Medical Marijuana Establishment Registration Certificate, Application No. C012. In cooperation
with our joint venture partners, Element NV LLC we expect to invest more than $3,500,000.00 in the build-out of this more
than 17,000 square foot state-of-the-art facility, which should be fully operational in the second quarter of 2020 (see Subsequent
Events for additional information). We presently have approximately eight years remaining on our lease on this building with
two additional five-year options, as well as an option to purchase the property for $2,607,880.
|
|
●
|
exploration
of cannabis-related opportunities in the European Union, with a particular focus on Greece - In December of 2018 we established
MJ International Research Company, Ltd., headquartered in Dublin, Ireland. We have established two wholly owned subsidiaries
in Greece, Gioura International Single Member Private Company for the acquisition of land and MJ Holdings International Single
Member S.A. for the required licenses.
|
|
●
|
a
wellness hotel concept (the “Alternative Hospitality”). In November of 2018 the Company formed Alternative
Hospitality, Inc., a joint venture with a successful hotel operator, is developing hotel properties with a focus on the wellness
aspects of cannabis and cannabis related products.
|
We
also continue to identify potential acquisition of revenue producing assets and licenses within legalized cannabis markets both
nationally and internationally that can maximize shareholder value while providing a 360-degree spectrum of infrastructure, cultivation,
production, management, dispensaries and consulting services in the regulated cannabis industry
We
may face substantial competition in the operation of cultivation facilities in Nevada. Numerous other companies have also been
granted cultivation licenses, and, therefore, we anticipate that we will face competition from these other companies. Our management
team has experience in successfully developing, implementing, and operating marijuana cultivation and related businesses in other
legal cannabis markets. We believe our experience in cultivation and facility management will provide us with a competitive advantage
over our competitors. Senior management now also includes a number of executives possessing significant experience with public
companies, in mergers and acquisitions, and with raising public and private equity and debt financing.
The
Company occupies the entire second floor of an approximately 10,000 sq. ft. office building, located in the City of Las Vegas.
This properly was acquired in October of 2018.
Corporate
History/Acquisition of Red Earth
We
were 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.
On
November 22, 2016, in connection with a plan to divest ourselves of our real estate business, we submitted to our stockholders
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 our Common Stock in exchange for 1,800,000 shares of MJRE’s common units, representing membership
interests in MJRE. Effective February 1, 2017, we transferred our ownership interests in the real estate properties and our subsidiaries,
through which we hold 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
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 our Common Stock and a promissory
note in the amount of $900,000. The acquisition was accounted for as a “Reverse Merger”, whereby Red Earth was considered
the accounting acquirer and became our wholly owned subsidiary. Upon the consummation of the acquisition, the now-former members
of Red Earth became the beneficial owners of approximately 88% of our Common Stock, obtained controlling interest of the Company,
and retained certain of our key management positions. In accordance with the accounting treatment for a “reverse merger”
or a “reverse acquisition”, our historical financial statements prior to the reverse merger will be replaced with
the historical financial statements of Red Earth prior to the reverse merger in all future filings with the SEC.
The
consolidated financial statements after completion of the reverse merger included: the assets, liabilities, and results of operations
of the combined company from and after the closing date of the reverse merger, with only certain aspects of pre-consummation stockholders’
equity remaining in the consolidated financial statements. In February of 2019, the Company repurchased, from the Company’s
largest shareholder, 20,000,000 of the 26,366,484 shares that this shareholder originally received in connection with the Reverse
Merger - for a total purchase price of $20,000.
From
February 2014 to January 2017, we owned and leased to licensed marijuana operator’s real estate properties zoned for legalized
marijuana operations.
Our
Business History
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. In January of 2019, the Company
entered into a revised agreement with the Licensed Operator in order to be more stringently aligned with Nevada marijuana laws.
The material terms of the agreement remain unchanged. The Licensed Operator is contractually obligated to pay over to the Company
eighty-five (85%) percent of gross revenues defined as gross proceeds from sales of marijuana products minus applicable state
excise taxes and local sales tax. The agreement is to remain in force until April, 2026. In April 2019, the Licensed Operator
was acquired by a publicly traded Canadian cannabis company; the acquisition was subject to all of the contractual obligations
between the Company and the Licensed Operator.
Pursuant
to those agreements, the Licensed Operator engaged us to develop, manage and operate a licensed cultivation facility on property
owned by the Licensed Operator. Between April and August of 2018, at our sole cost and expense, we completed the construction
of a 120,000 square-foot outdoor grow facility, including the construction of an 8,000 square-foot building and installation of
required security fencing, meeting all of the State of Nevada’s stringent building codes and regulations. Operation of this
facility commenced in August, 2018 with our first test grow. We commenced harvest operations in November of 2018 and completed
the harvest on December 24, 2018 - yielding more than 5,000 total pounds of marijuana trim and flower.
In
April 2018, the State of Nevada finalized and approved the transfer of provisional Medical Marijuana Establishment Registration
Certificate No. 012 (the “Certificate”) from Acres Medical, LLC to our wholly owned subsidiary, Red Earth, LLC (“Red
Earth”). HDGLV, LLC (“HDGLV”), a wholly owned subsidiary of Red Earth, holds a triple-net leasehold interest
in a 17,298 square-foot commercial building located on Western Avenue in the City of Las Vegas, which will be home to our indoor
cultivation facility (the “Western Facility”). The initial term of the lease is for a period of ten years with two
additional five-year lease options. HDGLV also possesses an option to purchase the building for $2,607,880 which is exercisable
between months 25 and 60 of the initial term of the lease. In August of 2018 we received final approval from the State of
Nevada, Department of Taxation to commence cultivation activities with respect to the Certificate. Contemporaneously therewith,
Red Earth was issued a Business License by the City of Las Vegas to operate a marijuana cultivation facility at the Western Facility;
however, the City of Las Vegas Department of Building & Safety requested that additional modifications be made to the premises
prior to issuance of a certificate of occupancy (“COI”). The COI is expected to be issued in the first quarter of
2020, which will then allow the Company to commence legal marijuana cultivation activities within the City of Las Vegas.
In
July of 2018 the Company entered into a Corporate Advisory Agreement (“Advisory Agreement”) with a New York
City based consulting company (the “Consultant”) to provide business management, corporate compliance and related
services to the Company and its subsidiaries. The Advisory Agreement granted to the Consultant an option to acquire up to 10,000
additional shares of the Company’s common stock at an exercise price of $1.20. The options have a term of three years. The
fair value of these stock options was determined to be $6,738 using the Black-Scholes-Merton option-pricing model based on the
following assumptions: (i) volatility rate of 222%, (ii) discount rate of 2.88%, (iii) zero expected dividend yield, and (iv)
expected life of three years. In September 2018, the Company terminated the Advisory Agreement pursuant to its terms and paid
to the Consultant compensation consisting of 25,000 shares of the Company’s common stock and a $6,000 cash payment.
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 was 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 “Transaction Closing Date”), the Company entered into a Securities Purchase Agreement (the “Securities
Purchase Agreement”), pursuant to which the Company sold and issued 2,500 shares of its Series A Convertible Preferred Stock
(the “Preferred Stock”) to a single institutional, accredited investor for $1,000 per share or an aggregate subscription
of $2,500,000. During the year ended December 31, 2018, the Preferred Stock was converted into 3,333,333 shares of the Company’s
Common Stock at a conversion price of $0.75 per share, subject to adjustment as described in the Certificate of Designation. The
Company also entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with the purchaser,
which required the Company to register for resale the underlying common stock with the Securities and Exchange Commission. The
registration statement on Form S-1/A was declared effective on October 24, 2018.
On
August 13, 2018 (the “Effective Transaction Date”), the Company closed the transactions contemplated by an Exclusive
Distribution Agreement (the “Distribution Agreement”). The Agreement is between the Company and Healthier Choices
Management Corp., a designer and seller (the “Seller” or “HCMC”) of a series of integrated products, all
of which are designed to be utilized to consume cannabis products by vaporizing oil and other related products (the “Goods”).
The Company has the exclusive right to distribute the Goods in the territory of Nevada (the “Territory”). The Distribution
Agreement further requires the Company to advertise and market the Goods in the Territory. Pursuant to the terms of the Distribution
Agreement, the Company purchased certain of the Goods from the Seller and paid the sum of two million dollars ($2,000,000). The
funds were transferred to HCMC on the Effective Transaction Date. The Seller has applied for and received patent protection in
respect of one of the products. The Distribution Agreement is subject to standard termination provisions; however, the Seller
has the option to terminate the Distribution 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. Thereafter,
for each renewal term, the Company’s minimum purchase obligation for the Goods is $500,000, subject to good faith negotiation
at the end of each contract year. 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. This Agreement was terminated,
pursuant to the terms of the Agreement, effective August 12, 2019.
On
August 13, 2018, the Company entered into a Stock Exchange Agreement with HCMC to acquire 1,500,000,000 shares of their common
stock in exchange for 85,714 shares of the Company’s common stock. The value of the stock exchanged by each party on the
date of exchange was $150,000. This represents a less than 5% ownership interest for each company in the others’ company,
and the shares issued are restricted pursuant to Rule 144 of the Securities Act of 1933 (the “Act”). Please see note
11, Inventory, for further discussion of the Company’s additional business interests with HCMC.
The
Company recorded the 85,714 shares of HCMC common stock as an available for sale security and intends to mark the value to market
each reporting period based on the current market value of its held shares in HCMC. As of the transaction date, the price as quoted
on the OTC Markets for HCMC common stock was $0.0001 per share.
In August of 2018, the Company executed
a letter of intent (“LOI”) for the acquisition of all of the membership units of Farm Road, LLC, a Wyoming limited
liability company (“Farm Road”). Farm Road was the owner of five parcels of farmland in the Amargosa Valley of Nevada
totaling 260 acres and the concomitant 180 acre-feet of water rights. Pursuant to the terms of a membership interest purchase agreement
(“MIPA”) executed between the Company and Farm Road in November of 2018, the Company was to acquire Farm Road for $1,000,000
on the following terms: a deposit of $50,000 in cash and $50,000 of the Company’s restricted common stock upon execution
of the LOI, to be held in escrow until closing, $150,000 in cash payable at closing and a promissory note bearing 5% simple annual
interest (the “Promissory Note”) in the amount of $750,000.00 payable to FR Holdings, LLC (an unrelated third party)
(“FRH”) in 36 equal monthly interest only payments of three thousand one hundred twenty five ($3,125.00) dollars commencing
on the March 1, 2019. On January 18, 2019, pursuant to the terms the MIPA, the Company acquired a 100% interest in Farm Road. The
terms of the Promissory Note include a balloon payment to be made on January 17, 2022 of any then remaining principal balance and
accrued interest. The MIPA further provides that FRH shall be entitled to receive a consulting fee of five per cent (5%) of the
gross sales from any commercial use of the property up to a maximum of five hundred thousand ($500,000.00) dollars payable to FRH
within two years of the January 18, 2019 closing date. This will be the home of our Nye County cultivation facility upon closing
of our purchase of the required licenses. The Company has started construction of a state-of-the-art five-acre cultivation facility
on this property which we expect to complete in the first quarter of 2020.
In
September of 2018 the Company, through its wholly owned subsidiary Red Earth, applied for five Recreational Marijuana Establishment
Licenses to operate up to five retail marijuana stores within the state of Nevada. The Company’s goal was to open a store
within the City of Las Vegas, as well as additional dispensaries in Washoe County near Lake Tahoe, in North Las Vegas, unincorporated
Clark County and Henderson, Nevada. The Company received notice in early December 2018 that none of the submitted applications
received sufficiently high enough scores after being graded by the Nevada Department of Taxation (“NVDOT”). In connection
with the license applications we entered into a Memorandum of Understanding (“MOU”) with a third party (the “Party”).
Pursuant to the terms of the MOU the Party made payments to us totaling $232,500, which was paid during the year ended December
31, 2018. The Party was entitled to receive shares of our restricted common stock with a fair market value as of the trading day
immediately preceding the date the first license application was submitted to NVDOT (September 20, 2018) equal to $232,500. The
Company issued 91,177 shares of common stock to the Party in connection with this transaction. Subsequent to December 31, 2018,
the Company has entered into an agreement with the Party to relieve the Company and the Party of any further obligations under
the MOU in exchange for an additional 373,823 shares of the Company’s restricted common stock.
The
Company has joined with more than 15 other plaintiffs in an action against the State of Nevada in regard to how the applications
were scored and as to why licenses were granted to other applicants in contravention of the guidelines published by the State
of Nevada. On August 23, 2019 a Nevada District Court judge issued a preliminary injunction enjoining any of the entities that
were granted licenses from opening new dispensaries based upon the failure of NVDOT (the administrative body tasked with adopting
and enforcing marijuana regulations within the State of Nevada) to enforce a provision of Ballot Question 2 (“BQ2”),
that was approved by Nevada voters in 2016 and adopted by the Nevada legislature and codified as NRS 453D, which legalized the
sale and distribution of recreational use marijuana. The law requires that “each prospective owner, officer and board member
of a marijuana establishment license applicant” undergo a background check. The judge found that many of the successful
license applicants failed to comply with this requirement. On August 29, 2019 the judge modified the ruling and is allowing thirteen
of the successful license applicants who the State of Nevada have certified as having complied with the requirements of BQ2 to
open new dispensaries as granted in December of 2018. The plaintiffs shall now continue to trial on the merits of the pending
litigation against the State of Nevada.
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 $986,428, 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. In addition, the Company has
leased some of the available portions of the building to other entities engaged in the regulated cannabis business generating
approximately $1,150 of monthly revenue.
On
October 5, 2018, in accordance with the Company’s obligations under the Registration Rights Agreement, the Company filed
a Registration Statement on Form S-1 (File No. 333-227735) (the “Registration Statement”) with the SEC to register
3,335,000 shares of the Company’s stock for resale. The Company filed Amendment No. 1 to the Registration Statement in response
to comments received by the SEC. The SEC declared the Registration Statement effective on October 24, 2018. Pursuant to the amended
Registration Statement the holder of the 3,335,000 shares agreed not sell any of the stock at a price below $3.00 per share until
such time as the Company was listed on a national exchange or was no longer being quoted on the OTC Markets Group Inc.’s
Pink® Market. On November 6, 2018 the Company’s stock began trading through the quoted on the OTC Markets Group Inc.’s
Pink® Market.
On
October 15, 2018, we entered into an employment agreement (the “Tierney Employment Agreement”) with Terrence M. Tierney.
Pursuant to the Employment Agreement, we appointed Terrence M. Tierney, to the additional position of Chief Administrative Officer,
in addition to his current 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 Employment Agreement is
October 15, 2018, and continues until the earlier of: (i) the effective date of any subsequent employment agreement between Mr.
Tierney and us; (ii) the effective date of any termination of employment as provided for in the Employment Agreement; or (iii)
three (3) years from the effective date; provided, that the 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 the Employment
Agreement, 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. Tierney will report to the Chief Executive Officer and the
Board of Directors.
Mr.
Tierney’s annual salary shall be equal to or greater than any other senior executive of the Company with the exception of
the Chief Executive Officer. Mr. Tierney is entitled to the benefits other employees are entitled to, including medical, dental,
and vision insurance; life and disability insurance; retirement and profit-sharing programs; paid holidays; and such other benefits
and perquisites as are approved by the Board of Directors. 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 by the Company of an omnibus benefit plan. The Tierney
Employment Agreement defers $10,000 per month of Mr. Tierney’s salary until such time as the Company has posted 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. Tierney’s employment may be terminated for cause or without cause. In addition,
in the event of disability, the Company is entitled to terminate Mr. Tierney if he is unable to perform his duties without reasonable
accommodation for a period of more than thirty (30) consecutive days. Upon such termination, Mr. Tierney is entitled to all accrued
but unpaid salary and vacation. In the event of a “total disability,” as defined in the Employment Agreement, Mr.
Tierney is also entitled to receive his normal monthly salary for the shorter of the first three (3) months of disability or until
any disability insurance policy (offered as part of his employment) begins to pay benefits. After three (3) months, Mr. Tierney
is only entitled to receive amounts under the disability insurance coverage, if any. In the event of partial disabilities, Mr.
Tierney is entitled to that portion of his normal monthly salary that bears the same ratio to his normal monthly salary as the
amount of time which the Executive is able to devote to the usual performance of duties during such period bears to the total
time Mr. Tierney devoted to performing such services prior to the time the partial disability commenced. In the event of a combination
of total and partial disability, the maximum total disability compensation Mr. Tierney shall be entitled to cannot exceed an amount
equal to one (1) times his normal monthly compensation.
In
November of 2018, the Company formed Alternative Hospitality, Inc. (“Alternative”), a Nevada corporation as a joint
venture with TVK, LLC (“TVK”), an unrelated third-party, is a Florida limited liability company. The principals of
TVK, have over 40 years of broad experience operating and developing hotel properties. The Company owns fifty-one percent (51%)
of Alternative and TVK owns the remaining forty-nine percent (49%). Alternative will develop hotel properties with a focus on
the wellness aspects of cannabis and cannabis related products. Roger Bloss, one of the principal owners of TVK, will serve as
Alternative’s President, the Company’s Secretary, Terrence M. Tierney, will also serve as Vice President and Secretary
of Alternative and Mr. Bernard Moyle has been appointed to serve as Alternative’s Treasurer. In April of 2019, Mr. Bloss
was elected to the Board of Directors of the Company
In
November of 2018 the Company commenced the harvest of more than 7,000 marijuana plants at the licensed facility that we manage
in Amargosa, NV. We completed the harvest of approximately 5,400 lbs. of marijuana flower and trim in late December of 2018. We
began realizing revenues from this harvest in the first quarter of 2019.
In
January of 2019, the Company completed the purchase of 260-acres of fertile farmland in the Amargosa Valley of Nevada. The land
has more than 180-acre feet of permitted water rights which will provide more than sufficient water to markedly increase the Company’s
marijuana cultivation capabilities (see further description hereinabove). This will be the home of our Nye County cultivation
facility pursuant to our purchase of the required licenses. The Company has started construction of a state-of-the-art five-acre
cultivation facility on this property which we expect to complete in the first quarter of 2020.
In
January of 2019, we formed Coachill-Inn, LLC (“Coachill-Inn”), a subsidiary of Alternative Hospitality to develop
a proposed hotel in Desert Hot Springs, CA. From January of this year until June of this year we were actively engaged in negotiations
with the property owner of the proposed location. In June of this year Coachill-Inn executed a purchase and sale agreement with
Coachill Holdings, LLC (“CHL”) to acquire a 256,132 sq. ft. parcel of land within a 100-acre industrial cannabis park
in Indigo, CA (the “Property”) to develop our first hotel project. The purchase price for the property is $5,125,000
CHL is contributing $3,000,000 toward the purchase price of this property in exchange for a twenty-five percent (25%) ownership
interest in Coachill-Inn. Alternative Hospitality has made an initial deposit of $150,000 toward the purchase of the Property
and will own fifty-one percent (51%) of Coachill-Inn when the transaction is scheduled to close in late Q4 2019.
In February of this year, our 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 March 31, 2019 has been accrued as a payable by the Company,
significantly reducing the number of issued and outstanding shares of the Company. Beginning in March of this year, pursuant to
the filing of a Form D with the SEC, the Company offered for sale 15,000,000 of these shares at a per share price of $0.50 per
share. As of September 30, 2019, we have sold 12,850,000 shares for total proceeds of $6,425,000.
In
April of 2019, we executed a membership interest purchase agreement (the “MIPA2”) to acquire all of the membership
interests in two Nevada limited liability companies that are each the holder of a State of Nevada marijuana license. Marijuana
Establishment Registration Certificate, Application No. C202 and Marijuana Establishment Registration Certificate, Application
No. P133 (collectively the “Certificates”). The terms of the MIPA2 require the Company to purchase the licenses for
the total sum of $1,250,000 each - $750,000 in cash per license and $500,000 per license in the Company’s restricted common
stock. The terms of the MIPA provide for a $250,000 non-refundable down payment and include a short term note in the amount
of $500,000 carrying an annual interest rate of two percent (2%) which is due and payable on or before October 18, 2019, the Company
has made non-refundable deposits totaling $550,000 and has reduced the principal of the aforementioned note to $200,000. We have
made significant progress toward perfecting these licenses and transferring the membership interests in the licenses to the Company.
It is expected that we will receive all of the necessary regulatory approvals during the fourth quarter of this year. The Company
is required to issue 1,430,206 shares of our restricted common stock in fulfillment of our obligations in the MIPA2, as of the
date of this filing these shares have not been issued. We also executed a $750,000 long term note (the “LT Note”)
in favor of the current license holders that becomes due and payable upon the earliest of a) six months after the transfer of
the Certificates to the Company, or b) six months after the production/cultivation is declared fully operational by the applicable
regulatory agencies, or c) March 10, 2020. The LT Note carries an 8% annual interest rate and there is no penalty for any prepayments
of the LT Note. Additionally, the sellers shall receive, at closing, warrants to purchase up to 1,500,000 additional shares of
the Company’s common stock; 1,000,000 warrants shall be exercisable for a period of three years from the closing date at
an exercise price of $2.00 per share and 500,000 warrants shall be exercisable for a period of two years from the closing date
at an exercise price of $1.50 per share (collectively the “Warrants”). The LT Note Warrants and the restricted common
shares issued will be held in escrow until the transaction closes upon the terms of the MIPA2. It is the intention of the Company,
upon receipt of all necessary regulatory approvals, to move the cultivation license from its current location to the Company’s
260-acre facility in the Amargosa Valley of Nevada and move the production license into its recently acquired leasehold in Pahrump,
Nevada.
In
April of 2019, we consummated our purchase of an approximately 50-acre, commercial trailer and RV park (the “Trailer
Park”) in close proximity to our Amargosa Valley cultivation facilities. The Trailer Park can accommodate up to 90
trailers and RV’s. There presently are 17 occupied trailers in the Trailer Park and we are making necessary upgrades to bring additional units to the facility to provide housing for our
farm personnel. We purchased the Trailer Park for a total of $600,000 in cash and $50,000 of the Company’s restricted
common stock, resulting in the issuance of 66,667 shares. The sellers hold a $250,000 note, bearing interest at six and
one-half percent resulting in monthly payments in the amount of $2,177.77 based upon a 15-year amortization schedule (the
“TP Note”). The TP Note requires additional principal reduction payments in the amount of $50,000 on or before
April 5, 2020 and April 5, 2021, respectively. The principal and interest payments will be recalculated. A final balloon
payment of any and all outstanding principal and accrued interest is due and payable on or before April 5, 2022. There are no
prepayment penalties should the Company elect to retire the note prior to its maturity date. It is the Company’s
intention to locate our hemp seed genetics lab on this property. The land possesses sufficient water rights to successfully
cultivate hemp for the purpose of developing proprietary hemp strains that should thrive in the harsh Amargosa
climate.
On
August 30, 2019 the Company entered into a material definitive agreement with an Ohio limited liability company (the “Buyer”)
to sell forty-nine percent (49%) of the membership interests in the Company’s wholly owned subsidiary Red Earth, LLC (“Red
Earth”) for $441,000. The membership interest purchase agreement (the “MIPA3”) requires the Buyer to make an
additional $3,559,000 payment to be utilized for the improvement and build-out of the Company’s Western Avenue leasehold
in Las Vegas, Nevada. The payment is due within ten (10) days of the receipt by Red Earth of a special use permit (“SUP”)
from the City of Las Vegas for our Western Avenue cultivation facility. The Company expects to receive the SUP in early October
of 2019. The Buyer, in conjunction with the Company, will jointly manage and operate the facility upon completion. The MIPA3 also
requires the Buyer to make a final payment to the Company of $1,000,000 between 90 and 180 days of issuance of the SUP. Additionally,
the Buyer has a first refusal right to fund and build a 40,000 sq. ft. greenhouse facility at the Company’s Amargosa Valley
Farm the terms of which are to be negotiated in good faith upon the exercise of any rights granted in the MIPA3.
We
intend to grow continue to our business through the acquisition of existing companies and/or through the development of new opportunities
and joint ventures that can maximize shareholder value while providing a 360-degree spectrum of infrastructure (dispensaries),
cultivation, production, management, and consulting services in the regulated cannabis industry.
Marijuana
Industry Overview
We
currently operate marijuana businesses in Nevada. Although the possession, cultivation and distribution of marijuana is permitted
in Nevada, provided compliance with applicable state and local laws, rules, and regulations, marijuana is illegal under federal
law. We believe we operate our business in compliance with applicable state laws and regulations. Any changes in federal, state,
or local law enforcement regarding marijuana may affect our ability to operate our business. Strict enforcement of federal law
regarding marijuana would likely result in the inability to proceed with our business plans, could expose us to potential criminal
liability, and could subject our properties to civil forfeiture. Any changes in banking, insurance, or other business services
may also affect our ability to operate our business.
Marijuana
cultivation refers to the planting, tending, improving and harvesting of the flowering plant Cannabis, primarily for the production
and consumption of cannabis flowers, often referred to as “buds”. The cultivation techniques for marijuana cultivation
differ than for other purposes such as hemp production. Generally, references to marijuana cultivation and production do not include
hemp production.
Cannabis
belongs to the genus Cannabis in the family Cannabaceae and for the purposes of production and consumption, includes three species,
C. sativa (“Sativa”), C. Indica (“Indica”), and C. ruderalis (“Ruderalis”). Sativa and Indica
generally grow tall with some varieties reaching approximately 4 meters. The female plants produce flowers rich in tetrahydrocannabinol
(“THC”). Ruderalis is a short plant and produces trace amounts of THC but is very rich in cannabidiol (“CBD”),
which is an antagonist (inhibits the physiological action) to THC.
As
of October 2019, there are a total of 33 states, plus the District of Columbia, with legislation passed as it relates to
medicinal cannabis. These state laws are in direct conflict with the United States Federal Controlled Substances Act (21 U.S.C.
§ 811) (“CSA”), which places controlled substances, including cannabis, in a schedule. Cannabis is classified
as a Schedule I drug, which is viewed as having a high potential for abuse, has no currently accepted use for medical treatment
in the U.S., and lacks acceptable safety for use under medical supervision. These xx states, plus the District of Columbia, have
adopted laws that exempt patients who use medicinal cannabis under a physician’s supervision from state criminal penalties.
These are collectively referred to as the states that have de-criminalized medicinal cannabis, although there is a subtle difference
between de-criminalization and legalization, and each state’s laws are different.
As
of October 2019, 11 states and the District of Columbia now allow for the recreational use and possession of small amounts of
marijuana and marijuana products. Decriminalization of marijuana varies by state. Decriminalization generally means that violators
of local marijuana laws may be subject to civil penalty rather than face criminal prosecution. Fifteen states have decriminalized
the possession of small amounts of marijuana but have not legalized possession. In these states decriminalization can mean possession
of as little as ten grams of marijuana up to one-hundred grams of marijuana that will not result in any criminal prosecution but
may result in civil fines. In three states, Idaho, South Dakota, and Kansas, the cultivation, possession or use of marijuana is
strictly prohibited and violators may be subject to criminal prosecution. In Nevada, where the Company is headquartered and currently
focused most of its activities, legalized marijuana for recreational use was effective as of July 1, 2017 and made it legal for
adults over the age of 21 to use marijuana and to possess up to one ounce of marijuana flowers and one-eighth of an ounce of marijuana
concentrates. Individuals are also permitted to grow up to six marijuana plants for personal use. In addition, businesses can
legally, pursuant to state regulations, cultivate, process, dispense, distribute, and test marijuana products under certain conditions.
The
dichotomy between federal and state laws has limited the access to banking and other financial services by marijuana businesses.
Recently the U.S. Department of Justice (the “DOJ”) and the U.S. Department of Treasury issued guidance for banks
considering conducting business with marijuana dispensaries in states where those businesses are legal, pursuant to which banks
must now file a Marijuana Limited Suspicious Activity Report that states the marijuana business is following the government’s
guidelines with regard to revenue that is generated exclusively from legal sales. However, since the same guidance noted that
banks could still face prosecution if they provide financial services to marijuana businesses, it has led to the widespread refusal
of the banking industry to offer banking services to marijuana businesses operating within state and local laws. In March of this
year, U.S. Congressman Ed Perlmutter (D – Colorado) introduced house bill H.R. 1595, known as the Secure and Fair Enforcement
(SAFE) Banking Act to allow legally operating cannabis related businesses to utilize traditional banking services without fear
of federal agencies taking legal action against the banks or their customers. The SAFE bill has strong bipartisan support in the
House of Representatives and many industry observers anticipate it will be ratified within the next year.
The
DOJ has not historically devoted resources to prosecuting individuals whose conduct is limited to possession of small amounts
of marijuana for use on private property but has relied on state and local law enforcement to address marijuana activity.
In
the event the DOJ reverses its stated policy and begins strict enforcement of the CSA in states that have laws legalizing medical
marijuana and recreational marijuana in small amounts, there may be a direct and adverse impact to our business and our revenue
and profits.
Furthermore,
H.R. 83, known as the Rohrabacher-Farr amendment, is a rider to the annual appropriations bill that prohibits the DOJ from using
federal funds to prevent certain states, including Nevada and California, from implementing their own laws that authorized the
use, distribution, possession, or cultivation of medical marijuana. This prohibition is currently in place until November 21,
2019.
We
are monitoring the Trump administration’s, the DOJ’s, and Congress’ positions on federal marijuana law and policy.
Based on public statements and reports, we understand that certain aspects of those laws and policies are currently under review,
but no official changes have been announced. It is possible that certain changes to existing laws or policies could have a negative
effect on our business and results of operations.
Corporate
Entities
MJ
Holdings, Inc.
|
This
entity, the Parent, serves as a holding company for all of the operating businesses/assets.
|
|
|
Prescott
Management, LLC
|
Prescott
Management is a wholly owned subsidiary of the Company that provides day-to-day management and operational oversight to the
Company’s operating subsidiaries.
|
|
|
Icon
Management, LLC
|
Icon
is a wholly owned subsidiary of the Company that provides Human Resource Management (“HR”) services to MJ Holdings.
Icon is responsible for all payroll activities and administration of employee benefit plans and programs.
|
|
|
Farm
Road, LLC
|
Farm
Road, LLC, a wholly owned subsidiary of the Company, is a Wyoming limited liability company that owns 260 acres of farmland
in Amargosa, NV. The Company acquired all of the membership interests of Farm Road in January of 2019.
|
|
|
Condo
Highrise Management, LLC
|
Condo
Highrise Management, a wholly owned subsidiary of the Company that manages the Company owned Trailer Park in Amargosa, Nevada.
|
|
|
Red
Earth Holdings, LLC
|
It
is anticipated that this recently formed (June 2019) wholly owned subsidiary of the Company will eventually be the holder
of the Company’s primary cannabis license assets. As of the date of this report Red Earth Holdings has no operations
and holds no assets.
|
|
|
Red
Earth, LLC
|
Red
Earth, established in 2016, was a wholly owned subsidiary of the Company from December 15, 2017 until August 30, 2019
when we sold a forty-nine percent (49%) interest in Red Earth to Element NV, LLC, an unrelated third party (See further
description of the transaction hereinabove). Red Earth’s assets consist of: (i) a cultivation license to grow marijuana
within the City of Las Vegas in the State of Nevada and (ii) all of the outstanding membership interests in HDGLV, which
holds a triple net leasehold interest in a 17,298 square-foot building in Las Vegas, Nevada, which we expect to operate
as an indoor marijuana cultivation facility. We expect to complete construction of this facility in the first quarter
of 2020.
In
April 2018, the State of Nevada finalized and approved the transfer of the provisional cultivation license from Acres
Medical, LLC, an unrelated third-party, to Red Earth. In July 2018, we completed the first phase of construction
on this facility and we received a City of Las Vegas Business License to operate a marijuana cultivation facility. We
expect to obtain final approvals towards perfecting the cultivation license from the State of Nevada regulatory authorities
in the first quarter of 2020, but we can provide no assurances on the receipt and/or timing of the final approvals.
|
HDGLV,
LLC
|
HDGLV
is a wholly owned subsidiary of Red Earth, LLC and is the holder of a triple net lease on a commercial building in Las Vegas,
Nevada which is being developed to house our indoor grow facility.
|
|
|
Q-Brands,
LLC
|
Q-Brands
is a wholly owned subsidiary of the Company. Q-Brands is responsible for the development and marketing of the Highland Brother
s brand of cannabis products.
|
|
|
Alternative
Hospitality, Inc.
|
Alternative
Hospitality is a Nevada corporation formed in November of 2018. MJ Holdings owns fifty-one percent (51%) of the company and
the remaining forty-nine percent (49%) is owned by TVK, LLC a Florida limited liability company.
|
|
|
Campus
Production Studios, LLC
|
Campus
Production Studios, LLC is a wholly owned subsidiary of MJ Holdings. It is anticipated that this company will oversee our
cannabis production activities once we have completed the acquisition of our production license. Campus Production is presently
a non-operating subsidiary.
|
|
|
Unique
Sales Management, LLC
|
Unique
Sales Management is a wholly owned subsidiary of the Company. It is anticipated that Unique Sales will provide sales and marketing
services to the Company’s owned and licensed brands of cannabis products. Presently this subsidiary has no operations.
|
|
|
One
Source CBD, LLC
|
One
Source, a wholly owned subsidiary of the Company, was formed to develop a potential electronic CBD (cannabidiol) exchange
market.
|
|
|
MJ
International Research Company Limited
|
MJ
International is a wholly owned subsidiary of the Company that is headquartered in Dublin, Ireland. MJ International is the
sole shareholder of MJ Holdings International Single Member S.A. and Gioura International Single Member Private Company.
|
Corporate
Information
Our
corporate headquarters is located at 1300 South Jones Boulevard Las Vegas, Nevada 89146 and our telephone number are (702) 879-4440.
Our website address is: www.MJHoldingsinc.com. Information on or accessed through our website is not incorporated into this Form
10-K
Our
Common Stock is not listed on any national stock exchange but is quoted on the OTC Markets Group Inc.’s Pink® Market
under the symbol “MJNE.”
Revenue
For
the years ended December 31, 2018 and 2017, we generated $8,150 and $0, respectively, of revenue.
Employees
As
of December 31, 2018, we had four full-time employees.
Item
1A. Risk Factors
You
should carefully consider the risks, uncertainties and other factors described below, in addition to the other information set
forth in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes thereto. Any of
these risks, uncertainties and other factors could materially and adversely affect our business, financial condition, results
of operations, cash flows, or prospects. In that case, the trading price of our Common Stock could decline, and you may lose all
or part of your investment. An investment in our securities is speculative and involves a high degree of risk. You should not
invest in our securities if you cannot bear the economic risk of your investment for an indefinite period of time and cannot afford
to lose your entire investment. There may be additional risks that we do not presently know of or that we currently believe are
immaterial which could also impair our business and financial position. See also “Cautionary Note Regarding Forward-Looking
Statements.”
Risks
Relating to Our Business and Industry
The
report of our independent registered public accounting firm that accompanies our audited consolidated financial statements includes
a going concern explanatory paragraph in which such firm expressed substantial doubt about our ability to continue as a going
concern.
Our
financial statements have been prepared on a going concern basis, which contemplates the realization of assets and
settlement of liabilities and commitments in the normal course of business. However, we are a development stage company with
current operations established in October 2016. The Company’s primary asset is a Medical Marijuana Establishment
Registration Certificate, Application No. C012 (the “License”) issued by the State of Nevada for the cultivation
of marijuana. There is no assurance on the receipt and/or timing of final approvals from the appropriate authorities, as of
July 19, 2019 we have not received final approval to commence cultivation under the License. As of December 31, 2018, we have
generated little revenues and our accumulated deficit as of the same date was $7,870,449. These factors, among others,
raise substantial doubt about the Company’s ability to continue as a going concern.
We
have a limited operating history, which may make it difficult for investors to predict future performance based on current operations.
We
have a limited operating history upon which investors may base an evaluation of our potential future performance. In particular,
we have not proven that we can sell cannabis products in a manner that enables us to be profitable and meet customer requirements,
obtain the necessary permits and/or achieve certain milestones to develop our cultivation businesses, enhance our line of cannabis
products, develop and maintain relationships with customers and strategic partners, to raise sufficient capital in the public
and/or private markets, or respond effectively to competitive pressures. As a result, there can be no assurance that we will be
able to develop or maintain consistent revenue sources, or that our operations will be profitable and/or generate positive cash
flow.
Any
forecasts we make about our operations may prove to be inaccurate. We must, among other things, determine appropriate risks, rewards,
and level of investment in our product lines, respond to economic and market variables outside of our control, respond to competitive
developments and continue to attract, retain, and motivate qualified employees. There can be no assurance that we will be successful
in meeting these challenges and addressing such risks and the failure to do so could have a materially adverse effect on our business,
results of operations, and financial condition. Our prospects must be considered in light of the risks, expenses, and difficulties
frequently encountered by companies in the early stage of development. As a result of these risks, challenges, and uncertainties,
the value of your investment could be significantly reduced or completely lost.
We
will likely need additional capital to sustain our operations and will likely need to seek further financing, which we may not
be able to obtain on acceptable terms or at all. If we fail to raise additional capital, as needed, our ability to implement our
business model and strategy could be compromised.
As
of December 31, 2018, we had limited capital resources and operations. Through that date, our operations had been funded primarily
from the proceeds of equity financings. We may require additional capital in the near future to develop business operations at
our proposed production facilities in Las Vegas, Nevada, to expand our production of our future franchise production lines, to
develop our intellectual property base, and establish our targeted levels of commercial production. We may not be able to obtain
additional financing on terms acceptable to us, or at all. In particular, because marijuana is illegal under federal law, we may
have difficulty attracting investors.
We
have incurred losses in prior periods, and losses in the future could cause the quoted price of our Common Stock to decline or
have a material adverse effect on our financial condition, our ability to pay our debts as they become due, and on our cash flows.
We
have incurred losses in prior periods. For the year ended December 31, 2018, we incurred a net loss of $5,077,928
and, as of that date, we had an accumulated deficit of $7,870,449. Our historical financial statements prior to
the Red Earth reverse merger were replaced with the historical financial statements of Red Earth, as the accounting acquirer,
based on the accounting treatment for the reverse merger transactions. Accordingly, we had a net loss of $334,788 for the year
ended December 31, 2017 and, as of that date, we had an accumulated deficit of approximately $362,521. Any losses in the future
could cause the quoted price of our Common Stock to decline or have a material adverse effect on our financial condition, our
ability to pay our debts as they become due, and on our cash flow.
Even
if we obtain financing for our near-term operations, we expect that we will require additional capital thereafter. Our capital
needs will depend on numerous factors including: (i) our profitability; (ii) the release of competitive products by our competition;
(iii) the level of our investment in research and development, and (iv) the amount of our capital expenditures, including acquisitions.
We cannot assure you that we will be able to obtain capital in the future to meet our needs.
If
we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership held by our
existing stockholders will be reduced and our stockholders may experience significant dilution. In addition, new securities may
contain rights, preferences, or privileges that are senior to those of our Common Stock. If we raise additional capital by incurring
debt, this will result in increased interest expense. If we raise additional funds through the issuance of securities, market
fluctuations in the price of our shares of Common Stock could limit our ability to obtain equity financing.
We
cannot give you any assurance that any additional financing will be available to us, or if available, will be on terms favorable
to us. If we are unable to raise capital when needed, our business, financial condition, and results of operations would be materially
adversely affected, and we could be forced to reduce or discontinue our operations.
We
face intense competition and many of our competitors have greater resources that may enable them to compete more effectively.
The
industries in which we operate in general are subject to intense and increasing competition. Some of our competitors may have
greater capital resources, facilities, and diversity of product lines, which may enable them to compete more effectively in this
market. Our competitors may devote their resources to developing and marketing products that will directly compete with our product
lines. Due to this competition, there is no assurance that we will not encounter difficulties in obtaining revenues and market
share or in the positioning of our products. There are no assurances that competition in our respective industries will not lead
to reduced prices for our products. If we are unable to successfully compete with existing companies and new entrants to the market
this will have a negative impact on our business and financial condition.
If
we fail to protect our intellectual property, our business could be adversely affected.
Our
viability will depend, in part, on our ability to develop and maintain the proprietary aspects of our intellectual property to
distinguish our products from our competitors’ products. We rely on copyrights, trademarks, trade secrets, and confidentiality
provisions to establish and protect our intellectual property.
Any
infringement or misappropriation of our intellectual property could damage its value and limit our ability to compete. We may
have to engage in litigation to protect the rights to our intellectual property, which could result in significant litigation
costs and require a significant amount of our time. In addition, our ability to enforce and protect our intellectual property
rights may be limited in certain countries outside the United States, which could make it easier for competitors to capture market
position in such countries by utilizing technologies that are similar to those developed or licensed by us.
Competitors
may also harm our sales by designing products that mirror our products or processes without infringing on our intellectual property
rights. If we do not obtain sufficient protection for our intellectual property, or if we are unable to effectively enforce our
intellectual property rights, our competitiveness could be impaired, which would limit our growth and future revenue.
We
may also find it necessary to bring infringement or other actions against third parties to seek to protect our intellectual property
rights. Litigation of this nature, even if successful, is often expensive and time-consuming to prosecute and there can be no
assurance that we will have the financial or other resources to enforce our rights or be able to enforce our rights or prevent
other parties from developing similar products or processes or designing around our intellectual property.
Although
we believe that our products and processes do not and will not infringe upon the patents or violate the proprietary rights of
others, it is possible such infringement or violation has occurred or may occur, which could have a material adverse effect on
our business.
We
are not aware of any infringement by us of any person’s or entity’s intellectual property rights. In the event that
products we sell or processes we employ are deemed to infringe upon the patents or proprietary rights of others, we could be required
to modify our products or processes or obtain a license for the manufacture and/or sale of such products or processes or cease
selling such products or employing such processes. In such event, there can be no assurance that we would be able to do so in
a timely manner, upon acceptable terms and conditions, or at all, and the failure to do any of the foregoing could have a material
adverse effect upon our business.
There
can be no assurance that we will have the financial or other resources necessary to enforce or defend a patent infringement or
proprietary rights violation action. If our products or processes are deemed to infringe or likely to infringe upon the patents
or proprietary rights of others, we could be subject to injunctive relief and, under certain circumstances, become liable for
damages, which could also have a material adverse effect on our business and our financial condition.
Our
trade secrets may be difficult to protect.
Our
success depends upon the skills, knowledge, and experience of our scientific and technical personnel, our consultants and advisors,
as well as our licensors and contractors. Because we operate in several highly competitive industries, we rely in part on trade
secrets to protect our proprietary technology and processes. However, trade secrets are difficult to protect. We enter into confidentiality
or non-disclosure agreements with our corporate partners, employees, consultants, outside scientific collaborators, developers,
and other advisors. These agreements generally require that the receiving party keep confidential and not disclose to third parties’
confidential information developed by the receiving party or made known to the receiving party by us during the course of the
receiving party’s relationship with us. These agreements also generally provide that inventions conceived by the receiving
party in the course of rendering services to us will be our exclusive property, and we enter into assignment agreements to perfect
our rights.
These
confidentiality, inventions, and assignment agreements may be breached and may not effectively assign intellectual property rights
to us. Our trade secrets also could be independently discovered by competitors, in which case we would not be able to prevent
the use of such trade secrets by our competitors. The enforcement of a claim alleging that a party illegally obtained and was
using our trade secrets could be difficult, expensive, and time consuming and the outcome would be unpredictable. In addition,
courts outside the United States may be less willing to protect trade secrets. The failure to obtain or maintain meaningful trade
secret protection could adversely affect our competitive position.
Our
business, financial condition, results of operations, and cash flow may in the future be negatively impacted by challenging global
economic conditions.
Future
disruptions and volatility in global financial markets and declining consumer and business confidence could lead to decreased
levels of consumer spending. These macroeconomic developments could negatively impact our business, which depends on the general
economic environment and levels of consumer spending. As a result, we may not be able to maintain our existing customers or attract
new customers, or we may be forced to reduce the price of our products. We are unable to predict the likelihood of the occurrence,
duration, or severity of such disruptions in the credit and financial markets and adverse global economic conditions. Any general
or market-specific economic downturn could have a material adverse effect on our business, financial condition, results of operations,
and cash flow.
Our
future success depends on our key executive officers and our ability to attract, retain, and motivate qualified personnel.
Our
future success largely depends upon the continued services of our executive officers and management team. If one or more of our
executive officers are unable or unwilling to continue in their present positions, we may not be able to replace them readily,
if at all. Additionally, we may incur additional expenses to recruit and retain new executive officers. If any of our executive
officers joins a competitor or forms a competing company, we may lose some or all of our customers. Finally, we do not maintain
“key person” life insurance on any of our executive officers. Because of these factors, the loss of the services of
any of these key persons could adversely affect our business, financial condition, and results of operations, and thereby an investment
in our stock.
Our
continuing ability to attract and retain highly qualified personnel will also be critical to our success because we will need
to hire and retain additional personnel as our business grows. There can be no assurance that we will be able to attract or retain
highly qualified personnel. We face significant competition for skilled personnel in our industries. In particular, if the marijuana
industry continues to grow, demand for personnel may become more competitive. This competition may make it more difficult and
expensive to attract, hire, and retain qualified managers and employees. Because of these factors, we may not be able to effectively
manage or grow our business, which could adversely affect our financial condition or business. As a result, the value of your
investment could be significantly reduced or completely lost.
We
may not be able to effectively manage our growth or improve our operational, financial, and management information systems, which
would impair our results of operations.
In
the near term, we intend to expand the scope of our operations activities significantly. If we are successful in executing our
business plan, we will experience growth in our business that could place a significant strain on our business operations, finances,
management, and other resources. The factors that may place strain on our resources include, but are not limited to, the following:
|
●
|
The
need for continued development of our financial and information management systems;
|
|
|
|
|
●
|
The
need to manage strategic relationships and agreements with manufacturers, customers, and partners, and
|
|
|
|
|
●
|
Difficulties
in hiring and retaining skilled management, technical, and other personnel necessary to support and manage our business
|
Additionally,
our strategy envisions a period of rapid growth that may impose a significant burden on our administrative and operational resources.
Our ability to effectively manage growth will require us to substantially expand the capabilities of our administrative and operational
resources and to attract, train, manage, and retain qualified management and other personnel. There can be no assurance that we
will be successful in recruiting and retaining new employees or retaining existing employees.
We
cannot provide assurances that our management will be able to manage this growth effectively. Our failure to successfully manage
growth could result in our sales not increasing commensurately with capital investments or otherwise materially adversely affecting
our business, financial condition, or results of operations.
If
we are unable to continually innovate and increase efficiencies, our ability to attract new customers may be adversely affected.
In
the area of innovation, we must be able to develop new technologies and products that appeal to our customers. This depends, in
part, on the technological and creative skills of our personnel and on our ability to protect our intellectual property rights.
We may not be successful in the development, introduction, marketing, and sourcing of new technologies or innovations, that satisfy
customer needs, achieve market acceptance, or generate satisfactory financial returns.
We
are dependent on the popularity of consumer acceptance of our current and future product lines.
Our
ability to generate revenue and be successful in the implementation of our business plan is dependent on consumer acceptance and
demand of our current and future product lines. During the first quarter 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. In the near term, we expect to begin operating a cultivation facility in Nevada at which we expect to grow and sell
marijuana on a commercial basis. Acceptance of our greenhouse solutions and, in the future, acceptance of our marijuana products,
will depend on several factors, including availability, cost, ease of use, familiarity of use, convenience, effectiveness, safety,
and reliability. If customers do not accept our products, or if we fail to meet customers’ needs and expectations adequately,
our ability to continue generating revenues could be reduced.
A
drop in the retail price of medical marijuana and recreational (adult use) marijuana products may negatively impact our business.
In
the future, the demand for the marijuana we intend to cultivate will depend in part on the market price of commercially grown
marijuana. Fluctuations in economic and market conditions that impact the prices of commercially grown marijuana, such as increases
in the supply of such marijuana and the decrease in the price of products using commercially grown marijuana, could cause the
demand for our marijuana products to decline, which would have a negative impact on our business.
Federal
regulation and enforcement may adversely affect the implementation of cannabis laws and regulations may negatively impact our
revenues and profits.
Currently,
there are 33 states plus the District of Columbia that have laws and/or regulations that recognize, in one form or another, legitimate
medical uses for cannabis and consumer use of cannabis in connection with medical treatment, as well as, in some cases, the legalization
of cannabis for adult use. Many other states are considering similar legislation. Conversely, under the CSA, the policies and
regulations of the federal government and its agencies are that cannabis has no medical benefit and a range of activities including
cultivation and the personal use of cannabis is prohibited. Unless and until Congress amends the CSA with respect to marijuana,
as to the timing or scope of any such potential amendments there can be no assurance, there is a risk that federal authorities
may enforce current federal law, and we may be deemed to be producing, cultivating, or dispensing marijuana in violation of federal
law. Thus, active enforcement of the current federal regulatory position on cannabis may indirectly and adversely affect our revenues
and profits. The risk of strict enforcement of the CSA in light of Congressional activity, judicial holdings, and stated federal
policy remains uncertain. In February 2017, the Trump administration announced that there may be “greater enforcement”
of federal laws regarding marijuana. Any such enforcement actions could have a negative effect on our business and results of
operations.
On
January 4, 2018, Attorney General Jeff Sessions issued a Marijuana Enforcement Memorandum that rescinded guidance previously issued
to federal law enforcement in a memorandum known as the “Cole Memo”. The Cole Memo provided that the DOJ is committed
to the enforcement of the CSA, but the DOJ is also committed to using its limited investigative and prosecutorial resources to
address the most significant threats in the most effective, consistent, and rational way.
The
guidance, which has since been rescinded, set forth certain enforcement priorities that are important to the federal government:
|
●
|
Distribution
of marijuana to children;
|
|
|
|
|
●
|
Revenue
from the sale of marijuana going to criminals;
|
|
|
|
|
●
|
Diversion
of medical marijuana from states where it is legal to states where it is not;
|
|
|
|
|
●
|
Using
state authorized marijuana activity as a pretext of another illegal drug activity;
|
|
|
|
|
●
|
Preventing
violence in the cultivation and distribution of marijuana;
|
|
|
|
|
●
|
Preventing
drugged driving;
|
|
|
|
|
●
|
Growing
marijuana on federal property; and
|
|
|
|
|
●
|
Preventing
possession or use of marijuana on federal property.
|
The
DOJ historically has not devoted resources to prosecuting individuals whose conduct is limited to possession of small amounts
of marijuana for use on private property but has relied on state and local law enforcement to address marijuana activity. In the
event the DOJ reverses its stated policy and begins strict enforcement of the CSA in states that have laws legalizing medical
marijuana and recreational marijuana in small amounts, there may be a direct and adverse impact to our business and our revenue
and profits. Furthermore, H.R. 83, known as the Rohrabacher-Farr amendment, is a rider to the annual appropriations bill that
prohibits the DOJ from using federal funds to prevent certain states, including Nevada and California, from implementing their
own laws that authorized the use, distribution, possession, or cultivation of medical marijuana. This prohibition is currently
in place until November 21, 2019.
On
September 27, 2018, the U.S. Drug Enforcement Agency announced that drugs, including “finished dosage formulations”
of CBD with THC below 0.1%, will be considered Schedule 5 drugs as long as the medications have been approved by the U.S. Food
and Drug Administration. The Agriculture Improvement Act of 2018 generally referred to as the 2018 Farm Bill included provisions
to greatly expand the ability to grow industrial hemp in the United States and declassified hemp as a Schedule 1 controlled substance
under the Controlled Substances Act. By definition hemp must have a less than .03% concentration of THC or it is then considered
marijuana. While the U.S. Department of Agriculture (“USDA”) has primary jurisdiction over the cultivation of industrial
hemp, the U.S. Food and Drug Administration (“FDA”) continues to have responsibility to regulate cannabis products
under the Food, Drug and Cosmetics Act (“FD&C Act”). Therefore, any product, including hemp derived products,
that make any claims as to the therapeutic benefit of the product must be approved by the FDA in advance of any sales to the public.
We
could be found to be violating laws related to cannabis.
Currently,
there are 33 states plus the District of Columbia that have laws and/or regulations that recognize, in one form or another, legitimate
medical uses for cannabis and consumer use of cannabis in connection with medical treatment, as well as, in some cases, the legalization
of cannabis for adult use. Many other states are considering similar legislation. Conversely, under the CSA, the policies and
regulations of the federal government and its agencies are that cannabis has no medical benefit and a range of activities including
cultivation and the personal use of cannabis is prohibited. Unless and until Congress amends the CSA with respect to medical marijuana,
as to the timing or scope of any such amendments there can be no assurance, there is a risk that federal authorities may enforce
current federal law. The risk of strict enforcement of the CSA in light of Congressional activity, judicial holdings, and stated
federal policy remains uncertain. With respect to our greenhouse products, we intend to market and sell our greenhouse solutions
to marijuana growers. Should it be determined under the CSA that our greenhouse products or equipment are deemed to fall under
the definition of drug paraphernalia because its products could be determined to be primarily intended or designed for use in
manufacturing or producing cannabis, we could be found to be in violation of federal drug paraphernalia laws and there may be
a direct and adverse effect on our business, revenues, and profits. With respect to Red Earth, we do not currently cultivate,
produce, sell, or distribute any marijuana, and, therefore, have no risk that we will be deemed to cultivate, produce, sell, or
distribute any marijuana in violation of federal law. However, if we obtain the necessary final governmental approvals and permits
in Nevada to commence the cultivation and production of marijuana, as to the successfully achievement of any or all of such objectives
there can be no assurance, we could be found in violation of the CSA. This would cause a direct and adverse effect on our subsidiaries’
businesses, or intended businesses, and on our revenue and prospective profits.
Variations
in state and local regulation, and enforcement in states that have legalized cannabis, may restrict marijuana-related activities,
including activities related to medical cannabis, which may negatively impact our revenues and prospective profits.
Individual state laws do not always conform
to the federal standard or to other states laws. A number of states have decriminalized marijuana to varying degrees, other states
have created exemptions specifically for medical cannabis, and several have both decriminalization and medical laws. As of October
2019, eleven states and the District of Columbia have legalized the recreational use of cannabis. Variations exist among states
that have legalized, decriminalized, or created medical marijuana exemptions. For example, certain states have limits on the number
of marijuana plants that can be homegrown. In most states, the cultivation of marijuana for personal use continues to be prohibited
except for those states that allow small-scale cultivation by the individual in possession of medical marijuana needing care or
that person’s caregiver. Active enforcement of state laws that prohibit personal cultivation of marijuana may indirectly
and adversely affect our business and our revenue and profits.
Prospective
customers may be deterred from doing business with a company with a significant nationwide online presence because of fears of
federal or state enforcement of laws prohibiting possession and sale of medical or recreational marijuana.
Our
website is visible in jurisdictions where medicinal and/or recreational use of marijuana is not permitted and, as a result, we
may be found to be violating the laws of those jurisdictions.
Marijuana
remains illegal under federal law.
Marijuana
is a Schedule-I controlled substance and is illegal under federal law. Even in those 33 states in which the use of marijuana has
been legalized, its use remains a violation of federal law. Since federal law criminalizing the use of marijuana preempts state
laws that legalize its use, strict enforcement of federal law regarding marijuana would likely result in our inability to proceed
with our business plan, especially in respect of our marijuana cultivation, production and dispensaries. In addition, our assets,
including real property, cash, equipment, and other goods, could be subject to asset forfeiture because marijuana is
still federally illegal.
In
February 2017, the Trump administration announced that there may be “greater enforcement” of federal laws regarding
marijuana. In January 2018, Attorney General Jeff Sessions rescinded previously issued guidance. Any such enforcement actions
or changes in federal policy or guidance could have a negative effect on our business and results of operations. On November 7,
2018, Jeff Sessions resigned as the Attorney General of the United States. Mr. Sessions was succeeded by William Barr who has
publicly stated that he would not prosecute legal marijuana businesses that rely on the Cole memo.
In
the future, we will not be able to deduct some of our business expenses.
Section
280E of the Internal Revenue Code prohibits any business engaged in the trafficking of controlled substances (within the meaning
of schedule I and II of the Controlled Substances Act) from deducting their ordinary and necessary business expenses, which may
force us to pay higher effective federal tax rates than similar companies in other industries. The effective tax rate on a marijuana
business depends on how large its ratio of nondeductible expenses is to its total revenues. Therefore, our marijuana business
may be less profitable than it could otherwise be.
We
may not be able to attract or retain any independent directors.
Our
board of directors (the “Board”) is not currently comprised of a majority of independent directors. We may have difficulty
attracting and retaining independent directors because, among other things, we operate in the marijuana industry.
We
may not be able to successfully execute on our merger and acquisition strategy.
Our
business plan depends in part on merging with or acquiring other businesses in the marijuana industry. The success of any acquisition
will depend upon, among other things, our ability to integrate acquired personnel, operations, products and technologies into
our organization effectively, to retain and motivate key personnel of acquired businesses, and to retain their customers. Any
acquisition may result in diversion of management’s attention from other business concerns, and such acquisition may be
dilutive to our financial results and/or result in impairment charges and write-offs. We might also spend time and money investigating
and negotiating with potential acquisition or investment targets, but not complete the transaction.
Although
we expect to realize strategic, operational, and financial benefits as a result of our acquisitions, we cannot predict whether
and to what extent such benefits will be achieved. There are significant challenges to integrating an acquired operation into
our business.
Any
future acquisition could involve other risks, including the assumption of unidentified liabilities for which we, as a successor
owner, may be responsible. These transactions typically involve a number of risks and present financial and other challenges,
including the existence of unknown disputes, liabilities, or contingencies and changes in the industry, location, or regulatory
or political environment in which these investments are located, that our due diligence review may not adequately uncover and
that may arise after entering into such arrangements.
Laws
and regulations affecting the medical and adult use marijuana industry are constantly changing, which could detrimentally affect
our proposed cultivation and production operations and greenhouse products.
Local,
state, and federal medical and adult use marijuana laws and regulations are broad in scope and subject to evolving interpretations,
which could require us to incur substantial costs associated with compliance or alter certain aspects of our business plan. In
addition, violations of these laws, or allegations of such violations, could disrupt certain aspects of our business plan and
result in a material adverse effect on certain aspects of our planned operations. In addition, it is possible that regulations
may be enacted in the future that will be directly applicable to certain aspects of our proposed cultivation and production businesses,
as well as our greenhouse solutions business. We cannot predict the nature of any future laws, regulations, interpretations, or
applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures,
when and if promulgated, could have on our business.
We
may not obtain the necessary permits and authorizations to operate our proposed marijuana business.
We
may not be able to obtain or maintain the necessary licenses, permits, authorizations, or accreditations for our proposed cultivation
and production businesses and greenhouse solutions business, or may only be able to do so at great cost. In addition, we may not
be able to comply fully with the wide variety of laws and regulations applicable to the medical and adult use marijuana industry.
Failure to comply with or to obtain the necessary licenses, permits, authorizations, or accreditations could result in restrictions
on our ability to operate the medical and adult use marijuana business, which could have a material adverse effect on our business.
If
we incur substantial liability from litigation, complaints, or enforcement actions, our financial condition could suffer.
Our
participation in the medical and adult use marijuana industry may lead to litigation, formal or informal complaints, enforcement
actions, and inquiries by various federal, state, or local governmental authorities against us. Litigation, complaints, and enforcement
actions could consume considerable amounts of financial and other corporate resources, which could have a negative impact on our
sales, revenue, profitability, and growth prospects. We have not been, and are not currently, subject to any material litigation,
complaint, or enforcement action regarding marijuana (or otherwise) brought by any federal, state, or local governmental authority.
Certain of our operating subsidiaries, may in the future engage in the distribution of marijuana; however, we have not been, and
are not currently, subject to any material litigation, complaint, or enforcement action regarding marijuana (or otherwise) brought
by any federal, state, or local governmental authority with respect to the business of any our subsidiaries.
We
may have difficulty accessing the service of banks, which may make it difficult for us to operate.
Since
the use of marijuana is illegal under federal law, many banks will not except for deposit funds from businesses involved with
the marijuana industry. Consequently, businesses involved in the marijuana industry often have difficulty finding a bank willing
to accept their business. The inability to open or maintain bank accounts may make it difficult for us to operate our proposed
marijuana businesses. If any of our bank accounts are closed, we may have difficulty processing transactions in the ordinary course
of business, including paying suppliers, employees and landlords, which could have a significant negative effect on our operations.
In March of this year, U.S. Congressman Ed Perlmutter (D – Colorado) introduced house bill H.R. 1595, known as the Secure
and Fair Enforcement (SAFE) Banking Act to allow legally operating cannabis related businesses to utilize traditional banking
services without fear of federal agencies taking legal action against the banks or their customers. On September 25, 2019 the
SAFE bill was passed with strong bipartisan support in the House of Representatives. Many industry observers anticipate that the
bill will be signed into law within the next year.
Litigation
may adversely affect our business, financial condition, and results of operations.
From
time to time in the normal course of our business operations, we may become subject to litigation that may result in liability
material to our financial statements as a whole or may negatively affect our operating results if changes to our business operations
are required. The cost to defend such litigation may be significant and may require a diversion of our resources. There also may
be adverse publicity associated with litigation that could negatively affect customer perception of our business, regardless of
whether the allegations are valid or whether we are ultimately found liable. Insurance may not be available at all or in sufficient
amounts to cover any liabilities with respect to these or other matters. A judgment or other liability in excess of our insurance
coverage for any claims could adversely affect our business and the results of our operations.
Our
officers and directors have substantial equity ownership in the Company and substantial control over certain corporate actions.
As
of December 31, 2018, our officers and directors owned approximately 36% of our outstanding Common Stock and thus exercise substantial
control over stockholder matters, such as election of directors, amendments to the Articles of Incorporation, and approval of
significant corporate transactions.
If
we fail to implement and maintain proper and effective internal controls and disclosure controls and procedures pursuant to Section
404 of the Sarbanes-Oxley Act of 2002, our ability to produce accurate and timely financial statements and public reports could
be impaired, which could adversely affect our operating results, our ability to operate our business, and investors’ views
of us.
Our
internal controls and procedures were not effective to detect the inappropriate application of U.S. GAAP rules. Our internal controls
were adversely affected by deficiencies in the design or operation of our internal controls, which management considered to be
material weaknesses. These material weaknesses include the following:
|
●
|
lack
of a majority of independent members and a lack of a majority of outside directors on our Board, resulting in ineffective
oversight in the establishment and monitoring of required internal controls and procedures;
|
|
|
|
|
●
|
inadequate
segregation of duties consistent with control objectives;
|
|
|
|
|
●
|
ineffective
controls over period end financial disclosure and reporting processes;
|
|
|
|
|
●
|
beginning in July of 2019 the Company’s
executive management team began convening weekly meetings to review expenditures and provide cash flow analysis, and
|
|
|
|
|
●
|
the Company intends to add additional external accounting support and establish an audit committee and
compensation committee by the end of 2019.
|
The
failure to implement and maintain proper and effective internal controls and disclosure controls could result in material weaknesses
in our financial reporting, such as errors in our financial statements and in the accompanying footnote disclosures that could
require restatements. Investors may lose confidence in our reported financial information and disclosure, which could negatively
impact our stock price.
We
do not expect that our internal controls over financial reporting will prevent all errors and all fraud. A control system, no
matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives
will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits
of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because
changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Our
insurance coverage may be inadequate to cover all significant risk exposures.
We
will be exposed to liabilities that are unique to the products we provide. While we intend to maintain insurance for certain risks,
the amount of our insurance coverage may not be adequate to cover all claims or liabilities, and we may be forced to bear substantial
costs resulting from risks and uncertainties of our business. It is also not possible to obtain insurance to protect against all
operational risks and liabilities. In particular, we may have difficulty obtaining insurance because we intend to operate in the
marijuana industry. The failure to obtain adequate insurance coverage on terms favorable to us, or at all, could have a material
adverse effect on our business, financial condition, and results of operations. We do not have any business interruption insurance.
Any business disruption or natural disaster could result in substantial costs and diversion of resources.
If
our products are contaminated, we may have litigation and products liability exposure.
We
source some of our products from third-party suppliers. Although we are required by Nevada law to test the products we receive
from third-party suppliers, we may not identify all contamination in those products. Possible contaminates include pesticides,
molds, and fungus. If a customer suffers an injury from our products, they may sue us in addition to the supplier and we may not
have adequate insurance to cover any such claims, which could result in a negative effect on our results of operations.
Some
of our lines of business rely on our third-party service providers to host and deliver services and data, and any interruptions
or delays in these hosted services, security or privacy breaches, or failures in data collection could expose us to liability
and harm our business and reputation.
Some
of our lines of business and services rely on services hosted and controlled directly by third-party service providers. We do
not have redundancy for all of our systems, many of our critical applications reside in only one of our data centers, and our
disaster recovery planning may not account for all eventualities. If our business relationship with a third-party provider of
hosting or software services is negatively affected, or if one of our service providers were to terminate its agreement with us,
we might not be able to deliver access our data, which could subject us to reputational harm and cause us to lose customers and
future business, thereby reducing our revenue.
We
may hold large amounts of customer data, some of which will likely be hosted in third-party facilities. A security incident at
those facilities or ours may compromise the confidentiality, integrity or availability of customer data. Unauthorized access to
customer data stored on our computers or networks may be obtained through break-ins, breaches of our secure network by an unauthorized
party, employee theft or misuse or other misconduct. It is also possible that unauthorized access to customer data may be obtained
through inadequate use of security controls by customers. Accounts created with weak passwords could allow cyber-attackers to
gain access to customer data. If there were an inadvertent disclosure of customer information, or if a third party were to gain
unauthorized access to the information we possess on behalf of our customers, our operations could be disrupted, our reputation
could be damaged, and we could be subject to claims or other liabilities. In addition, such perceived or actual unauthorized disclosure
of the information we collect, or breach of our security could damage our reputation, result in the loss of customers and harm
our business.
Because
of the data we expect to collect and manage using our hosted solutions, it is possible that hardware or software failures or errors
in our systems (or those of our third-party service providers) could result in data loss or corruption, cause the information
that we collect to be incomplete or contain inaccuracies that our customers regard as significant or cause us to fail to meet
committed service levels. Furthermore, our ability to collect and report data may be delayed or interrupted by a number of factors,
including access to the Internet, the failure of our network or software systems or security breaches. In addition, computer viruses
or other malware may harm our systems, causing us to lose data, and the transmission of computer viruses or other malware could
expose us to litigation. We may also find, on occasion, that we cannot deliver data and reports in near real time because of a
number of factors, including failures of our network or software. If we supply inaccurate information or experience interruptions
in our ability to capture, store and supply information in near real time or at all, our reputation could be harmed and we could
lose customers, or we could be found liable for damages or incur other losses. Moreover, states in which we operate may require
that we maintain certain information about our customers and transactions. If we fail to maintain such information, we could be
in violation of state laws.
Risks
Related to an Investment in Our Securities
We
expect to experience volatility in the price of our Common Stock, which could negatively affect stockholders’ investments.
The
trading price of our Common Stock may be highly volatile and could be subject to wide fluctuations in response to various factors,
some of which are beyond our control. The stock market in general has experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating performance of companies with securities traded in those markets. Broad
market and industry factors may seriously affect the market price of companies’ stock, including ours, regardless of actual
operating performance. All of these factors could adversely affect your ability to sell your shares of Common Stock or, if you
are able to sell your shares, to sell your shares at a price that you determine to be fair or favorable.
Our
Common Stock is categorized as “penny stock,” which may make it more difficult for investors to sell their shares
of Common Stock due to suitability requirements.
Our
Common Stock is categorized as “penny stock.” The SEC has adopted Rule 15g-9, which generally defines “penny
stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of
less than $5.00 per share, subject to certain exceptions. The price of our Common Stock is significantly less than $5.00 per share
and, therefore, is considered “penny stock.” This designation imposes additional sales practice requirements on broker-dealers
who sell to persons other than established customers and accredited investors. The penny stock rules require a broker-dealer buying
our securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine
that the purchaser is reasonably suitable to purchase the securities given the increased risks generally inherent in penny stocks.
These rules may restrict the ability and/or willingness of brokers or dealers to buy or sell our Common Stock, either directly
or on behalf of their clients, may discourage potential stockholders from purchasing our Common Stock, or may adversely affect
the ability of stockholders to sell their shares.
Financial
Industry Regulatory Authority (“FINRA”) sales practice requirements may also limit a stockholder’s ability to
buy and sell our Common Stock, which could depress the price of our Common Stock.
In
addition to the “penny stock” rules described above, FINRA has adopted rules that require a broker-dealer to have
reasonable grounds for believing that the investment is suitable for that customer before recommending an investment to a customer.
Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable
efforts to obtain information about the customer’s financial status, tax status, investment objectives, and other information.
Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will
not be suitable for at least some customers. Thus, the FINRA requirements make it more difficult for broker-dealers to recommend
that their customers buy our Common Stock, which may limit your ability to buy and sell our shares of Common Stock, have an adverse
effect on the market for our shares of Common Stock, and thereby depress our price per share of Common Stock.
Our
Common Stock may not be eligible for listing or quotation on any national securities exchange.
We
do not currently meet the initial quantitative listing standards of any national securities exchange. We cannot assure you that
we will be able to meet the initial listing standards of any national securities exchange in the future, or, if we do meet such
initial listing standards, that we will be able to maintain any such listing. Until our Common Stock is listed on a national securities
exchange, which event may never occur, we expect that it will continue to be eligible and quoted on the OTC Markets Group Inc.’s
Pink® Market. However, investors may find it difficult to obtain accurate quotations as to the market value of our Common
Stock. Further, the national securities exchanges are adopting so-called “seasoning” rules that will require that
we meet certain requirements, including prescribed periods of time trading over the counter and minimum filings of periodic reports
with the SEC, before we are eligible to apply for listing on such national securities exchanges. In addition, if we fail to meet
the criteria set forth in SEC regulations, various requirements would be imposed by law on broker-dealers who sell our securities
to persons other than established customers and accredited investors. Consequently, such regulations may deter broker-dealers
from recommending or selling our Common Stock, which may further affect its liquidity. This would also make it more difficult
for us to raise additional capital.
The
elimination of monetary liability against our directors, officers, and employees under Nevada law and the existence of indemnification
rights for our obligations to our directors, officers, and employees may result in substantial expenditures by us and may discourage
lawsuits against our directors, officers, and employees.
Our
Articles of Incorporation contain a provision permitting us to eliminate the personal liability of our directors to us and our
stockholders for damages for the breach of a fiduciary duty as a director or officer to the extent provided by Nevada law. We
may also have contractual indemnification obligations under any future employment agreements with our officers or agreements entered
into with our directors. The foregoing indemnification obligations could result in us incurring substantial expenditures to cover
the cost of settlement or damage awards against directors and officers, which we may be unable to recoup. These provisions and
the resulting costs may also discourage us from bringing a lawsuit against directors and officers for breaches of their fiduciary
duties and may similarly discourage the filing of derivative litigation by our stockholders against our directors and officers
even though such actions, if successful, might otherwise benefit us and our stockholders.
We
may issue additional shares of Common Stock or preferred stock in the future, which could cause significant dilution to all stockholders.
Our
Articles of Incorporation authorize the issuance of up to 95,000,000 shares of Common Stock and 5,000,000 shares of preferred
stock, with a par value of $0.001 per share. As of December 31, 2018, we had 70,894,146 shares of Common Stock, outstanding; however,
we may issue additional shares of Common Stock or preferred stock in the future in connection with a financing or an acquisition.
Such issuances may not require the approval of our stockholders. Any issuance of additional shares of our Common Stock,
or equity securities convertible into our Common Stock, including but not limited to, preferred stock, warrants, and options,
will dilute the percentage ownership interest of all stockholders, may dilute the book value per share of our Common Stock, and
may negatively impact the market price of our Common Stock.
Anti-takeover
effects of certain provisions of Nevada state law hinder a potential takeover of us.
Nevada
has a business combination law that prohibits certain business combinations between Nevada corporations and “interested
stockholders” for three years after an “interested stockholder” first becomes an “interested stockholder,”
unless the corporation’s board of directors approves the combination in advance. For purposes of Nevada law, an “interested
stockholder” is any person who is (i) the beneficial owner, directly or indirectly, of ten percent or more of the voting
power of the outstanding voting shares of the corporation or (ii) an affiliate or associate of the corporation and at any time
within the three previous years was the beneficial owner, directly or indirectly, of ten percent or more of the voting power of
the then outstanding shares of the corporation. The definition of the term “business combination” is sufficiently
broad to cover virtually any kind of transaction that would allow a potential acquirer to use the corporation’s assets to
finance the acquisition or otherwise to benefit its own interests rather than the interests of the corporation and its other stockholders.
The
effect of Nevada’s business combination law is potentially to discourage parties interested in taking control of us from
doing so if they cannot obtain the approval of our Board. Both of these provisions could limit the price investors would be willing
to pay in the future for shares of our Common Stock.
Because
we do not intend to pay any cash dividends on our Common Stock, our stockholders will not be able to receive a return on their
shares unless they sell them.
We
intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any
cash dividends on our Common Stock in the foreseeable future. Declaring and paying future dividends, if any, will be determined
by our Board, based upon earnings, financial condition, capital resources, capital requirements, restrictions in our Articles
of Incorporation, contractual restrictions, and such other factors as our Board deems relevant. Unless we pay dividends, our stockholders
will not be able to receive a return on their shares unless they sell them. There is no assurance that stockholders will be able
to sell shares when desired or for prices that they deem acceptable.
Item
1B. Unresolved Staff Comments
The
disclosures are not applicable to us.
Item
2. Properties
Our
principal office is located at 1300 South Jones Boulevard, Las Vegas, Nevada 89146, where we occupy approximately 5,000 square
feet of an approximately 10,000 square foot office building that the Company purchased in October of 2018 for $1,500,000 subject
to a monthly mortgage payment of $6,953.
We
hold a triple net leasehold interest in a 17,298 square foot building located at 2310 Western Avenue, Las Vegas, Nevada.
The lease is for an initial term of 10 years, with a 12-month rent abatement. The commencement date of the lease is June
29, 2017. The lease includes two options to extend, each for an additional 5 years. The lease grants us an option to purchase
the property on or after the 25th month of the lease and continuing through the 60th month of the lease
for the sum of $2,607,880. Currently, we have no intention to exercise the purchase option.
In August of 2018, the Company executed
a letter of intent (“LOI”) for the acquisition of all of the membership units of Farm Road, LLC, a Wyoming limited
liability company (“Farm Road”). Farm Road was the owner of five parcels of farmland in the Amargosa Valley of Nevada
totaling 260 acres and the concomitant 180 acre-feet of water rights. Pursuant to the terms of a membership interest purchase
agreement (“MIPA”) executed between the Company and Farm Road in November of 2018, the Company was to acquire Farm
Road for $1,000,000 on the following terms: a deposit of $50,000 in cash and $50,000 of the Company’s restricted common
stock upon execution of the LOI, to be held in escrow until closing, $150,000 in cash payable at closing and a promissory note
bearing 5% simple annual interest (the “Promissory Note”) in the amount of $750,000.00 payable to FR Holdings, LLC
(an unrelated third party) (“FRH”) in 36 equal monthly interest only payments of three thousand one hundred twenty
five ($3,125.00) dollars commencing on the March 1, 2019. On January 18, 2019, pursuant to the terms the MIPA, the Company acquired
a 100% interest in Farm Road. The terms of the Promissory Note include a balloon payment to be made on January 17, 2022 of any
then remaining principal balance and accrued interest. The MIPA further provides that FRH shall be entitled to receive a consulting
fee of five per cent (5%) of the gross sales from any commercial use of the property up to a maximum of five hundred thousand
($500,000.00) dollars payable to FRH within two years of the January 18, 2019 closing date. The Company will utilize this acquisition
to expand its Nevada outdoor cultivation capabilities.
Effective
August 1, 2019 the Company entered into an agreement to lease an approximately 17,000 sq. ft. commercial building in Pahrump,
NV. The lease is for a term of ten years at an initial monthly rent of $10,000 per month with rent increases each August 1st
during the term of the lease equal to the Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department
of Labor for CPI W (Urban Wage Earners and Clerical Workers) for Las Vegas, Nevada. The Company paid the property owner a security
deposit in the amount of $20,000. While the Company took possession of the premises on August 1, 2019, the monthly rent commences
on October 1, 2019. The Company has an option, exercisable between July 1, 2020 and July 1, 2024, to purchase the property for
$1,800,000. The leasehold has previously been utilized as a fully-licensed, State of Nevada marijuana cultivation facility; and,
it is the Company’s intention to move our marijuana processing into this facility upon receipt of all required regulatory
approvals – anticipated in the fourth quarter of 2019.
Item
3. Legal Proceedings
From
time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of
business. When the Company is aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. If it is
probable that a loss will result and the amount of the loss can be reasonably estimated, the Company will record a liability for
the loss. 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.
Item
4. Mine Safety Disclosures
The
disclosures are not applicable to us.
Notes
to the Consolidated Financial Statements
Note
1 — Description of Business
MJ
Holdings Inc. (OTC Pink: MJNE. “the Company”, “we”, “us”) is a publicly-traded, cannabis holding
company providing cultivation management, licensing support, production management and asset and infrastructure development –
currently in the Las Vegas market. It is our intention to grow our business and provide a 360-degree spectrum of infrastructure
(including: cultivation, production management, dispensaries and consulting services) through: the acquisition of existing companies;
joint ventures with existing companies possessing complementary expertise, and/or through the development of new opportunities.
(See Subsequent Events for highlights of major events subsequent to December 31, 2018)
We
were incorporated on November 17, 2006, as Securitas EDGAR Filings, Inc. under the laws of the State of Nevada 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 stockholders
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 our Common Stock in exchange for 1,800,000 shares of MJRE’s common units, representing 100%
of the membership interests in MJRE. Effective February 1, 2017, we transferred our ownership interests in the real estate properties
and our subsidiaries, through which we 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 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 our Common Stock and a promissory
note in the amount of $900,000. The acquisition was accounted for as a reverse merger, whereby Red Earth was considered the accounting
acquirer and became our wholly owned subsidiary. Upon the consummation of the acquisition, the now-former members of Red Earth
became the beneficial owners of approximately 88% of our Common Stock, obtained controlling interest of the Company, and retained
certain of our key management positions. In accordance with the accounting treatment for a “reverse merger” or a “reverse
acquisition,” our historical financial statements prior to the reverse merger were replaced with the historical financial
statements of Red Earth prior to the reverse merger. The consolidated financial statements after completion of the reverse merger
includes the assets, liabilities, and results of operations of the combined company from and after the closing date of the reverse
merger, with only certain aspects of pre-consummation stockholders’ equity remaining in the consolidated financial statements.
Through
Red Earth, we hold a provisional State of Nevada issued cannabis cultivation license, and through its wholly-owned subsidiary
HDGLV , LLC (“HDGLV”), we hold a triple-net leasehold, with an option to buy for $2,607,880, on a 17,298 square-foot
building, in which we intend to house our indoor cultivation facility.
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. In January of 2019, the Company
entered into a revised agreement with the Licensed Operator in order to be more stringently aligned with Nevada marijuana laws.
The material terms of the agreement remain unchanged. The Licensed Operator is contractually obligated to pay over to the Company
eighty-five (85%) percent of gross revenues defined as gross proceeds from sales of marijuana products minus applicable state
excise taxes and local sales tax. The agreement is to remain in force until April, 2026. In April 2019, the Licensed Operator
was acquired by a publicly traded Canadian cannabis company; the acquisition was subject to all of the contractual obligations
between the Company and the Licensed Operator.
Pursuant
to those agreements, the Licensed Operator engaged us to develop, manage and operate a licensed cultivation facility on property
owned by the Licensed Operator. Between April and August of 2018, at our sole cost and expense, we completed the construction
of a 120,000 square-foot outdoor grow facility, including the construction of an 8,000 square-foot building and installation of
required security fencing, meeting all of the State of Nevada’s stringent building codes and regulations. Operation of this
facility commenced in August, 2018 with our first test grow.
In
April 2018, the State of Nevada finalized and approved the transfer of provisional Medical Marijuana Establishment Registration
Certificate No. 012 (the “Certificate”) from Acres Medical, LLC to our wholly owned subsidiary, Red Earth, LLC (“Red
Earth”). HDGLV, LLC (“HDGLV”), a wholly owned subsidiary of Red Earth, holds a triple-net leasehold interest
in a 17,298 square-foot commercial building located on Western Avenue in the City of Las Vegas, which will be home to our indoor
cultivation facility (the “Western Facility”). The initial term of the lease is for a period of ten years with two
additional five-year lease options. HDGLV also possesses an option to purchase the building for $2,607,880 which is exercisable
between months 25 and 60 of the initial term of the lease. In August of 2018 we received final approval from the State of
Nevada, Department of Taxation to commence cultivation activities with respect to the Certificate. Contemporaneously therewith,
Red Earth was issued a Business License by the City of Las Vegas to operate a marijuana cultivation facility at the Western Facility;
however, the City of Las Vegas Department of Building & Safety requested that additional modifications be made to the premises
prior to issuance of a certificate of occupancy (“COI”). The COI is expected to be issued in the first quarter of
2020, which will then allow the Company to commence legal marijuana cultivation activities within the City of Las Vegas.
In
July of 2018 the Company entered into a Corporate Advisory Agreement (“Advisory Agreement”) with a New York
City based consulting company (the “Consultant”) to provide business management, corporate compliance and related
services to the Company and its subsidiaries. The Advisory Agreement granted to the Consultant an option to acquire up to 10,000
additional shares of the Company’s common stock at an exercise price of $1.20. The options have a term of three years. The
fair value of these stock options was determined to be $6,738 using the Black-Scholes-Merton option-pricing model based on the
following assumptions: (i) volatility rate of 222%, (ii) discount rate of 2.88%, (iii) zero expected dividend yield, and (iv)
expected life of three years. In September 2018, the Company terminated the Advisory Agreement pursuant to its terms and paid
to the Consultant compensation consisting of 25,000 shares of the Company’s common stock and a $6,000 cash payment.
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 was 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 “Transaction Closing Date”), the Company entered into a Securities Purchase Agreement (the
“Securities Purchase Agreement”), pursuant to which the Company sold and issued 2,500 shares of its Series A
Convertible Preferred Stock (the “Preferred Stock”) to a single institutional, accredited investor for $1,000 per
share or an aggregate subscription of $2,500,000. During the year ended December 31, 2018, the Preferred Stock was converted
into 3,333,333 shares of the Company’s Common Stock at a conversion price of $0.75 per share, subject to adjustment as
described in the Certificate of Designation. The Company also entered into a Registration Rights Agreement (the
“Registration Rights Agreement”) with the purchaser, which required the Company to register for resale the
underlying common stock with the Securities and Exchange Commission. The registration statement on Form S-1/A was declared
effective on October 24, 2018.
On
August 13, 2018 (the “Effective Transaction Date”), the Company closed the transactions contemplated by an Exclusive
Distribution Agreement (the “Distribution Agreement”). The Agreement is between the Company and Healthier Choices
Management Corp., a designer and seller (the “Seller” or “HCMC”) of a series of integrated products, all
of which are designed to be utilized to consume cannabis products by vaporizing oil and other related products (the “Goods”).
The Company has the exclusive right to distribute the Goods in the territory of Nevada (the “Territory”). The Distribution
Agreement further requires the Company to advertise and market the Goods in the Territory. Pursuant to the terms of the Distribution
Agreement, the Company purchased certain of the Goods from the Seller and paid the sum of two million dollars ($2,000,000). The
funds were transferred to HCMC on the Effective Transaction Date. The Seller has applied for and received patent protection in
respect of one of the products. The Distribution Agreement is subject to standard termination provisions; however, the Seller
has the option to terminate the Distribution 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. Thereafter,
for each renewal term, the Company’s minimum purchase obligation for the Goods is $500,000, subject to good faith negotiation
at the end of each contract year. 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. This Agreement was terminated,
pursuant to the terms of the Agreement, effective August 12, 2019.
On
August 13, 2018, the Company entered into a Stock Exchange Agreement with HCMC to acquire 1,500,000,000 shares of their common
stock in exchange for 85,714 shares of the Company’s common stock. The value of the stock exchanged by each party on the
date of exchange was $150,000. Please see note 11, Inventory, for further discussion of the Company’s additional business
interests with HCMC. The Company recorded the 85,714 shares of HCMC common stock as an available for sale security and intends
to mark the value to market each reporting period based on the current market value of its held shares in Healthier Choices. As
of the transaction date, the price as quoted on the OTC Markets for Healthier Choices common stock was $0.0001 per share.
In
August of 2018, the Company executed a letter of intent (“LOI”) for the acquisition of all of the membership units
of Farm Road, LLC, a Wyoming limited liability company (“Farm Road”). Farm Road was the owner of five parcels of farmland
in the Amargosa Valley of Nevada totaling 260 acres and the concomitant 180 acre-feet of water rights. Pursuant to the terms of
the LOI the Company was to acquire Farm Road for $1,000,000 on the following terms: a deposit of $50,000 in cash and $50,000 of
the Company’s restricted common stock upon execution of the LOI, to be held in escrow until closing, $150,000 in cash payable
at closing and a promissory note bearing 5% simple annual interest (the “Promissory Note”) in the amount of $750,000
payable to FR Holdings, LLC (an unrelated third party) (“FRH”) in 36 equal monthly interest only payments of three
thousand one hundred twenty five ($3,125) dollars commencing on the March 1, 2019. On January 18, 2019, pursuant to the terms
of a membership interest purchase agreement (“MIPA”) between the Company and Farm Road, the Company acquired a 100%
interest in Farm Road. The terms of the Promissory Note include a balloon payment to be made on January 17, 2022 of any then remaining
principal balance and accrued interest. The MIPA further provides that FRH shall be entitled to receive a consulting fee of five
per cent (5%) of the gross sales from any commercial use of the property up to a maximum of five hundred thousand ($500,000) dollars
payable to FRH within two years of the January 18, 2019 closing date The Company will utilize this acquisition to expand its Nevada
outdoor cultivation capabilities.
In
September of 2018 the Company, through its wholly owned subsidiary Red Earth, applied for five Recreational Marijuana Establishment
Licenses to operate up to five retail marijuana stores within the state of Nevada. The Company’s goal was to open a store
within the City of Las Vegas, as well as additional dispensaries in Washoe County near Lake Tahoe, in North Las Vegas, unincorporated
Clark County and Henderson, Nevada. The Company received notice in early December 2018 that none of the submitted applications
received sufficiently high enough scores after being graded by the Nevada Department of Taxation (“NVDOT”). In connection
with the license applications we entered into a Memorandum of Understanding (“MOU”) with a third party (the “Party”).
Pursuant to the terms of the MOU the Party made payments to us totaling $232,500, which was paid during the year ended December
31, 2018. The Party was entitled to receive shares of our restricted common stock with a fair market value as of the trading day
immediately preceding the date the first license application was submitted to NVDOT (September 20, 2018) equal to $232,500. The
Company issued 91,177 shares of common stock to the Party in connection with this transaction. Subsequent to December 31, 2018,
the Company has entered into an agreement with the Party to relieve the Company and the Party of any further obligations under
the MOU in exchange for an additional 373,823 shares of the Company’s restricted common stock.
The
Company has joined with more than 15 other plaintiffs in an action against the State of Nevada in regard to how the applications
were scored and as to why licenses were granted to other applicants in contravention of the guidelines published by the State
of Nevada. On August 23, 2019 a Nevada District Court judge issued a preliminary injunction enjoining any of the entities that
were granted licenses from opening new dispensaries based upon the failure of NVDOT (the administrative body tasked with adopting
and enforcing marijuana regulations within the State of Nevada) to enforce a provision of Ballot Question 2 (“BQ2”),
that was approved by Nevada voters in 2016 and adopted by the Nevada legislature and codified as NRS 453D, which legalized the
sale and distribution of recreational use marijuana. The law requires that “each prospective owner, officer and board member
of a marijuana establishment license applicant” undergo a background check. The judge found that many of the successful
license applicants failed to comply with this requirement. On August 29, 2019 the judge modified the ruling and is allowing thirteen
of the successful license applicants who the State of Nevada have certified as having complied with the requirements of BQ2 to
open new dispensaries as granted in December of 2018. The plaintiffs shall now continue to trial on the merits of the pending
litigation against the State of Nevada.
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, leaving a principal balance of $1,087,705. On November 1, 2019, 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.
On
October 5, 2018, in accordance with the Company’s obligations under the Registration Rights Agreement, the Company filed
a Registration Statement on Form S-1 (File No. 333-227735) (the “Registration Statement”) with the SEC to register
3,335,000 shares of the Company’s stock for resale. The Company filed Amendment No. 1 to the Registration Statement in response
to comments received by the SEC. The SEC declared the Registration Statement effective on October 24, 2018. Pursuant to the amended
Registration Statement the holder of the 3,335,000 shares agreed not sell any of the stock at a price below $3.00 per share until
such time as the Company was listed on a national exchange or was no longer being quoted on the OTC Markets Group Inc.’s
Pink® Market.
On
October 15, 2018, we entered into an employment agreement (the “Tierney Employment Agreement”) with Terrence M. Tierney.
Pursuant to the Employment Agreement, we appointed Terrence M. Tierney, to the additional position of Chief Administrative Officer,
in addition to his current 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 Employment Agreement is
October 15, 2018, and continues until the earlier of: (i) the effective date of any subsequent employment agreement between Mr.
Tierney and us; (ii) the effective date of any termination of employment as provided for in the Employment Agreement; or (iii)
three (3) years from the effective date; provided, that the 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 the Employment
Agreement, 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. Tierney will report to the Chief Executive Officer and the
Board of Directors.
Mr.
Tierney’s annual salary shall be equal to or greater than any other senior executive of the Company with the exception of
the Chief Executive Officer. Mr. Tierney is entitled to the benefits other employees are entitled to, including medical, dental,
and vision insurance; life and disability insurance; retirement and profit-sharing programs; paid holidays; and such other benefits
and perquisites as are approved by the Board of Directors. 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 by the Company of an omnibus benefit plan. The Tierney
Employment Agreement defers $10,000 per month of Mr. Tierney’s salary until such time as the Company has posted 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. Tierney’s employment may be terminated for cause or without cause. In addition,
in the event of disability, the Company is entitled to terminate Mr. Tierney if he is unable to perform his duties without reasonable
accommodation for a period of more than thirty (30) consecutive days. Upon such termination, Mr. Tierney is entitled to all accrued
but unpaid salary and vacation. In the event of a “total disability,” as defined in the Employment Agreement, Mr.
Tierney is also entitled to receive his normal monthly salary for the shorter of the first three (3) months of disability or until
any disability insurance policy (offered as part of his employment) begins to pay benefits. After three (3) months, Mr. Tierney
is only entitled to receive amounts under the disability insurance coverage, if any. In the event of partial disabilities, Mr.
Tierney is entitled to that portion of his normal monthly salary that bears the same ratio to his normal monthly salary as the
amount of time which the Executive is able to devote to the usual performance of duties during such period bears to the total
time Mr. Tierney devoted to performing such services prior to the time the partial disability commenced. In the event of a combination
of total and partial disability, the maximum total disability compensation Mr. Tierney shall be entitled to cannot exceed an amount
equal to one (1) times his normal monthly compensation.
In
November of 2018, the Company formed Alternative Hospitality, Inc. (“Alternative”), a Nevada corporation as a joint
venture with TVK, an unrelated third-party, is a Florida limited liability company. The Company owns fifty-one percent (51%)
of Alternative and TVK owns the remaining forty-nine percent (49%). Alternative will develop hotel properties with a focus on
the wellness aspects of cannabis and cannabis related products. Roger Bloss, one of the managing members of TVK, will serve as
Alternative’s President, the Company’s Secretary, Terrence M. Tierney, will also serve as Vice President and Secretary
of Alternative and Mr. Bernard Moyle has been appointed to serve as Alternative’s Treasurer. In April of 2019, Mr. Bloss
was elected to the Board of Directors of the Company.
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 (“Alternative”) 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 December 31, 2018 and 2017. 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.
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 December 31, 2018, the Company’s investment in marketable securities – available for sale was determined to be
a level 1 investment. As of December 31, 2017, the Company did not have any financial assets that required to be recorded at
fair value.
Cash
Cash
includes cash on hand and deposits placed with banks or other financial institutions, which are unrestricted as to withdrawal
and use and with an original maturity of three months or less. The Company maintains its cash in bank deposit accounts.
The
Company, at various times throughout the year, had cash in financial institutions in excess of Federally insured limits. 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.
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 December 31, 2018. Inventories are valued at the lower of cost or net realizable value. We determine
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.
Property,
Plant and Equipment
Property,
plant 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,
plant 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
|
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. We did not
record any impairments of long-lived assets during the year ended December 31, 2018 and 2017.
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.
Revenues
are recognized when control of the promised goods or performance obligations for services is transferred to the Company’s
customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for the goods or services.
The
Company recognized an insignificant amount of revenue during the year ended December 31, 2018. There was no revenue recognized
in previous years.
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.
For
stock-based financial instruments issued to parties other than employees, we use 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 our best estimates, but these estimates
involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different
assumptions, our 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.
The
Company evaluates convertible preferred stock in accordance with ASC 470-20-35-7. The issued Series A Preferred Stock was converted
into shares of the Company’s Common Stock at a conversion price of $0.75 per share and the fair value of the common stock
based on closing price of the Company’s common stock on the day of issuance of the Preferred Stock was $1.50 per share of
common stock. Therefore, the intrinsic value is calculated at $0.75 per share.
The
Company determined that there is a beneficial conversion feature (“BCF”) of $2,500,000. Since the holder can convert
the preferred stock into shares of common stock at any time, amortization of this type of discount on convertible preferred stock
occurs upon issuance. The Company treated the amortization of the BCF as a dividend that reduces net income in arriving at income
available to common stockholders.
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.
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 our 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 — Red Earth Acquisition
On
December 15, 2017, the Company acquired all of the issued and outstanding membership interests of Red Earth LLC 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,” Red Earth
was treated as the “acquiring company” and MJ Holdings was treated as the “acquired company.” The Company’s
historical financial statements prior to the reverse merger were replaced with the historical financial statements of Red Earth
prior to the reverse merger. 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.
Note
4 — Going Concern
The
Company has recurring net losses, which have resulted in an accumulated deficit of $7,870,449 as of December 31, 2018. The Company
incurred a net loss of $5,007,928 and negative operating cash flow of $5,792,542 for the year ended December 31, 2018. At December
31, 2018 the Company had cash and cash equivalents of $56,656 and working capital of $1,144,761. These factors raise substantial
doubt about the Company’s ability to continue as a going concern for one year from the issuance of the financial statements.
The ability of the Company to continue as a going concern is dependent on the Company’s ability to further implement its business
plan, raise capital, and generate revenues. The Financial Statements do not include any adjustments that might be necessary if
the Company is unable to continue as a going concern.
The
Company’s current capital resources include cash, and inventories. Historically, the Company has financed its operations
principally through equity and debt financing.
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 (see Note 7) 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, the Company begins the cultivation process.
Note
6 — Stock Based Compensation
Warrants
and Options
Prior
to the Reverse Merger, the Company had issued warrants to acquire 166,665 shares of common stock as compensation for consulting
services. The warrants expire between June 2019 and July 2021.
In
July of 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 warrants and options issued, exercised and expired are below:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Avg.
|
|
|
|
|
|
|
Exercise
|
|
Warrants and Options:
|
|
Shares
|
|
|
Price
|
|
Balance at December 31, 2017
|
|
|
166,665
|
|
|
$
|
5.88
|
|
Issued
|
|
|
10,000
|
|
|
$
|
1.20
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Balance at December 31, 2018
|
|
|
176,665
|
|
|
$
|
5.61
|
|
Warrants
outstanding for the year ending December 31, 2018 and 2017 was 166,665.
Options
outstanding for the year ending December 31, 2018 and 2017 was 10,000 and 0, respectively.
Note
7 — Note Payable to Fund Acquisition of Provisional Grow License
In
February 2017, an investor advanced the Company $350,000 to fund the acquisition of the Provisional Grow License discussed above
in Note 5. The Company incurred $14,521 of debt issuance costs in association with the advance. The note, plus a $50,000 fee for
consideration of the advance, was due within sixty days upon approval by the State of Nevada of the transfer of the Provisional
Grow License to the Company. In December 2017, upon completion of the Reverse Merger discussed above in Note 3, the debt obligation,
including the $50,000 fee, was assumed by Paris Balaouras, the Chief Executive Officer of the Company. The Company recorded $64,521
of interest expense, the $50,000 fee plus the $14,521 of debt issuance costs, during the year ended December 31, 2017.
Note
8 — Commitments and Contingencies
Employment
Agreements
On
October 15, 2018, we entered into an employment agreement (the “Tierney Employment Agreement”) with Terrence M. Tierney.
Pursuant to the Employment Agreement, we appointed Terrence M. Tierney, to the position of Chief Administrative Officer, in addition
to his previous role as Secretary. The initial term of employment was 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
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 May 31, 2019, the Company’s Treasurer and Chief Financial Officer, John R. Wheeler resigned and was
immediately replaced by Laurence Ruhe. Mr. Wheeler is to receive a total of 250,000 shares of the Company’s $.001 par value
common stock (the “Stock”) for all past services provided to the Company. The initial 125,000 shares of Stock shall
be issued to Mr. Wheeler on or before June 15, 2019 and the remaining Stock shall be issued in twelve equal monthly installments
of 10,417 shares per month commencing on July 1, 2019.
On
June 1, 2019, we entered in an employment agreement with Mr. Laurence Ruhe. 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
July 15, 2019 the Company’s Board of Directors appointed Richard S. Groberg to be the President of the Company. Mr. Groberg
replaces Paris Balaouras, who was interim President from January 1, 2019 until July 15, 2019. Mr. Balaouras will continue in his
role as the Company’s CEO and Chairman of the Board. 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.
Operating
Leases
The
Company leases a production / warehouse facility under a non-cancelable operating lease that expire in June 2027. Future minimal
rental and lease commitments under non-cancelable operating leases with terms in excess of one year as of December 31, 2018, are
as follows:
|
|
Amount
|
|
Fiscal year ending December 31:
|
|
|
|
2019
|
|
|
230,640
|
|
2020
|
|
|
230,640
|
|
2021
|
|
|
230,640
|
|
2022
|
|
|
230,755
|
|
2023
|
|
|
230,986
|
|
Thereafter
|
|
|
812,328
|
|
Total minimum lease payments
|
|
$
|
1,965,989
|
|
Rent
expense, incurred pursuant to operating leases for the year ended December 31, 2018 and 2017, was $311,994 and $112,815, 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.
Note
9 — Income Taxes
The
Company did not incur any federal or state income tax expense or benefit for the years ended December 31, 2018 and 2017.
The
provision for income taxes differs from the amounts which would result from applying the federal statutory rate of 21% to the
Company’s loss before income taxes as follows:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Computed “expected” income tax benefit
|
|
$
|
(1,051,665
|
)
|
|
$
|
(113,828
|
)
|
State income tax benefit, net of federal benefit
|
|
|
-
|
|
|
|
15,209
|
|
Change in valuation allowance
|
|
|
1,028,817
|
|
|
|
(191,667
|
)
|
Other
|
|
|
22,848
|
|
|
|
(106,919
|
)
|
Change in federal income tax rate
|
|
|
-
|
|
|
|
120,784
|
|
IRC section 382 limitations on future NOL utilization
|
|
|
-
|
|
|
|
249,208
|
|
Write-off of property & equipment deferred tax asset
|
|
|
-
|
|
|
|
27,213
|
|
Provision for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
income taxes reflect the net tax effects of loss and credit carryforwards and temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components
of the Company’s deferred tax assets for federal and state income taxes for the years ended December 31, 2018 are as follows:
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Federal and state NOL carryforward
|
|
$
|
919,904
|
|
|
$
|
176,030
|
|
Property and equipment
|
|
|
25,819
|
|
|
|
(65
|
)
|
Reserves and accruals
|
|
|
3,619
|
|
|
|
|
|
Other intangibles
|
|
|
47,302
|
|
|
|
|
|
Deferred expenses
|
|
|
213,371
|
|
|
|
|
|
Deferred rent
|
|
|
42,846
|
|
|
|
|
|
Capitalized start-up expense
|
|
|
|
|
|
|
48,078
|
|
Deferred tax assets
|
|
|
1,252,861
|
|
|
|
224,043
|
|
Less: Valuation allowance
|
|
|
(1,252,861
|
)
|
|
|
(224,043
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
A
valuation allowance is required to be established when it is more likely than not that all or a portion of a deferred tax asset
will not be realized. Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are
uncertain. A full review of all positive and negative evidence needs to be considered. The Company has established a valuation
allowance against all its deferred tax assets.
On
December 22, 2017, H.R. 1 (the “Act”) was enacted and included broad tax reforms. The Act reduced the U.S. corporate
tax rate from 35% to 21% effective January 1, 2018.
As of December 31, 2018, the Company had
a net operating loss carryforward for federal income tax purposes of approximately $4.4 million and credit carryforwards are subject
to annual limitations due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar
state provisions. The annual limitations may result in the expiration of net operating losses and credits before utilization.
The Company has not performed a Section 382 study as of December 31, 2018.
The
Company files income tax returns in the U.S. The Company is not currently under examination in any of these jurisdictions and
all its tax years remain open to examination due to net operating loss carryforwards.
The
Company uses the “more likely than not” criterion for recognizing the income tax benefit of uncertain income tax positions
and establishing measurement criteria for income tax benefits. Although it is reasonably possible that certain unrecognized tax
benefits may increase or decrease within the next twelve months due to tax examination changes, settlement activities, expirations
of statute of limitations, or the impact on recognition and measurement considerations related to the results of published tax
cases or other similar activities, the Company does not anticipated any significant changes to unrecognized tax benefits over
the next 12 months. During the year ended December 31, 2018, no interest or penalties were required to be recognized relating
to unrecognized tax benefits. In the event the Company should need to recognize interest and penalties related to unrecognized
income tax liabilities, this amount will be recorded as an accrued liability and an increase to income tax expense.
Note
10 — 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 year ended December 31, 2018, 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 December 31, 2018, to purchase 176,665
shares of common stock were not included in the calculations of diluted loss per share because the impact would have been anti-dilutive.
Note
— 11 Inventory
At
December 31, 2018, inventory consisted of finish goods which amounted to $1,587,852. The Company did not hold any inventory at
December 31, 2017.
Note
12 — Fixed Assets
Property
and Equipment at December 31, 2018 and December 31, 2017 consisted of the following:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Leasehold Improvements
|
|
|
17,535
|
|
|
|
17,535
|
|
Machinery and Equipment
|
|
|
919,782
|
|
|
|
-
|
|
Building and Land
|
|
|
1,500,000
|
|
|
|
-
|
|
Furniture and Fixtures
|
|
|
314,890
|
|
|
|
-
|
|
Total property and equipment
|
|
|
2,752,207
|
|
|
|
17,535
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation
|
|
|
(123,256
|
)
|
|
|
-
|
|
Property and equipment, net
|
|
|
2,628,951
|
|
|
|
17,535
|
|
Depreciation
expense for the year ending December 31, 2018 and 2017 was $123,256 and $0, respectively.
Note
13 — Notes Payable
Notes payable as of December 31, 2018 and December 31, 2017 consist of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Note payable bearing interest at 6.50%, originated November 1, 2018, due on October 31, 2023 originally $1,100,000
|
|
$
|
1,099,006
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Note payable bearing interest at 5.00%, originated October 17, 2018, due on October 16, 2019
|
|
$
|
250,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Note payable bearing interest at 0.50%, originated December 15, 2017, due on October 15, 2018 – Related party
|
|
|
-
|
|
|
|
900,000
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
$
|
1,349,006
|
|
|
$
|
900,000
|
|
Less: current portion
|
|
|
(312,905
|
)
|
|
|
(900,000
|
)
|
|
|
|
|
|
|
|
|
|
Long-term notes payable
|
|
$
|
1,036,101
|
|
|
$
|
0
|
|
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.
|
|
Amount
|
|
Fiscal year ending December 31:
|
|
|
|
2019
|
|
|
62,905
|
|
2020
|
|
|
11,725
|
|
2021
|
|
|
12,510
|
|
2022
|
|
|
13,348
|
|
2023
|
|
|
998,518
|
|
Thereafter
|
|
|
-
|
|
Total minimum loan payments
|
|
$
|
1,099,006
|
|
In October of 2018 the Company executed
a note in the amount of $250,000 with the holder, Roger Bloss (“Bloss”). The term of the note was for one year, bearing
interest at five percent (5%) per year and was convertible into shares of the Company’s common stock at $.50 per share. In
July of 2019 Bloss exercised his conversion rights and the Company issued a total of 500,000 shares and retired the note.
As
part of the merger transaction (see Note 3), on December 15, 2017, the Company issued a convertible note payable in the amount
of $900,000 to the members of Red Earth. The controlling partner and majority stockholder of Red Earth at the time of the transaction
was Paris Balaouras, the Company’s Chief Executive Officer. The convertible note payable was due October 15, 2018. The note
was convertible into shares of the Company’s common stock at the holder’s discretion at a conversion price of $0.75
per share. The note accrued interest, commencing six months from the issuance date, at a rate equal to one half of one percent
(0.50%) per annum. Interest was payable on the maturity date or the conversion date. This Note was repaid in full during the year
ended December 31, 2018.
Note 14 — Related Party Transactions
Between April 2018 and December 31, 2018,
we engaged Desert Star Construction, LLC (“Desert Star”) to perform general contractor services at our managed facility
in Amargosa Valley and our leased premises at 2310 Western Avenue. We made payments to Desert Star in excess $190,000. Ronald Sassano,
a Managing Member of Red Dot is also a Manager of Desert Star.
Between March 2018 and May 2018, we made
payments totaling $54,000 to Apex Operations, LLC (“Apex”) as commission payments for third party contracts for assembly
of greenhouses on property owned and licensed by Acres Cultivation, LLC. Upon information and belief, Ronald Sassano and/or Michael
Sassano are controlling parties with regard to Apex.
Note
15 — Subsequent Events
Purchase
of Real Property
On January 18, 2019, the Company acquired
100% of the membership interests of Farm Road, LLC, a Wyoming limited liability company (“Farm Road”), which included
260-acres of farmland in the Amargosa Valley of Nevada. In August of 2018, the Company executed a letter of intent (“LOI”)
for the acquisition of all of the membership units of Farm Road, LLC, a Wyoming limited liability company (“Farm Road”).
Farm Road was the owner of five parcels of farmland in the Amargosa Valley of Nevada totaling 260 acres and the concomitant 180
acre-feet of water rights. Pursuant to the terms of a membership interest purchase agreement (“MIPA”) executed between
the Company and Farm Road in November of 2018, the Company was to acquire Farm Road for $1,000,000 on the following terms: a deposit
of $50,000 in cash and $50,000 of the Company’s restricted common stock upon execution of the LOI, to be held in escrow until
closing, $150,000 in cash payable at closing and a promissory note bearing 5% simple annual interest (the “Promissory Note”)
in the amount of $750,000.00 payable to FR Holdings, LLC (an unrelated third party) (“FRH”) in 36 equal monthly interest
only payments of three thousand one hundred twenty five ($3,125.00) dollars commencing on the March 1, 2019. The terms of the Promissory
Note include a balloon payment to be made on January 17, 2022 of any then remaining principal balance and accrued interest. The
MIPA further provides that FRH shall be entitled to receive a consulting fee of five per cent (5%) of the gross sales from any
commercial use of the property up to a maximum of five hundred thousand ($500,000.00) dollars payable to FRH within two years of
the January 18, 2019 closing date. This will be the home of our Nye County cultivation facility upon closing of our purchase of
the required licenses. The Company has started construction of a state-of-the-art five-acre cultivation facility on this property
which we expect to complete in the first quarter of 2020.
In
April of 2019, we consummated our purchase of an approximately 50-acre, commercial trailer and RV park (the “Trailer Park”)
in close proximity to our Amargosa Valley cultivation facilities. The Trailer Park can accommodate up to 90 trailers and RV’s.
There presently are 17 occupied trailers in the Trailer Park, and,
we are making necessary upgrades to bring additional units to the facility to provide housing for our farm personnel. We purchased
the Park for a total of $600,000 in cash and $50,000 of the Company’s common stock, resulting in the issuance of 66,667
shares. The sellers hold a $250,000 note, bearing interest at 6.50% resulting in monthly payments in the amount of $2,178 (the
“TP Note”). The TP Note requires additional principal reduction payments in the amount of $50,000 on or before April
5, 2020 and April 5, 2021. A final balloon payment of any and all outstanding principal and accrued interest is due and payable
on or before April 5, 2022. There are no prepayment penalties should the Company elect to retire the TP Note prior to its maturity
date. It is the Company’s attention to locate our hemp seed genetics lab on this property.
Material
Agreements
In
January of 2019, we formed Coachill-Inn, LLC (“Coachill-Inn”), a subsidiary of Alternative Hospitality to develop
a proposed hotel in Desert Hot Springs, CA. From January 2019 until June 2019, we were actively engaged in negotiations with the
property owner of the proposed location.
In
June of 2019, Coachill-Inn executed a purchase and sale agreement with Coachill Holdings, LLC (“CHL”) to acquire a
parcel of land within a 100-acre industrial cannabis park in Indigo, CA (the “Property”) to develop our first hotel
project. The purchase price for the property is $5,125,000. CHL is contributing $3,000,000 toward the purchase price of this property
in exchange for a twenty-five percent ownership interest in Coachill-Inn. Alternative Hospitality has made an initial deposit
of $150,000 toward the purchase of the Property and will own 51% of Coachill-Inn, when the transaction is scheduled to closes.
In
April of 2019, we executed a membership interest purchase agreement (the “MIPA2”) to acquire all of the
membership interests in two Nevada limited liability companies that are each the holder of a State of Nevada marijuana
license. Marijuana Establishment Registration Certificate, Application No. C202 and Marijuana Establishment Registration
Certificate, Application No. P133 (collectively the “Certificates”). The terms of the MIPA2 require the Company
to purchase the licenses for the total sum of $1,250,000 each, $750,000 in cash and $500,000 per license in the
Company’s common stock. The terms of the MIPA2 provide for a $250,000 non-refundable down payment and include a
short term note in the amount of $500,000 carrying an annual interest rate of two percent (2%) which is due and payable on or
before October 18, 2019. The Company has made non-refundable deposits totaling $550,000 and has reduced the principal of the
aforementioned note to $200,000. The Company is obligated to issue approximately 1,400,000 shares of our common stock in
fulfillment of our obligations in the MIPA2 and has executed a $750,000 long term note (the “LT Note”) in favor
of the current license holders that becomes due and payable upon the earlier of a) six months after the transfer of the
Certificates to the Company, or b) six months after the production/cultivation is declared fully operational by the
applicable regulatory agencies, or c) March 10, 2020. The LT Note carries an 8% annual interest rate and there is no
penalty for any prepayments of the LT Note. Additionally, the sellers shall receive, at closing, warrants to purchase up to
1,500,000 additional shares of the Company’s common stock; 1,000,000 warrants shall be exercisable for a period of
three years from the closing date at an exercise price of $2.00 per share and 500,000 warrants shall be exercisable for a
period of two years from the closing date at an exercise price of $1.50 per share (collectively the “MJ
Warrants”). The LT Note, MJ Warrants and the common shares issued will be held in escrow until the transaction closes
upon the terms of the MIPA2. The Company, upon receipt of all necessary regulatory approvals, plans to move the cultivation
license from its current location to the Company’s 260-acre facility in the Amargosa Valley of Nevada and move the
production license into its recently acquired leasehold in Pahrump, NV.
On August 30, 2019 the Company entered
into a material definitive agreement with an Ohio limited liability company (the “Buyer”) to sell forty-nine percent
(49%) of the membership interests in the Company’s wholly owned subsidiary Red Earth, LLC (“Red Earth”) for $441,000.
The membership interest purchase agreement (the “MIPA3”) requires the Buyer to make an additional $3,559,000 payment
to be utilized for the improvement and build-out of the Company’s Western Avenue leasehold in Las Vegas, Nevada. The payment
is due within ten (10) days of the receipt by Red Earth of a special use permit (“SUP”) from the City of Las Vegas
for our Western Avenue cultivation facility. The Company received the SUP on October 8, 2019. The Buyer, in conjunction with the
Company, will jointly manage and operate the facility upon completion. The MIPA3 also requires the Buyer to make a final payment
to the Company of $1,000,000 between 90 and 180 days after issuance of the SUP. Additionally, the Buyer has a first refusal right
to fund and build a 40,000 sq. ft. greenhouse facility at the Company’s Amargosa Valley Farm the terms of which are to be
negotiated in good faith upon the exercise of any rights granted in the MIPA3.
Miscellaneous
In February of this year, our largest shareholder,
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 March 31, 2019 has been accrued as a payable by the Company, significantly reducing the number of issued
and outstanding shares of the Company. Beginning in March of this year, pursuant to the filing of a Form D with the SEC, the Company
offered for sale 15,000,000 of these shares at a per share price of $0.50 per share. As of September 30, 2019, we have sold 12,850,000
shares for total proceeds of $6,425,000.
Effective
August 1, 2019 the Company entered into an agreement to lease an approximately 17,000 sq. ft. commercial building in Pahrump,
NV. The lease is for a term of ten years at an initial monthly rent of $10,000 per month with rent increases each August 1st
during the term of the lease equal to the Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department
of Labor for CPI W (Urban Wage Earners and Clerical Workers) for Las Vegas, Nevada. The Company paid the property owner a security
deposit in the amount of $20,000. While the Company took possession of the premises on August 1, 2019, the monthly rent commences
on October 1, 2019. The Company has an option, exercisable between July 1, 2020 and July 1, 2024, to purchase the property for
$1,800,000. The leasehold has previously been utilized as a fully-licensed, State of Nevada marijuana cultivation facility; and,
it is the Company’s intention to move our marijuana processing into this facility upon receipt of all required regulatory
approvals – anticipated in the fourth quarter of 2019.