Notes
to the Condensed Consolidated Financial Statements
For
the Three Months Ended March 31, 2021 and 2020
(Unaudited)
Note
1 — Nature of the Business
MJ
Holdings, Inc. (OTCPK: MJNE) is a highly-diversified cannabis holding company providing cultivation management, asset and infrastructure
development – currently concentrated in the Las Vegas market. It is the Company’s intention to grow its business and
provide a 360-degree spectrum of infrastructure, including, cannabis cultivation, production of cannabis related products, management
services, dispensaries and consulting services. The Company intends to grow its business through joint ventures with existing
companies possessing complementary subject matter expertise, acquisition of existing companies and through the development of
new opportunities. The Company intends to “prove the concept” profitably in the rapidly expanding Las Vegas market
and then use that anticipated success as a template for replicating the concept in other developing states through a combination
of strategic partnerships, acquisitions and opening new operations.
The
Company was incorporated on November 17, 2006, as Securitas EDGAR Filings, Inc. under the laws of the State of Nevada. Prior to
the formation of Securitas EDGAR Filings Inc., the business was operated as Xpedient EDGAR Filings, LLC, a Florida Limited Liability
Company, formed on October 31, 2005. On November 21, 2005, Xpedient EDGAR Filings LLC amended its Articles of Organization to
change its name to Securitas EDGAR Filings, LLC. On January 21, 2009, Securitas EDGAR Filings LLC merged into Securitas EDGAR
Filings, Inc., a Nevada corporation. On February 14, 2014, the Company amended and restated its Articles of Incorporation and
changed its name to MJ Holdings, Inc.
On
November 22, 2016, in connection with a plan to divest the Company of its real estate business, the Company submitted to its stockholders
an offer to exchange (the “Exchange Offer”) its common stock for shares in MJ Real Estate Partners, LLC, (“MJRE”)
a newly formed LLC formed for the sole purpose of effecting the Exchange Offer. On January 10, 2017, the Company accepted for
exchange 1,800,000 shares of its Common Stock in exchange for 1,800,000 shares of MJRE’s common units, representing membership
interests in MJRE. Effective February 1, 2017, the Company transferred its ownership interests in the real estate properties and
its subsidiaries, through which the Company held ownership of the real estate properties, to MJRE. MJRE also assumed the senior
notes and any and all obligations associated with the real estate properties and business, effective February 1, 2017.
Acquisition
of Red Earth
On
December 15, 2017, the Company acquired all of the issued and outstanding membership interests of Red Earth, LLC, a Nevada limited
liability company (“Red Earth”) established in October 2016, in exchange for 52,732,969 shares of its Common Stock
and a promissory note in the amount of $900,000. The acquisition was accounted for as a “Reverse Merger”, whereby
Red Earth was considered the accounting acquirer and became its wholly owned subsidiary. Upon the consummation of the acquisition,
the now former members of Red Earth became the beneficial owners of approximately 88% of the Company’s Common Stock, obtained
controlling interest of the Company, and retained certain of its key management positions. In accordance with the accounting treatment
for a “reverse merger” or a “reverse acquisition”, the Company’s historical financial statements
prior to the reverse merger will be replaced with the historical financial statements of Red Earth prior to the reverse merger
in all future filings with the SEC. Red Earth is the holder of a Nevada Marijuana Establishment Certificate for the cultivation
of marijuana.
COVID-19
COVID-19
has caused and continues to cause significant loss of life and disruption to the global economy, including the curtailment of
activities by businesses and consumers in much of the world as governments and others seek to limit the spread of the disease,
and through business and transportation shutdowns and restrictions on people’s movement and congregation.
As
a result of the pandemic, the Company has experienced, and continues to experience, weakened demand for its products. Many of
its customers have been unable to sell its products in customer stores due to government-mandated closures and have deferred or
significantly reduced orders for the Company’s products. The Company expects these trends to continue until such closures
are significantly curtailed or lifted. In addition, the pandemic has reduced foot traffic in the stores where its products are
sold that remain open, and the global economic impact of the pandemic has temporarily reduced consumer demand for its products
as they focus on purchasing essential goods.
Given
these factors, the Company anticipates that the greatest impact from the COVID-19 pandemic in 2020 occurred in the second and
third quarters and resulted in a significant net sales decline in its quarterly results.
In
addition, certain of its suppliers and the manufacturers of certain of its products were adversely impacted by COVID-19. As a
result, the Company faced delays or difficulty sourcing products, which negatively affected its business and financial results.
Even if the Company were able to find alternate sources for such products, it may cost more and cause delays in its supply chain,
which could adversely impact its profitability and financial condition.
The
Company has taken actions to protect its employees in response to the pandemic, including closing its corporate offices and requiring
its office employees to work from home. At its grow facilities, certain practices are in effect to safeguard workers, including
a staggered work schedule, and the Company is continuing to monitor direction from local and national governments carefully.
As
a result of the impact of COVID-19 on its financial results, and the anticipated future impact of the pandemic, the Company has
implemented cost control measures and cash management actions, including:
|
●
Furloughing a significant portion of its employees; and
|
|
|
|
●
Implementing 20% salary reductions across its executive team and other members of upper-level management; and
|
|
|
|
●
Executing reductions in operating expenses, planned inventory levels and non-product development capital expenditures; and
|
|
|
|
●
Proactively managing working capital, including reducing incoming inventory to align with anticipated sales.
|
Note
2 — Summary of Significant Accounting Policies
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, Inc., Condo Highrise Management, LLC and Prescott Management, LLC.
Inter-company balances and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Significant estimates and assumptions are required in the determination
of the fair value of financial instruments and the valuation of stock-based compensation. Some of these judgments can be subjective and
complex, and, consequently, actual results may differ from these estimates.
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.
Fair
Value of Financial Instruments
Fair
value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as
of March 31, 2021 and December 31, 2020. 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.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Three Months Ended March 31, 2021 and 2020
(Unaudited)
Note
2 — Summary of Significant Accounting Policies (continued)
Level
1: The preferred inputs to valuation efforts are “quoted prices in active markets for identical assets or liabilities,”
with the caveat that the reporting entity must have access to that market. Information at this level is based on direct observations
of transactions involving the same assets and liabilities, not assumptions, and thus offers superior reliability. However, relatively
few items, especially physical assets, actually trade in active markets.
Level
2: FASB acknowledged that active markets for identical assets and liabilities are relatively uncommon and, even when they
do exist, they may be too thin to provide reliable information. To deal with this shortage of direct data, the board provided
a second level of inputs that can be applied in these situations.
Level
3: If inputs from levels 1 and 2 are not available, FASB acknowledges that fair value measures of many assets and liabilities
are less precise. The board describes Level 3 inputs as “unobservable,” and limits their use by saying they “shall
be used to measure fair value to the extent that observable inputs are not available.” This category allows “for situations
in which there is little, if any, market activity for the asset or liability at the measurement date”. The FASB explains
that “observable inputs” are gathered from sources other than the reporting company and that they are expected to
reflect assumptions made by market participants.
As
of March 31, 2021 and December 31, 2020, the Company’s investment in marketable securities – available
for sale was determined to be a level 1 investment.
|
|
March
31, 2021
|
|
|
December
31, 2020
|
|
Marketable
securities
|
|
|
-
|
|
|
|
150,000
|
|
Total
|
|
$
|
-
|
|
|
$
|
150,000
|
|
On
February 17, 2021, the Company entered into a Stock Purchase Agreement (the “Agreement”) with ATG Holdings, LLC (the
“ATG”). Under the terms of the Agreement, the Company purchased 1,500,000,000 shares of common stock of Healthier
Choices Management Corp (“HCMC”) from ATG for the purchase price of $200,000. The transaction closed on February 19,
2021.
During
the three months ended March 31, 2021, the Company liquidated its marketable securities that it received in the Stock Exchange
Agreement with HCMC dated August 13, 2018 and the shares of HCMC that it received under the Agreement with ATG.
The
net proceeds received by the Company for the sale of the marketable securities were $9,857,429.
Accounts
Receivable and Allowance for Doubtful Accounts:
Accounts
receivable are recorded at invoiced amount and generally do not bear interest. An allowance for doubtful accounts is established,
as necessary, based on past experience and other factors which, in management’s judgment, deserve current recognition in
estimating bad debts. Such factors include growth and composition of accounts receivable, the relationship of the allowance for
doubtful accounts to accounts receivable and current economic conditions. The determination of the collectability of amounts due
from customer accounts requires the Company to make judgments regarding future events and trends. Allowances for doubtful accounts
are determined based on assessing the Company’s portfolio on an individual customer and on an overall basis. This process
consists of a review of historical collection experience, current aging status of the customer accounts, and the financial condition
of the Company’s customers. Based on a review of these factors, the Company establishes or adjusts the allowance for specific
customers and the accounts receivable portfolio as a whole.
|
|
March
31,
2021
|
|
|
December
31,
2020
|
|
Accounts
receivable
|
|
$
|
50,061
|
|
|
$
|
23,675
|
|
Less
allowance
|
|
|
34,932
|
|
|
|
12,000
|
|
Net
accounts receivable
|
|
$
|
15,129
|
|
|
$
|
11,675
|
|
Debt
Issuance Costs
Costs
associated with obtaining, closing, and modifying loans and/or debt instruments are netted against the carrying amount of the
debt instrument, and charged to interest expense over the term of the loan.
Inventory
Inventories
consist of finished goods as of March 31, 2021. Inventories are valued at the lower of cost or net realizable value. The
Company determines cost on the basis of the first in first out method. The Company periodically reviews inventories for obsolescence
and any inventories identified as obsolete are reserved or written off. The Company has performed a valuation and has established
a reserve against its finished goods inventory.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation and any impairment losses. Depreciation is computed using the straight-line
method over the useful lives of the assets. Major renewals and betterments are capitalized and depreciated; maintenance and repairs
that do not extend the life of the respective assets are expensed as incurred. Upon disposal of assets, the cost and related accumulated
depreciation are removed from the accounts and any gain or loss is included in the consolidated statements of operations.
Construction
in progress primarily represents the construction or the renovation costs stated at cost less any accumulated impairment loss,
which is not depreciated. Costs incurred are capitalized and transferred to property and equipment upon completion, at which time
depreciation commences.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Three Months Ended March 31, 2021 and 2020
(Unaudited)
Note
2 — Summary of Significant Accounting Policies (continued)
Property
and equipment are depreciated over their estimated useful lives as follows:
Buildings
|
12
years
|
Land
|
Not
depreciated
|
Leasehold
Improvements
|
Lessor
of lease term or 5 years
|
Machinery
and Equipment
|
5
years
|
Furniture
and Fixtures
|
5
years
|
Long–lived
Assets
Long-lived
assets, including real estate property and intangible assets, are reviewed for impairment whenever events or changes in circumstances
indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their
carrying amounts to future undiscounted cash flows the assets are expected to generate. If the assets are considered to be impaired,
the impairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair value.
Impairment
of Long-lived Assets
The
Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the asset’s carrying
amount may not be recoverable. The Company conducts its long-lived asset impairment analyses in accordance with ASC 360-10-15, “Impairment
or Disposal of Long-Lived Assets.” ASC 360-10-15 requires the Company to group assets and liabilities at the lowest level for which
identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against
the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable,
an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted
cash flow analysis or appraisals. The Company recorded an impairment of its long-lived assets in the amount of $4,586 and $18,345 for
the three months ended March 31, 2021 and year ended December 31, 2020, respectively.
Non-
Controlling Interest
The
Company’s non-controlling interest represents the minority shareholder’s ownership interest related to the Company’s
subsidiary, Alternative Hospitality, Inc. The Company reports its non-controlling interest in subsidiaries as a separate component of
equity in the Consolidated Balance Sheets and reports both net loss attributable to the non-controlling interest and net loss attributable
to the Company’s common shareholders on the face of the Consolidated Statements of Operations. The Company’s equity interest
in Alternative Hospitality, Inc. is 51% and the non-controlling stockholder’s interest is 49%. This is reflected in the Consolidated
Statements of Equity.
Revenue
Recognition
On
January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606 – Revenue from Contracts with
Customers using the modified retrospective method. There was no impact upon adoption of ASC 606 on our consolidated financial statements.
The new revenue standard was applied prospectively in the Company’s consolidated financial statements from January 1, 2018 forward
and reported financial information for historical comparable periods will not be revised and will continue to be reported under the accounting
standards in effect during those historical periods.
Generally,
the Company considers all revenues as arising from contracts with customers. Revenue is recognized based on the five-step process
outlined in the Accounting Standards Codification (“ASC”) 606:
Step
1 – Identify the Contract with the Customer – A contract exists when (a) the parties to the contract have approved
the contract and are committed to perform their respective obligations, (b) the entity can identify each party’s rights
regarding the goods or services to be transferred, (c) the entity can identify the payment terms for the goods or services to
be transferred, (d) the contract has commercial substance and it is probably that the entity will collect substantially all of
the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.
Step
2 – Identify Performance Obligations in the Contract – Upon execution of a contract, the Company identifies as performance
obligations each promise to transfer to the customer either (a) goods or services that are distinct, or (b) a series of distinct
goods or services that are substantially the same and have the same pattern of transfer to the customer. To the extent a contract
includes multiple promised goods or services, the Company must apply judgement to determine whether the goods or services are
capable of being distinct within the context of the contract. If these criteria are not met, the goods or services are accounted
for as a combined performance obligation.
Step
3 – Determine the Transaction Price – When (or as) a performance obligation is satisfied, the Company shall recognize
as revenue the amount of the transaction price that is allocated to the performance obligation. The contract terms are used to
determine the transaction price. Generally, all contracts include fixed consideration. If a contract did include variable consideration,
the Company would determine the amount of variable consideration that should be included in the transaction price based on expected
value method. Variable consideration would be included in the transaction price, if in the Company’s judgement, it is probable
that a significant future reversal of cumulative revenue under the contract would not occur.
Step
4 – Allocate the Transaction Price – After the transaction price has been determined, the next step is to allocate
the transaction price to each performance obligation in the contract. If the contract only has one performance obligation, the
entire transaction price will be applied to that obligation. If the contract has multiple performance obligations, the transaction
price is allocated to the performance obligations based on the relative standalone selling price (SSP) at contract inception.
Step
5 – Satisfaction of the Performance Obligations (and Recognize Revenue) – Revenue is recognized when (or as) goods
or services are transferred to a customer. The Company satisfies each of its performance obligations by transferring control of
the promised good or service underlying that performance obligation to the customer. Control is the ability to direct the use
of and obtain substantially all of the remaining benefits from an asset. It includes the ability to prevent other entities from
directing the use of and obtaining the benefits from an asset. Indicators that control has passed to the customer include: a present
obligation to pay; physical possession of the asset; legal title; risks and rewards of ownership; and acceptance of the asset(s).
Performance obligations can be satisfied at a point in time or over time.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Three Months Ended March 31, 2021 and 2020
(Unaudited)
Note
2 — Summary of Significant Accounting Policies (continued)
The
majority of the Company’s revenue was derived under the agreements, Consulting Agreement and Equipment Lease Agreement, entered
into with Acres Cultivation, LLC. Revenue derived from consulting services fees are recognized over the term of the arrangement as services
are provided. Revenue is presented net of discounts, fees and other related taxes. Revenue derived from equipment leases is
recognized when the lease agreement is entered into and control of the equipment has passed to the customer. The Company’s remaining
revenue is derived from its rental property in Nye County, Nevada. Rental revenue for operating leases is recognized on a straight-line
basis over the term of the lease. Rental revenue recognition commences when the leased space is available for use by the lessee.
|
|
For the three months ended
|
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Rental income (i)
|
|
$
|
19,861
|
|
|
$
|
22,499
|
|
Management income (ii)
|
|
|
202,951
|
|
|
|
306,112
|
|
Equipment lease income (ii)
|
|
|
84,563
|
|
|
|
127,547
|
|
Total
|
|
$
|
307,375
|
|
|
$
|
456,158
|
|
|
(i)
|
The rental income is from the Company’s THC Park.
|
|
(ii)
|
In April 2018, the Company entered into a management agreement with
Acres Cultivation, LLC, a Nevada limited liability company (the “Licensed Operator”) that holds a license for the legal
cultivation of marijuana for sale under the laws of the State of Nevada. In January of 2019, the Company entered into a revised agreement,
which replaced the April 2018 agreement, with the Licensed Operator in order to be more stringently aligned with Nevada marijuana
laws. The material terms of the agreement remain unchanged. The Licensed Operator is contractually obligated to pay over to the Company
eighty-five (85%) percent of gross revenues defined as gross proceeds from sales of marijuana products minus applicable state excise
taxes and local sales tax. The agreement is to remain in force until April 2026. In April 2019, the Licensed Operator was acquired
by Curaleaf Holdings, Inc., a publicly traded Canadian cannabis company.
|
Other
Current Liabilities
The
Company’s other current liabilities consisted of amounts due under the management agreement and performance guarantee with
Acres Cultivation, LLC. As of March 31, 2021 and December 31, 2020, other current liabilities were $1,454,471
and $1,328,438, respectively.
Stock-Based
Compensation
The
Company’s share-based payment awards principally consist of grants of common stock. In accordance with the applicable accounting
guidance, stock-based payment awards are classified as either equity or liabilities. For equity-classified awards, the Company
measures compensation cost based on the grant date fair value and recognizes compensation expense in the consolidated statements
of operations over the requisite service or performance period the award is expected to vest. The fair value of liability-classified
awards is at each reporting date through the settlement date. Change in fair value during the requisite service period will be
remeasured as compensation cost over that period.
The
Company utilizes its historical stock price to determine the volatility of any stock-based compensation.
The
expected dividend yield is 0% as the Company has not paid any dividends on its common stock and does not anticipate it will pay
any dividends in the foreseeable future.
The
risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant date with a term equal to
the expected term of the stock-based award.
For
stock-based financial instruments issued to parties other than employees, the Company uses the contractual term of the financial
instruments as the expected term of the stock-based financial instruments.
The
assumptions used in calculating the fair value of stock-based financial instruments represent its best estimates, but these estimates
involve inherent uncertainties and the application of management judgment. As a result, if factors change and it uses different assumptions,
its stock-based compensation expense could be materially different in the future.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Three Months Ended March 31, 2021 and 2020
(Unaudited)
Note
2 — Summary of Significant Accounting Policies (continued)
Operating
Leases
The Company adopted ASC Topic 842, Leases, on
January 1, 2019. The new leasing standard requires recognition of leases on the consolidated balance sheets as right-of-use (“ROU”)
assets and lease liabilities. ROU assets represent the Company’s right to use underlying assets for the lease terms and lease liabilities
represent the Company’s obligation to make lease payments arising from the leases. Operating lease ROU assets and operating lease
liabilities are recognized based on the present value and future minimum lease payments over the lease term at commencement date. As
the Company’s leases do not provide an implicit rate, the Company used its estimated incremental borrowing rate based on the information
available at commencement date in determining the present value of lease payments. A number of the lease agreements contain options to
renew and options to terminate the leases early. The lease term used to calculate ROU assets and lease liabilities only includes renewal
and termination options that are deemed reasonably certain to be exercised.
The Company recognized lease liabilities, with
corresponding ROU assets, based on the present value of unpaid lease payments for existing operating leases longer than twelve months.
The ROU assets were adjusted per ASC 842 transition guidance for existing lease-related balances of accrued and prepaid rent, and unamortized
lease incentives provided by lessors. Operating lease cost is recognized as a single lease cost on a straight-line basis over the lease
term and is recorded in selling, general and administrative expenses. Variable lease payments for common area maintenance, property taxes
and other operating expenses are recognized as expense in the period when the changes in facts and circumstances on which the variable
lease payments are based occur. The Company has elected not to separate lease and non-lease components for all property leases for the
purposes of calculating ROU assets and lease liabilities.
Income
Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. A valuation allowance on deferred tax assets is established when management considers
it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Tax
benefits from an uncertain tax position are only recognized if it is more likely than not that the tax position will be sustained
on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial
statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of
being realized upon ultimate resolution. Interest and penalties related to unrecognized tax benefits are recorded as incurred
as a component of income tax expense. The Company has not recognized any tax benefits from uncertain tax positions for any of
the reporting periods presented.
Recent
Accounting Pronouncements
Stock
Based Compensation: In June 2018, FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718),
Improvements to Nonemployee Share Based Payment Accounting.
The
amendments in this Update expand the scope of stock compensation to include share-based payment transactions for acquiring goods
and services from nonemployees. The guidance in this Update does not apply to transactions involving equity instruments granted
to a lender or investor that provides financing to the issuer. The guidance is effective for fiscal years beginning after December
31, 2018 including interim periods within the fiscal year. The Company adopted with an effective date of January 1, 2019.
Note
3 — Going Concern
The
Company has recurring net losses, which have resulted in an accumulated deficit of $12,776,776 as of March 31, 2021. The
Company had negative cash flows from operations of $2,735,731 for the three months ended March 31, 2021. These factors
raise substantial doubt about the Company’s ability to continue as a going concern for one year from the issuance of the financial
statements. The ability of the Company to continue as a going concern is dependent on the Company’s ability to further implement
its business plan, raise capital, and generate revenues. The Financial Statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern.
The
Company’s current capital resources include cash. Historically, the Company has financed its operations
principally through equity and debt financing.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Three Months Ended March 31, 2021 and 2020
(Unaudited)
Note 4 — Note Receivable
Note receivable at March 31, 2021 and December
31, 2020 consisted of the following:
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
Note receivable- GeneRx (i)
|
|
|
300,000
|
|
|
|
-
|
|
Total
|
|
$
|
300,000
|
|
|
$
|
-
|
|
|
i.
|
On March 12, 2021, the Company (the “Holder”) was issued a
Convertible Promissory Note (the “Note”) by GeneRx (the “Borrower”), a Delaware corporation, in the amount of
$300,000. The Note has a term of one year (March 12, 2022 Maturity Date) and accrues interest at two percent (2%) per annum. The Note
is convertible, at the option of the Holder, into shares of common stock of the Borrower at a fixed conversion price of $1.00 per share.
Upon an Event of Default, the Conversion Price shall equal the Alternate Conversion Price (as defined herein) (subject to equitable adjustments
for stock splits, stock dividends or rights offerings by the Borrower relating to the Borrower’s securities or the securities of
any subsidiary of the Borrower, combinations, recapitalization, reclassifications, extraordinary distributions and similar events). The
“Alternate Conversion Price” shall equal the lesser of (i) 80% multiplied by the average of the three lowest daily volume
weighted average prices (“VWAP”) during the previous twenty (20) Trading Days (as defined below) before the Issue Date of
this Note (representing a discount rate of 20%) or (ii) 80% multiplied by the Market Price (as defined herein) (representing a discount
rate of 20%). “Market Price” means the average of the three lowest daily VWAPs for the Common Stock during the twenty (20)
Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. Any amount of principal or interest on this
Note which is not paid when due shall bear interest at the rate of twenty-four percent (24%) per annum from the due date thereof until
the same is paid (the “Default Interest”). The Company funded the transaction on March 15, 2021.
|
|
|
|
|
ii.
|
The convertible note receivable is considered available for sale
debt securities with a private company that is not traded in active markets. Since observable price quotations were not available
at acquisition, fair value was estimated based on cost less an appropriate discount upon acquisition. The discount of each instrument
is accreted into interest income over the respective term as shown within the Company’s Condensed Consolidated Statements of
Operations.
|
Note
5 — Property and Equipment
Property
and equipment at March 31, 2021 and December 31, 2020 consisted of the following:
|
|
March
31,
2021
|
|
|
December
31,
2019
|
|
Leasehold
Improvements
|
|
$
|
323,281
|
|
|
$
|
323,281
|
|
Machinery
and Equipment
|
|
|
1,163,242
|
|
|
|
1,087,679
|
|
Building
and Land
|
|
|
1,650,000
|
|
|
|
3,150,000
|
|
Furniture
and Fixtures
|
|
|
578,843
|
|
|
|
543,366
|
|
Total
property and equipment
|
|
|
3,715,366
|
|
|
|
5,104,326
|
|
|
|
|
|
|
|
|
|
|
Less:
Accumulated depreciation
|
|
|
(913,481
|
)
|
|
|
(948,651
|
)
|
Property
and equipment, net
|
|
$
|
2,801,885
|
|
|
$
|
4,155,675
|
|
Depreciation
expense for the three months ended March 31, 2021 and 2020 was $97,470 and $92,282, respectively.
Note
6 — Intangible Assets
In
October 2016, Red Earth entered into an Asset Purchase and Sale Agreement with the owner of a provisional Medical Marijuana Establishment
Registration Certificate (the “Provisional Grow License”) issued by the state of Nevada for the cultivation of medical
marijuana for $300,000. To initiate the purchase and transfer the Provisional Grow License, the Company paid a $25,000 deposit
to the seller in October 2016. In February 2017, an investor advanced the Company $350,000.
The
Provisional Grow License remains in a provisional status until the Company has completed the build out of a cultivation facility
and obtained approval from the state of Nevada to begin cultivation in the approved facility. Once approval from the state of
Nevada is received, the Company begins the cultivation process.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Three Months Ended March 31, 2021 and 2020
(Unaudited)
Note
7 — Notes Payable
Notes
payable as of March 31, 2021 and December 31, 2020 consist of the following:
|
|
March
31,
2020
|
|
|
December
31,
2020
|
|
Note
payable bearing interest at 6.50%, originated November 1, 2018, due on October 31, 2023, originally $1,100,000 (i)
|
|
$
|
-
|
|
|
$
|
1,022,567
|
|
Note
payable bearing interest at 5.0%, originated January 17, 2019, due on January 31, 2022, originally $750,000 (ii)
|
|
|
750,000
|
|
|
|
750,000
|
|
Note
payable bearing interest at 9.0%, originated January 17, 2019, due on January 16, 2020, originally $150,000 (iii)
|
|
|
100,000
|
|
|
|
100,000
|
|
Note
payable bearing interest at 6.5% originated April 1, 2019, due on March 31, 2022, originally $250,000 (iv)
|
|
|
229,675
|
|
|
|
234,431
|
|
Notes
payable, related party, bearing interest at 9.0%, originated February 20, 2020, due on February 20, 2021, originally $110,405
(v)
|
|
|
-
|
|
|
|
110,405
|
|
Notes
payable, related party, bearing interest at 9.0%, originated April 3, 2020, due on March 30, 2021, originally $90,000 (vi)
|
|
|
-
|
|
|
|
90,000
|
|
Total
notes payable
|
|
$
|
1,079,675
|
|
|
$
|
2,307,403
|
|
Less:
current portion
|
|
|
(912,470
|
)
|
|
|
(1,485,678
|
)
|
Long-term
notes payable
|
|
$
|
167,205
|
|
|
$
|
921,725
|
|
|
(i)
|
On
September 21, 2018, the Company, through its wholly-owned subsidiary Prescott Management, LLC, entered into a contract to
purchase an approximately 10,000 square foot office building located at 1300 South Jones Boulevard, Las Vegas, Nevada 89146
for $1,500,000, subject to seller financing in the amount of $1,100,000, amortizing over 30 years at an interest rate of 6.5%
per annum with monthly installments of $6,952.75 beginning on November 1, 2018, and continuing on the same day of each month
thereafter until October 31, 2019. Upon the one-year anniversary of the note, a principal reduction payment of $50,000 is
due, and provided that the monthly payments and the principal reduction payment have been made, the payments will be recalculated
and re-amortized on the same terms with a new scheduled monthly payment of $6,559 beginning on November 1, 2019 and continuing
until October 31, 2023, at which time the entire sum of principal in the amount of $986,438, plus any accrued interest, is
due and payable. The Company closed the purchase on October 18, 2018. On December 12, 2020, the Company entered into a
sales contract with Helping Hands Support, Inc. for the sale of the Company’s commercial building. On January 12, 2021,
the Company completed the sale of its commercial building for $1,627,500. As of March 31, 2021, the note was paid in
full.
|
|
(ii)
|
On
January 17, 2019, the Company executed a promissory note for $750,000 with FR Holdings LLC, a Wyoming limited liability company.
The note accrues interest at 5.0% per annum, payable in regular monthly installments of $3,125, due on or before the same
day of each month beginning February 1, 2019 until January 31, 2022 at which the entire principal and any then accrued interest
thereon shall be due and payable. As of March 31, 2021, $750,000 principal and $2,475 interest remain due.
|
|
|
|
|
(iii)
|
On
January 17, 2019, the Company executed a short-term promissory note for $150,000 with Let’s Roll Holdings, LLC, and entity
controlled by the Company’s Chief Cultivation Officer and a director. The note accrues interest at 9.0% per annum and is due
on January 16, 2020. Principal payments in the amount of $50,000 were made during the year ended December 31, 2019. As of March 31,
2021, $100,000 principal and $22,013 interest remain due.
|
|
|
|
|
(iv)
|
On
April 1, 2019, the Company executed a promissory note for $250,000 with John T. Jacobs and Teresa D. Jacobs. The note accrues
interest at 6.5% per annum, payable in regular monthly installments of $2,178, due on or before the same day of each month
beginning May 1, 2019 until March 31, 2020 at which time a principal reduction of $50,000 shall be due, the payments shall
be re-amortized (15-year amortization). On or before March 31, 2021, a second principal reduction of $50,000 shall be due,
the payments shall be re-amortized (15-year amortization). Payments shall continue to be paid until March 31, 2022,
at which time the entire sum of principal and accrued interest shall be due and payable. As of March 31, 2021, $229,675
principal and $1,318 interest remain due.
|
|
|
|
|
(v)
|
On
February 20, 2020, the Company’s subsidiary, Alternative Hospitality, Inc. (the “Borrower”), issued a Short-Term
Promissory Note (the “Note”) to Pyrros One, LLC (the “Holder”), an entity controlled by a relative of a director
of the Company, in the amount of $110,405 that matures on February 19, 2021. The Company received cash in the amount of $74,000 and
the Holder paid expenses on behalf of the Company in the amount of $36,405. The Note shall bear interest at a rate of 9% per annum
with interest-only payments in the amount of $825 due on or before the twentieth day of each month commencing on April 20, 2020.
The Borrower was required to make an interest and principal reduction payment in the amount of $1,233 on or before March 20, 2020.
The Holder is granted a security interest in that certain real property located at 1300 S. Jones Blvd, Las Vegas, NV 89146, which
was owned by the Borrower. As of March 31, 2021, the note was paid in full
|
|
|
|
|
(vi)
|
On
March 31, 2020, the Company’s subsidiary, Condo Highrise Management, LLC (the “Borrower”), issued a Short-Term
Promissory Note (the “Note”) to Pyrros One, LLC (the “Holder”), an entity controlled by a relative of a director
of the Company, in the amount of $90,000 that matures on March 30, 2021. The Note shall bear interest at a rate of 9% per annum with
interest-only payments in the amount of $675 due on or before the first day of each month commencing on May 1, 2020. The Holder is
granted a security interest in that certain real property located at 4295 Hwy 343, Amargosa, NV 89020, which was owned
by the Borrower. The transaction closed on April 3, 2020. As of March 31, 2021, the note was paid in full
|
|
|
Amount
|
|
Fiscal
year ending December 31:
|
|
|
|
|
2021
(excluding the three months ended March 31, 2021)
|
|
|
913,475
|
|
2022
|
|
|
19,397
|
|
2023
|
|
|
20,696
|
|
2024
|
|
|
22,082
|
|
2025
|
|
|
23,561
|
|
Thereafter
|
|
|
80,464
|
|
Total
minimum loan payments
|
|
$
|
1,079,675
|
|
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Three Months Ended March 31, 2021 and 2020
(Unaudited)
Note
8 — Commitments and Contingencies
Employment
Agreements
On
October 1, 2020, the Company entered into an Employment Agreement (the “Agreement”) with Jim Kelly. The Agreement
became effective as of October 1, 2020. Under the terms of the Kelly Agreement, the Employee shall serve as the Company’s
Interim Chief Financial Officer for a term of (i) the sooner of six (6) months, or (ii) the completion of all regulatory filings,
including but not limited to the Company’s 2019 Annual Report on Form 10-K, the March 31, 2020 Quarterly Report on Form
10-Q, the June 30, 2020 Quarterly Report on Form 10-Q, the September 30, 2020 Quarterly Report on Form 10-Q and all required Current
Reports on Form 8-K, with the Securities and Exchange Commission (“SEC”) to bring the Company current with the SEC.
The Employee shall receive a base salary of $24,000 annually, shall be eligible to receive an annual discretionary bonus during
the Term, based on performance criteria determined by the C-Suite of the Company in its sole discretion, in an amount equal to
up to 400% of the Employee’s base salary for the then current fiscal year, and at commencement of the Term the Employee
shall receive a grant of stock of 500,000 restricted shares of the Company’s common stock. On March 16, 2021, Mr. Kelly
resigned in his position as Interim Chief Financial Officer.
On
September 1, 2020, the Company entered into an Employment Agreement (the “Agreement”) with Paris Balaouras (the “Employee”).
Under the terms of the Agreement, the Employee shall serve as the Company’s Chief Cultivation Officer for a term of three
(3) years (the “Term”) commencing on September 15, 2020. The Employee shall receive a base salary of $105,000 annually,
shall be eligible to receive an annual discretionary bonus during the Term, based on performance criteria determined by the board
of directors of the Company in its sole discretion, in amount equal to up to 100% of Employee’s base salary for the then
current fiscal year, shall be eligible to receive an annual discretionary stock grant during the Term which shall be vested in
equal increments of 1/3rd each over a three year period beginning on the first anniversary of employment, shall be
eligible to receive a compensatory stock grant of 667,000 shares for and in consideration of past compensation ($224,000 at September
15, 2020) foregone by Employee; such grant exercisable at Employee’s option as such time as Employer is profitable at the
NOI level on a trailing twelve (12) month basis or upon other commercial reasonable terms as the Board may determine and shall
be awarded options to purchase 500,000 shares of the Company’s common stock, exercisable at a price of $.75 per share.
On
September 1, 2020, the Company entered into an Employment Agreement (the “Agreement”) with Roger Bloss. Under the
terms of the Agreement, the Employee shall serve as the Company’s Interim Chief Executive Officer for a term of six (6)
months and the Chief Executive Officer and for an additional two (2) years and six (6) months as the Chief Executive Officer for
a total of three (3) years (the “Term”) commencing on September 15, 2020. The Employee shall receive a base salary
of $105,000 annually, shall be eligible to receive an annual discretionary bonus during the Term, based on performance criteria
determined by the board of directors of the Company in its sole discretion, in amount equal to up to 100% of Employee’s
base salary for the then current fiscal year, shall be eligible to receive an annual discretionary stock grant during the Term
which shall be vested in equal increments of 1/3rd each over a three year period beginning on the first anniversary
of employment and shall be awarded options to purchase 500,000 shares of the Company’s common stock, exercisable at a price
of $.75 per share.
On
September 1, 2020, the Company entered into an Employment Agreement (the “Agreement”) with Bernard Moyle. Under the
terms of the Agreement, the Employee shall serve as the Company’s Secretary/Treasurer for a term of three (3) years (the
“Term”) commencing on September 15, 2020. The Employee shall receive a base salary of $60,000 annually, shall be eligible
to receive an annual discretionary bonus during the Term, based on performance criteria determined by the board of directors of
the Company in its sole discretion, in amount equal to up to 200% of Employee’s base salary for the then current fiscal
year, shall, at commencement of the Term receive a grant of stock of 500,000 shares and shall be eligible to receive an annual
discretionary stock grant during the Term which shall be vested in equal increments of 1/3rd each over a three year
period beginning on the first anniversary of employment and shall be awarded options to purchase 500,000 shares of the Company’s
common stock, exercisable at a price of $.75 per share. On March 16, 2021, Mr. Moyle assumed the role of interim Chief Financial
Officer upon the resignation of Mr. Kelly. The terms of Mr. Moyle’s Agreement did not change.
Board
of Directors Services Agreements
On
September 15, 2020, the Company entered into a Board of Directors Services Agreement (the “Agreement”) with Messrs.
Bloss, Dear and Balaouras (collectively, the “Directors”). Under the terms of the Agreement, each of the Directors
shall provide services to the Company as a member of the Board of Directors for a period of not less than one year. Each of the
Directors shall receive compensation as follows: (i) Fifteen Thousand and no/100 dollars ($15,000.00), paid in four (4) equal
installments on the last calendar day of each quarter, and (ii) Fifteen Thousand (15,000) shares of the Company’s common
stock on the last calendar day of each quarter. The Agreement for each of the Directors is effective as of October 1, 2020.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Three Months Ended March 31, 2021 and 2020
(Unaudited)
Note
8 — Commitments and Contingencies (continued)
Operating
Leases
The
Company leases a two production / warehouse facility under a non-cancelable operating lease that expires in June 2027 and September
2029, respectively.
As
of March 31, 2021, the Company recorded operating lease liabilities of $2,111,573 and right of use assets for operating
leases of $1,959,713. During the three months ended March 31, 2021, operating cash outflows relating to operating lease
liabilities was $19,468. As of March 31, 2021, the Company’s operating leases had a weighted-average remaining term
of 7.88 years.
Future
minimal rental and lease commitments under non-cancelable operating leases with terms in excess of one year as of March 31, 2021,
are as follows:
|
|
Amount
|
|
Fiscal year ending December 31:
|
|
|
|
|
2021
(excluding the three months ended March 31, 2021)
|
|
|
262,980
|
|
2022
|
|
|
350,755
|
|
2023
|
|
|
350,986
|
|
2024
|
|
|
351,333
|
|
2025
|
|
|
351,333
|
|
Thereafter
|
|
|
799,662
|
|
Total minimum
lease payments
|
|
$
|
2,467,049
|
|
Rent
expense, incurred pursuant to operating leases for the three months ended March 31, 2021 and 2020, was $60,937
and $87,660, 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.
DGMD
Complaint
On
March 19, 2021, a Complaint was filed against the Company, Jim Mueller, John Mueller, MachNV, LLC, Acres Cultivation, Paris Balaouras,
Dimitri Deslis, ATG Holdings, LLC and Curaleaf, Inc. (collectively, the “Defendants”) by DGMD Real Estate Investments,
LLC, ARMPRO, LLC, Zhang Springs LV, LLC, Prodigy Holdings, LLC and Green Organics, LLC (collectively, the “Plaintiffs”)
in the District Court of Clark County, Nevada.
In
the Complaint, the Plaintiffs allege that the Defendants: (i) intended to fraudulently obtain money from the Plaintiffs in order
to put that money towards the Acres dispensary and to make Acres look more appealing to potential buyers as well as pay off Defendants’
agents, and (ii) the Defendants acted together in order to find investors to invest money into the Acres and MJ Holdings “Investment
Schemes”, and (iii) the Defendants intended to fraudulently obtain Plaintiffs’ money for the purpose of harming the
Plaintiffs to benefit the Defendants, and (iv) the Defendants committed unlawful fraudulent misrepresentation in the furtherance
of the agreement to defraud the Plaintiffs. The Plaintiffs allege that damages are in excess of $15,000.
As
the complaint pleads only the statutory minimum of damages, the Company is unable to estimate the potential exposure, if any,
resulting from this matter but believes it is without merit as to liability and otherwise deminimis as to damages. Thus, the Company
does not expect this matter to have a material effect on the Company’s consolidated financial position or its results of
operations. The Company will vigorously defend itself against this action and has filed an
appropriate and timely answer to the Complaint including a lengthy and comprehensive series of affirmative defenses and liability
and damage avoidances.
Tierney Arbitration
On March 9, 2021, Terrence Tierny, the Company’s
former President and Secretary, filed for arbitration with the American Arbitration Association for: (i) breach of contract, (i) breach
of the implied covenant of good faith and fair dealing, and (iii) NRS 608 wage claim. Mr. Tierney demanded payment in the amount of $501,085
for deferred business compensation, business compensation, expenses paid on behalf of the Company, accrued vacation and severance pay.
On April 7, 2021, the Company made payment against the wage claim in
the amount of $62,392, inclusive of $59,583 for wages and $2,854 for accrued vacation.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Three Months Ended March 31, 2021 and 2020
(Unaudited)
Note
9 — Stockholders’ Equity (Deficit)
General
The
Company is currently authorized to issue up to 95,000,000 shares of Common Stock and 5,000,000 shares of preferred stock, par
value $0.001 per share.
Common
Stock
Of
the 95,000,000 shares of Common Stock authorized by the Company’s Articles of Incorporation, 69,628,015 shares of
Common Stock are issued and outstanding as of March 31, 2021. Each holder of Common Stock is entitled to one vote per share
on all matters to be voted upon by the stockholders and are not entitled to cumulative voting for the election of directors. Holders
of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the board of directors
out of funds legally available therefor subject to the rights of preferred stockholders. The Company has not paid any dividends
and does not intend to pay any cash dividends to the holders of Common Stock in the foreseeable future. The Company anticipates
reinvesting its earnings, if any, for use in the development of its business. In the event of liquidation, dissolution, or winding
up of the Company, the holders of Common Stock are entitled, unless otherwise provided by law or the Company’s Articles
of Incorporation, including any certificate of designations for a series of preferred stock, to share ratably in all assets remaining
after payment of liabilities and the preferences of preferred stockholders. Holders of the Company’s Common Stock do not
have preemptive, conversion, or other subscription rights. There are no redemptions or sinking fund provisions applicable to the
Company’s Common Stock.
Common
Stock Issuances
For
the three months ended March 31, 2021, the Company issued and/or sold the following unregistered securities:
For
the three months ended March 31, 2021
On March 8, 2021, the Company issued 526,216
shares of common stock in satisfaction of $100,000 principal and all accrued interest for a note payable to a related party as per the
terms of the Debt Conversion and Stock Purchase Agreement dated January 14, 2021.
On March 8, 2021, the Company issued 263,158
shares of common stock to a related party for the purchase of $50,000 of common stock as per the terms of the Debt Conversion and Stock
Purchase Agreement dated January 14, 2021.
On March 29, 2021, the Company issued 225,000
shares of common stock to a consultant as per the terms of the Consulting Agreement dated February 25, 2021.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Three Months Ended March 31, 2021 and 2020
(Unaudited)
Note
9 — Stockholders’ Equity (Deficit) (continued)
At
March 31, 2021 and December 31, 2020, there are 69,628,015 and 68,613,541 shares of Common Stock issued
and outstanding, respectively.
Preferred
Stock
The
Board is authorized, without further approval from our stockholders, to create one or more series of preferred stock, and to designate
the rights, privileges, preferences, restrictions, and limitations of any given series of preferred stock. Accordingly, the Board
may, without stockholder approval, issue shares of preferred stock with dividend, liquidation, conversion, voting, or other rights
that could adversely affect the voting power or other rights of the holders of Common Stock. The issuance of preferred stock could
have the effect of restricting dividends payable to holders of our Common Stock, diluting the voting power of our Common Stock,
impairing the liquidation rights of our Common Stock, or delaying or preventing a change in control of us, all without further
action by our stockholders. Of the 5,000,000 shares of preferred stock, par value $0.001 per share, authorized in our Articles
of Incorporation, 2,500 shares are designated as Series A Convertible Preferred Stock.
Series
A Convertible Preferred Stock
Each
share of Series A Preferred Stock is convertible, at the option of the holder, into that number of shares of Common Stock determined
by dividing the stated value of each share of Series A Preferred Stock (currently, $1,000) by the conversion price (currently,
$0.75). The stated value and the conversion price are subject to adjustment as provided for in the Certificate of Designation.
We are prohibited from effecting a conversion of the Series A Preferred Stock to the extent that, after giving effect to the conversion,
the holder (together with such holder’s affiliates and any persons acting as a group with holder or any of such holder’s
affiliates) would beneficially own in excess of 4.99% of the number of shares of Common Stock outstanding immediately after giving
effect to the issuance of shares of Common Stock issuable upon conversion. A holder, upon notice to us, may increase or decrease
this beneficial ownership limitation; provided, that, in no event can the holder increase the beneficial ownership limitation
in excess of 9.99% of the number of shares of Common Stock outstanding immediately after giving effect to the issuance of shares
of Common Stock upon the conversion of the Series A Preferred Stock then held by holder. Such increase of the beneficial ownership
limitation cannot be effective until the 61st day after such notice is given to us and shall apply only to such holder.
The Series A Preferred Stock has no voting rights; however, as long as any shares of Series A Preferred Stock are outstanding,
we are not permitted, without the affirmative vote of the holders of a majority of the then outstanding shares of the Series A
Preferred Stock to (i) alter or change adversely the powers, preferences, or rights given to the Series A Preferred Stock or alter
or amend the Series A Preferred Stock Certificate of Designation, (ii) amend our Articles of Incorporation or other charter documents
in any manner that adversely affects any rights of the holders, (iii) increase the number of authorized shares of Series A Preferred
Stock, or (iv) enter into any agreement with respect to any of the forgoing.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Three Months Ended March 31, 2021 and 2020
(Unaudited)
Note
9 — Stockholders’ Equity (Deficit) (continued)
Preferred
Stock Issuances
For
the three months ended March 31, 2021
None
At
March 31, 2021 and December 31, 2020, there were 0 and 0 shares of Series A Preferred Stock issued and outstanding,
respectively.
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 three months ended March 31, 2021, 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 March 31, 2021, to
purchase 2,993,000 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 — Stock Based Compensation
Warrants
and Options
A
summary of the warrants and options issued, exercised and expired are below:
Stock
Options
On
June 22, 2018, the Company entered into a Corporate Advisory Agreement (“Advisory Agreement”) with a New York City
based consulting company (the “Consultant”) to provide business management, corporate compliance and related services
to the Company and its subsidiaries. Pursuant to the Advisory Agreement, the Company granted the Consultant an option to acquire
up to 10,000 additional shares of the Company’s common stock at an exercise price of $1.20. The option has a term of 3
years.
On
September 15, 2020, the Company issued an option to purchase 500,000 shares of common stock to each of Messrs. Balaouras, Bloss
and Moyle as per the terms of their employment agreements. The options have an exercise price of $0.75 and expire on the three-year
anniversary date.
A
summary of the options issued, exercised and expired are below:
Options:
|
|
Shares
|
|
|
Weighted
Avg.
Exercise Price
|
|
|
Remaining
Contractual
Life
in Years
|
|
Balance
at December 31, 2020
|
|
|
1,510,000
|
|
|
$
|
0.76
|
|
|
|
2.33
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance
at March 31, 2021
|
|
|
1,510,000
|
|
|
$
|
0.76
|
|
|
|
2.44
|
|
Exercisable
at March 31, 2021
|
|
|
760,000
|
|
|
$
|
0.76
|
|
|
|
2.4
|
|
Options
outstanding as of March 31, 2021 and December 31, 2020 were 1,510,000 and 1,510,000, respectively.
Warrants
In
June of 2019, in conjunction with the Company’s offering under Rule 506 of Regulation D of the Securities Act (the “Offering”),
the Company granted warrants to each participant in the Offering upon the following terms and conditions: (a) each participant
has the right to acquire additional shares of the Company’s Common Stock equal to ten (10%) of the shares purchased in the
offering (the “Warrants”); (b) one-half of the Warrants granted to each participant have an exercise price of $0.65
and the other one-half have an exercise price of $1.00, and (c) the Warrants shall be exercisable between June 5, 2019, the date
of grant and June 4, 2021 the date of expiration of the Warrants.
On
January 11, 2021, the Company issued an accredited investor a Common Stock Purchase Warrant Agreement in conjunction with the
July 2020 Securities Purchase Agreement granting the holder the right to purchase up
to 250,000 shares of the Company’s common stock at an exercise price of $0.10 for a term of 4-years.
A
summary of the warrants issued, exercised and expired are below:
Warrants:
|
|
Shares
|
|
|
Weighted
Avg.
Exercise Price
|
|
|
Remaining
Contractual
Life
in Years
|
|
Balance
at December 31, 2020
|
|
|
1,233,000
|
|
|
$
|
0.83
|
|
|
|
0.4
|
|
Issued
|
|
|
250,000
|
|
|
|
0.10
|
|
|
|
3.8
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance
at March 31, 2021
|
|
|
1,483,000
|
|
|
$
|
0.75
|
|
|
|
.75
|
|
Warrants
outstanding as of March 31, 2021 and December 31, 2020 were 1,483,000 and 1,233,000, respectively.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Three Months Ended March 31, 2021 and 2020
(Unaudited)
Note
12 — Related Party Transactions
On
February 20, 2020, the Company’s subsidiary, Alternative Hospitality, Inc. (the “Borrower”), issued a Short-Term
Promissory Note (the “Note”) to Pyrros One, LLC (the “Holder”), an entity controlled by a relative of
a director of the Company, in the amount of $110,405 that matures on February 19, 2021. The Note shall bear interest at a rate
of 9% per annum with interest-only payments in the amount of $825 due on or before the twentieth day of each month commencing
on April 20, 2020. The Borrower was required to make an interest and principal reduction payment in the amount of $1,233 on or
before March 20, 2020. The Holder is granted a security interest in that certain real property located at 1300 S. Jones Blvd,
Las Vegas, NV 89146, which is owned by the Borrower. The Note was paid in full during the three months ended March 31, 2021.
On
March 31, 2020, the Company’s subsidiary, Condo Highrise Management, LLC (the “Borrower”), issued a Short-Term
Promissory Note (the “Note”) to Pyrros One, LLC (the “Holder”), an entity controlled by a relative of
a director of the Company, in the amount of $90,000 that matures on March 30, 2021. The Note shall bear interest at a rate of
9% per annum with interest-only payments in the amount of $675 due on or before the first day of each month commencing on May
1, 2020. The Holder is granted a security interest in that certain real property located at 4295 Hwy 343, Amargosa, NV 89020 which
is owned by the Borrower. The transaction closed on April 3, 2020. The Note was paid in full during the three months ended
March 31, 2021.
Note
13 — Subsequent Events
On April 7, 2021, the Company (the “Holder”) was issued a Convertible
Promissory Note (the “Note”) by GeneRx (the “Borrower”), a Delaware corporation, in the amount of $200,000. The
Note has a term of one year (April 7, 2022 Maturity Date) and accrues interest at two percent (2%) per annum. The Note is convertible,
at the option of the Holder, into shares of common stock of the Borrower at a fixed conversion price of $1.00 per share. Upon an Event
of Default, the Conversion Price shall equal the Alternate Conversion Price (as defined herein) (subject to equitable adjustments for
stock splits, stock dividends or rights offerings by the Borrower relating to the Borrower’s securities or the securities of any
subsidiary of the Borrower, combinations, recapitalization, reclassifications, extraordinary distributions and similar events). The “Alternate
Conversion Price” shall equal the lesser of (i) 80% multiplied by the average of the three lowest daily volume weighted average
prices (“VWAP”) during the previous twenty (20) Trading Days (as defined below) before the Issue Date of this Note (representing
a discount rate of 20%) or (ii) 80% multiplied by the Market Price (as defined herein) (representing a discount rate of 20%). “Market
Price” means the average of the three lowest daily VWAPs for the Common Stock during the twenty (20) Trading Day period ending on
the latest complete Trading Day prior to the Conversion Date. Any amount of principal or interest on this Note which is not paid when
due shall bear interest at the rate of twenty-four percent (24%) per annum from the due date thereof until the same is paid (the “Default
Interest”). The Company funded $150,000 on April 5, 2021 and $50,000 on April 7, 2021.
On
April 24, 2021, the Company issued 1,000,000 shares of common stock as per the terms of the Termination Agreement with Blue Sky Companies,
LLC and Let’s Roll Nevada, LLC.
On
May 7, 2021 (the “Effective Date”), MJ Holdings, Inc. (“MJNE”) entered into a Cultivation and Sales Agreement
(the “Agreement”) with Green Grow Investments Corporation (the “Company”). Under the terms of the Agreement,
MJNE shall retain the Company to provide oversight and management of MJNE’s cultivation and sale of products at MJNE’s
Amargosa Valley, NV farm. The Agreement shall commence on the Effective Date, continue for a period of ten (10) years and automatically
renew for a period of five (5) years. The Company shall be responsible for compliance, standard of care, packaging, insurance,
labor matters, policies and procedures, testing, record keeping, security and marketing.
As
deposits, security and royalty, the Company shall pay to MJNE:
|
(i)
|
a $600,000 Product
Royalty of which $50,000 is due upon signing, $150,000 upon MJNE obtaining the licenses from MJ Distributing, Inc. and affiliates
and $200,000 for each of the first and second years’ harvests;
|
|
(ii)
|
a deposit of
$20,000 to be applied against the first and last month’s Security and Compliance fee;
|
|
(iii)
|
$10,000 on the
first of each month for Security and Compliance;
|
|
(iv)
|
a royalty of
10% of gross revenue less applicable taxes (hereinafter “Net Sales Revenue”) on all sales of product by the Company;
and
|
|
(v)
|
the Company shall,
after the first two (2) years from execution of the Agreement, be responsible to pay to MJNE a minimum royalty of $50,000.00
per month.
|
As
compensation, MJNE shall pay to the Company:
|
(i)
|
a Management
Fee that is based upon the net sales price (after taxes) and further subject to all contractual expenses.
|
On
May 12, 2021, the Company entered into a Cooperation and Release Agreement (the “Agreement”) with Richard S. Groberg
and RSG Advisors, LLC. Under the terms of the Agreement, Mr. Groberg agreed to relinquish all common stock of the Company
issued to or owned by him and waived any right to any future stock issuances except for 100,000 shares to be retained by Mr. Groberg.