Notes
to the Condensed Consolidated Financial Statements
For
the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
Note
1 — Nature of the Business
MJ
Holdings, Inc. (OTCQB: 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.
MJH
Research, Inc. Acquisition
On
July 8, 2022, MJ Holdings, Inc. (the “Buyer”) entered into a Common Stock Purchase Agreement (the
“Agreement”) with MJH Research, Inc. (the “Company”), a Florida corporation, and Sunstate Futures, LLC (the
“Seller”), a Florida limited liability company. Under the terms of the Agreement, the Seller agreed to sale all issued
and outstanding shares of common stock (100,000
shares) (the “Common Stock”) of the Company to the Buyer. In consideration of the purchase of the shares of Common
Stock, the Buyer agreed to issue the Seller seven million (7,000,000)
shares of its common stock. The transaction closed on July 11, 2022. Net assets and liabilities of MJH Research, Inc. were
approximately $500,000
and consideration on the acquisition date equated to approximately $1,955,000,
most of which would be applied to intellectual property related to research of MJH Research, Inc. Please see Note 6 — Acquisition
of MJH Research, Inc. for further information.
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.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
Note
1 — Nature of the Business (continued)
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
Basis
of Presentation
The
condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America (“GAAP”) for interim financial statements and with Form 10-Q and Article 10 of Regulation S-X of the United
States Securities and Exchange Commission (the “SEC”). Accordingly, they do not contain all information and footnotes required
by GAAP for annual financial statements. The condensed consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of the Company’s
management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary (consisting
only of normal recurring accruals) to present the financial position of the Company as of September 30, 2022 and the results of operations,
changes in stockholders’ equity, and cash flows for the periods presented. The results of operations for the three and nine months
ended September 30, 2022 are not necessarily indicative of the operating results for the full fiscal year or any future period.
These
condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes
thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the Securities
and Exchange Commission on June 21, 2022. The Company’s accounting policies are described in the Notes to Consolidated Financial
Statements in its Annual Report on Form 10-K for the year ended December 31, 2021, and updated, as necessary, in this Quarterly Report
on Form 10-Q.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, MJH Research, Inc., Icon Management,
LLC, Condo Highrise Management, LLC, Prescott Management, LLC, Q Brands, LLC, Farm Road, LLC, Red Earth Holdings, LLC and its majority
owned subsidiary, Alternative Hospitality, Inc. 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. At
September 30, 2022, the Company had $1,771,538 in
excess. 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 September
30, 2022 and December 31, 2021. 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 Nine Months Ended September 30, 2022 and 2021
(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.
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.
Schedule
of Accounts Receivable and Allowance for Doubtful Accounts
| | |
September 30,
2022 | | |
December 31,
2021 | |
| Accounts receivable | |
$ | 135,418 | | |
$ | 50,179 | |
| Less allowance | |
| (42,190 | ) | |
| (42,190 | ) |
| Net accounts receivable | |
$ | 93,228 | | |
$ | 7,989 | |
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
Inventory
is comprised of raw materials, finished goods and work-in-process such as pre-harvested cannabis plants and by-products to be extracted.
The costs of growing cannabis, including but not limited to labor, utilities, nutrition and supplies, are capitalized into inventory
until the time of harvest. All direct and indirect costs related to inventory are capitalized when incurred, and subsequently classified
to cost of goods sold in the Consolidated Statements of Operations. Work-in-process is stated at the lower of cost or net realizable
value, determined using the weighted average cost. Raw materials and finished goods inventory are stated at the lower of cost or net realizable
value, with cost being determined on the first-in, first-out (“FIFO”) method of accounting. Net realizable value is determined
as the estimated selling price in the ordinary course of business less estimated costs to sell. The Company periodically reviews physical
inventory for excess, obsolete, and potentially impaired items and reserves. The Company reviews inventory for obsolete, redundant and
slow-moving goods and any such inventory is written down to net realizable value. Packaging and supplies are initially valued at cost.
The reserve estimate for excess and obsolete inventory is based on expected future use. The reserve estimates have historically been
consistent with actual experience as evidenced by actual sale or disposal of the goods.
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 Nine Months Ended September 30, 2022 and 2021
(Unaudited)
Note
2 — Summary of Significant Accounting Policies (continued)
Property
and equipment are depreciated over their estimated useful lives as follows:
Schedule of Property and Equipment Estimated Useful Lives
| Buildings | |
12 years |
| Land | |
Not depreciated |
| Construction in progress | |
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 $0 and $14,845 for the
nine months ended September 30, 2022 and year ended December 31, 2021, respectively.
Contract
Balances
The
Company receives payments for new Cultivation and Sales Agreements (the “Agreements”) upon signing and defers revenue recognition
for these payments until certain milestones are met as per the terms of the Agreements. In addition, the Company sold its luxury suite
at the Raiders Stadium and amortizes the income from this sale at each home game. These payments represent contract liabilities and are
recorded as such on the balance sheet. As of September 30, 2022 and December 31, 2021, the Company had $1,360,000 and $1,404,444 contract
liabilities, 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.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
Note
2 — Summary of Significant Accounting Policies (continued)
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 overtime.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
Note
2 — Summary of Significant Accounting Policies (continued)
For the nine
months ended September 30, 2022, the majority of the Company’s revenue was derived from its newly acquired subsidiary, MJH Research,
Inc. 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 nine months ended September 30, 2021,
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.
Schedule
of Rental Revenue Recognition
| | |
|
2022 | | |
|
2021 | |
| | |
For the nine months ended | |
| | |
September 30, | |
| | |
2022 | | |
2021 | |
| Revenues: | |
| | | |
| | |
| Rental income (i) | |
$ | 111,987 | | |
$ | 59,749 | |
| Management income from MJH Research, Inc. (ii) | |
| 661,475 | | |
| - | |
| Management income from Acres Cultivation (iii) | |
| - | | |
| 341,398 | |
| Management income | |
| - | | |
| 341,398 | |
| Equipment lease income (iii) | |
| - | | |
| 134,814 | |
| Total | |
$ | 773,462 | | |
$ | 535,961 | |
| |
(i) |
The
rental income is from the Company’s THC Park. |
| |
|
|
| |
(ii) |
On July 11, 2022, the Company purchased MJH Research, Inc. (“MJH”) through a stock exchange agreement. MJH is a Florida corporation
whose operations center around providing consulting services for growing techniques, management and cultivation of crops, as well as licensing
support, production and asset and infrastructure development. |
| |
|
|
| |
(iii) |
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. On January 21, 2021,
the Company received a Notice of Termination, effective immediately, from Acres Cultivation, LLC. The Company will not generate any further
revenue under the Acres relationship. |
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 Nine Months Ended September 30, 2022 and 2021
(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.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
Note
3 — Going Concern
The
Company has recurring net losses, which have resulted in an accumulated deficit of $19,812,798 as of September 30, 2022. The Company
had negative cash flows from operations of $3,048,875 for the nine months ended September 30, 2022. 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.
Note
4 — Inventory
Inventory
at September 30, 2022 and December 31, 2021 consisted of the following:
Schedule of Inventory
| | |
September 30, 2022 | | |
December 31, 2021 | |
| Inventory – finished goods (i) | |
$ | 1,271,402 | | |
$ | 1,271,402 | |
| Storage inventory (ii)(iii) | |
| 498,675 | | |
| 498,675 | |
| Less reserve | |
| (1,770,077 | ) | |
| (1,770,077 | ) |
| Inventory, net | |
$ | - | | |
$ | - | |
| (i) |
On
January 21, 2021, the Company received a Notice of Termination, effective immediately, from Acres Cultivation, LLC. During the year
ended December 31, 2021, the Company relocated all of its equipment utilized on the Acres lease to its 260 Acres adjacent to the
Acres lease. As part of the termination, the Company was granted the right to retain 3,654 lbs. of cannabis from the Cultivation
Facility. |
| |
|
| (ii) |
On
April 14, 2021, the Company entered into a storage work order with TapRoot Labs (“TapRoot”). Under the terms of the work
order, the Company stored 1827 lbs. of fresh frozen flower (“Product”) with TapRoot at a rate of $6,000/ month. Rent
was payable through Product stored with TapRoot at the rate of $175/lb. The work order had a term of 5 months and then continued
on a month-to-month basis upon the same terms. At September 30, 2022, the Company had 979.41 lbs. stored with TapRoot. The Company
has elected to reserve the full amount of Product stored with TapRoot as it does not anticipate any future sales will be made. |
| |
|
| (iii) |
On
April 13, 2021, the Company entered into a Storage & Purchase Agreement (the “Agreement”) with AP Management, LLC
(“AP”). Under the terms of the Agreement, the Company stored 1827 lbs. of fresh frozen flower (“Product”)
with AP. AP was granted the exclusive right to purchase the Product at a rate of $175/lb for the first 30 days of storage. After
30 days, the Company had the right to make sales to third parties. At September 30, 2022, the Company had 1827 lbs. stored with AP.
The Company has elected to reserve the full amount of Product stored with AP as it does not anticipate any future sales will be made.
Please see Item 1. Legal Proceedings for further information. |
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
Note
5 — Note Receivable
Note
receivable at September 30, 2022 and December 31, 2021 consisted of the following:
Schedule
of Note Receivable
| | |
September 30, 2022 | | |
December 31, 2021 | |
| Note receivable- GeneRx (i) | |
$ | 500,000 | | |
$ | 500,000 | |
| Total | |
$ | 500,000 | | |
$ | 500,000 | |
| |
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 $300,000 on March 15, 2021, $150,000 on April 2, 2021 and $50,000 on April 7, 2021. As of September
30, 2022, $500,000 principal was due on the Note. The Note is currently in default. |
| |
|
|
| |
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
6 — Acquisition of MJH Research, Inc.
On July 8, 2022, MJ Holdings, Inc. (the
“Buyer”) entered into a Common Stock Purchase Agreement (the “Agreement”) with MJH Research, Inc. (the
“Company”), a Florida corporation, and Sunstate Futures, LLC (the “Seller”), a Florida limited liability
company. Under the terms of the Agreement, the Seller agreed to sale all issued and outstanding shares of common stock (100,000
shares) (the “Common Stock”) of the Company to the Buyer. In consideration of the purchase of the shares of Common
Stock, the Buyer agreed to issue the Seller seven million (7,000,000)
shares of its common stock. The acquisition is a provisional estimate and is being further evaluated. The transaction closed on July
11, 2022.
Details
regarding the book values and fair values of the net assets acquired are as follows:
Schedule Of Fair Value Of Net Assets Acquired
| | |
Book
Value | | |
Fair
Value | | |
Difference | |
| | |
| | |
| | |
| |
| Cash | |
$ | 504,685 | | |
$ | 504,685 | | |
$ | - | |
| Total | |
$ | 504,685 | | |
$ | 504,685 | | |
$ | - | |
Goodwill
and Intangibles
Goodwill
is recorded when the cost of acquired businesses exceeds the fair value of the identifiable net assets acquired. Intangible assets other
than goodwill are recorded at fair value at the time acquired or at cost, if applicable. Intangible assets that do not have indefinite
lives are amortized in line with the pattern in which the economic benefits of the intangible asset are consumed. If the pattern of economic
benefit cannot be reliably determined, the intangible assets are amortized on a straight-line basis over the shorter of the legal or
estimated life. Goodwill and indefinite-lived intangibles assets are not amortized but are tested for impairment in the fourth quarter
using the same dates each year or more frequently if changes in circumstances or the occurrence of events indicate potential impairment.
In
performing the annual impairment test, the fair value of each indefinite-lived intangible asset is compared to its carrying value and
an impairment charge is recorded if the carrying value exceeds the fair value. For goodwill, the Company first assesses qualitative factors
to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its’ carrying amount, and whether
it is necessary to perform the quantitative goodwill impairment test. The quantitative test is required only if the Company concludes
that it is more-likely-than-not that a reporting unit’s fair value is less than its’ carrying amount. For quantitative testing,
the Company compares the fair value of each reporting unit with its’ carrying amount. If the carrying amount exceeds the fair value, an
impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed
the total amount of goodwill allocated to that reporting unit.
Fair
values are determined using established business valuation techniques and models developed by the Company, estimates of market participant
assumptions of future cash flows, future growth rates and discount rates to value estimated cash flows. Changes in economic and operating
conditions, actual growth below the assumed market participant assumptions or an increase in the discount rate could result in an impairment
charge in a future period.
Acquisitions
Upon
acquisition of a business, the Company uses the income, market or cost approach (or a combination thereof) for the valuation as appropriate.
The valuation inputs in these models and analyses are based on market participant assumptions. Market participants are considered to
be buyers and sellers unrelated to the Company in the principal or most advantageous market for the asset or liability.
Fair
value estimates are based on a series of judgments about future events and uncertainties and rely heavily on estimates and assumptions.
Management values property, plant and equipment using the cost approach supported where available by observable market data, which includes
consideration of obsolescence. Management values acquired intangible assets using the relief from royalty method or excess earnings method,
forms of the income approach supported by observable market data for peer companies. The significant assumptions used to estimate the
value of the acquired intangible assets include discount rates and certain assumptions that form the basis of future cash flows (such
as revenue growth rates, customer attrition rates, and royalty rates). Acquired inventories are marked to fair value for valuation of
the total purchase price. For certain items, the carrying value is determined to be a reasonable approximation of fair value based on
information available to the Company.
Schedule Of Assets Acquired
| Assets
acquired | |
As
of
July 11, 2022 | |
| | |
| |
| Cash | |
$ | 504,685 | |
| Goodwill
(i) | |
| 1,451,815 | |
| Total
purchase price | |
$ | 1,956,500 | |
| (i) |
Goodwill
is recorded when the cost of acquired businesses exceeds the fair value of the identifiable net assets acquired. |
The
changes in the carrying amount of goodwill for the period from July 11, 2022 through September 30, 2022 were as follows:
Schedule Of Goodwill
| | |
| | |
| Balance
as of July 11, 2022 | |
$ | 1,451,815 | |
| Additions
and adjustments | |
| - | |
| Balance
as of June 30, 2022 | |
$ | 1,451,815 | |
Note
7 — Property and Equipment
Property
and equipment at September 30, 2022 and December 31, 2021 consisted of the following:
Schedule
of Property and Equipment
| | |
September 30,
2022 | | |
December 31,
2021 | |
| Leasehold Improvements | |
$ | 257,824 | | |
$ | 654,628 | |
| Machinery and Equipment | |
| 780,863 | | |
| 244,583 | |
| Building and Land | |
| 1,650,000 | | |
| 1,650,000 | |
| Furniture and Fixtures | |
| 561,350 | | |
| 566,220 | |
| Total property and equipment | |
| 3,250,037 | | |
| 3,115,431 | |
| | |
| | | |
| | |
| Less: Accumulated depreciation | |
| (706,774 | ) | |
| (536,500 | ) |
| Property and equipment, net | |
$ | 2,543,263 | | |
$ | 2,578,931 | |
Depreciation
expense for the nine months ended September 30, 2022 and 2021 was $173,110 and $286,038, respectively.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
Note
8 — Intangible Assets
In
October 2016, Red Earth, LLC (“Red Earth”), a Nevada limited liability company, 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.
The
Provisional Grow License remains in a provisional status until the Company has completed the buildout 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.
On
December 15, 2017, the Company acquired 100% of the outstanding membership interests of Red Earth 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. Red Earth became a wholly owned subsidiary (the “Subsidiary”)
of the Company.
On
or about May 7, 2021, the Subsidiary, received an inquiry from the State of Nevada Cannabis Compliance Board (“CCB”) regarding
the transfer of ownership of the Subsidiary from its previous owners to the Company. The CCB has determined that the transfer was not
formally approved, thus a Category II violation.
On
July 27, 2021, the Subsidiary entered into a Stipulation and Order for Settlement of Disciplinary Action (the “Stipulation Order”)
with the CCB. Under the terms of the Stipulation Order, the Subsidiary has agreed to present to the CCB, by not later than August 31,
2021, a plan pursuant to which the ownership of the Subsidiary will be returned to the original owners. The Parties to the Stipulation
Order resolved the matter without the necessity of taking formal action. The Subsidiary agreed to pay a civil penalty of $10,000, which
was paid on July 29, 2021.
On
August 1, 2021, the Company entered into a Memorandum of Understanding and Agreement for Technical Services and Short-Term Funding (the
“Agreement”) with Red Earth, LLC (hereinafter, “Red Earth”), an entity controlled by its Chief Cultivation Officer,
Paris Balaouras. Under the terms of the Agreement, the Company will provide a short-term loan (the “Loan”) to Red Earth for
expenses related to the activation and operation of Red Earth’s cultivation license. The Loan shall bear interest at 12% per annum
and increase to 18% upon default. In addition, the Company shall provide Red Earth pre-opening technical services at a cost of $5,000
to $7,500 per month. As of September 30, 2022, the amount due the Company under the short-term loan is $182,469 and the amount of technical
services income (other income) recorded for the nine months ended September 30, 2022 was $70,000.
On
August 26, 2021, the Company and the Company’s Chief Cultivation Officer and previous owner of the Subsidiary, Paris Balaouras,
entered into a Termination Agreement. Under the terms of the Termination Agreement, the Purchase Agreement (the “Purchase Agreement”),
dated December 15, 2017, entered into between the Company and the Subsidiary was terminated as of the date of the Termination Agreement
resulting in the return of ownership of the Subsidiary to Mr. Balaouras. Neither party shall have any further obligation to one another
pursuant to the terms of the Purchase Agreement. Please see Note 14 — Related Party Transactions for further information.
On
September 2, 2021, the Company received approval of the Termination Agreement from the CCB.
Note
9 — Deposits
Deposits
as of September 30, 2022 and December 31, 2021 consist of the following:
Schedule
of Deposits
| | |
September 30, 2022 | | |
December 31, 2021 | |
| MJ Distributing, Inc. (i) | |
$ | 1,016,184 | | |
$ | 1,016,184 | |
| Total | |
$ | 1,016,184 | | |
$ | 1,016,184 | |
| |
(i) |
On
February 5, 2021, the Company (the “Purchaser”) executed a Membership Interest Purchase Agreement (“MIPA3”)
with MJ Distributing, Inc. (the “Seller”) to acquire all of the outstanding membership interests of MJ Distributing C202,
LLC and MJ Distributing P133, LLC, each the holder of a State of Nevada provisional medical and recreational cultivation license
and a provisional medical and recreational production license. In consideration of the sale, transfer, assignment and delivery of
the Membership Interests to Purchaser, and the covenants made by Seller under the MIPA3, Purchaser agreed to pay a combination of
cash, promissory notes, and stock in the amount of One-Million-Two-Hundred-Fifty Thousand Dollars ($1,250,000.00) in cash and/or
promissory notes and 200,000 shares of the Company’s restricted common stock, all of which constitutes the consideration agreed
to herein for (the “Purchase Price”), payable as follows: (i) a non-refundable down payment in the amount of $300,000
was made on January 15, 2021, (ii) the second payment in the amount of $200,000 was made on February 5, 2021, (iii) a deposit in
the amount of $310,000 was paid on February 22, 2021 ($210,000 was a pre-payment against future compensation due under the MIPA3),
(iv) $200,000 was deposited on June 24, 2021, (v) $200,000 shall be deposited on or before June 12, 2021, and (vi) $250,000 shall
be deposited within five (5) business days after the Nevada Cannabis Compliance Board (“CCB”) provides notice on its
agenda that the Licenses are set for hearing to approve the transfer of ownership from the Seller to the Purchaser. |
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
Note
10 — Notes Payable
Notes
payable as of September 30, 2022 and December 31, 2021 consist of the following:
Schedule
of Notes Payable
| | |
September 30,
2022 | | |
December 31,
2021 | |
| |
$ | 885,893 | | |
$ | 750,000 | |
| Note payable bearing interest at 5.0%, originated January 17, 2019, due on January 31, 2022, originally $750,000 (i) | |
$ | 885,893 | | |
$ | 750,000 | |
| Note payable bearing interest at 6.5%
originated April 1, 2019, due on March
31, 2022, originally $250,000
(iv) | |
| 110,117 | | |
| 124,728 | |
| Total notes payable | |
$ | 996,010 | | |
$ | 874,728 | |
| Less: current portion | |
| (996,010 | ) | |
| (874,728 | ) |
| Long-term notes payable | |
$ | - | | |
$ | - | |
| |
(i) |
On
January 17, 2019, the Company executed a promissory note for $750,000 with FR Holdings LLC (the “Holder”), a Wyoming
limited liability company. The Noted Secured by Deed of Trust (the “Secured 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 December 31, 2021, $750,000
principal and $0 interest remain due. On February 4, 2022, the Company entered into a Note Modification Agreement (the “Agreement”)
with the Holder amending the terms of the Secured Note. The Parties agree that the maturity date of the Secured Note being January
31, 2022, had passed and that the balance of the Secured Note is now due (currently Seven-Hundred and Fifty-Thousand Dollars ($750,000.00),
and the parties also agree that the conditions in the Secured Note requiring the assessment of the additional Five-Hundred Thousand
Dollars ($500,000.00) consulting fee was triggered bringing the total amount owed by the Company under the terms of the Secured Note
to One-Million Two-Hundred Fifty-Thousand Dollars ($1,250,000.00). Under the terms of the Agreement, the Company made a payment in
the amount of $357,342.88 bringing the new principal balance to $900,000. The interest rate shall be 7% per annum. Future payments
shall be calculated on a 20-year amortization with a balloon payment in three years. The first monthly payment of $6,977.69 was made
on March 25, 2022 with the final balloon payment due on February 1, 2025. As of September 30, 2022, $885,893 principal remains due. |
| |
|
|
| |
(ii) |
On
April 1, 2019, the Company executed a promissory note for $250,000 with John T. Jacobs and Teresa D. Jacobs. The note accrues interest
at 6.5% per annum, payable in regular monthly installments of $2,178, due on or before the same day of each month beginning May 1,
2019 until March 31, 2020 at which time a principal reduction of $50,000 shall be due, the payments shall be re-amortized (15-year
amortization). On or before March 31, 2021, a second principal reduction of $50,000 shall be due, the payments shall be re-amortized
(15-year amortization). Payments shall continue to be paid until March 31, 2022, at which time the entire sum of principal and accrued
interest shall be due and payable. As of September 30, 2022, $110,117 principal remains due. |
Schedule
of Minimum Loan Payments
| | |
Amount | |
| Fiscal year ending December 31: | |
| | |
| 2022 (excluding the nine months ended September 30, 2022) | |
$ | 996,010 | |
| 2023 | |
| - | |
| 2024 | |
| - | |
| 2025 | |
| - | |
| Thereafter | |
| - | |
| Total minimum loan payments | |
$ | 996,010 | |
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
Note
11 — Commitments and Contingencies
Employment
Agreements
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. Effective upon the resignation of
Mr. Bloss as the Company’s Chief Executive Officer, Mr. Balaouras assumed the role of Interim Chief Executive Officer.
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 24, 2022, Mr. Bloss submitted his resignation as the Company’s
Chief Executive Officer and Director effective as of September 24, 2022. On September 24,
2022, the Company and Mr. Bloss entered into a Settlement and Mutual Release, whereby Mr. Bloss would receive $20,000
as compensation upon his resignation and the Company’s 51% equity
interest in Alternative Hospitality, Inc. As of September 30, 2022, the Company had not paid Mr. Bloss the $20,000 in compensation nor
had it transferred its equity interest in Alternative Hospitality, Inc.
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 $.75 per share. On March
16, 2021, Mr. Moyle assumed the role of interim Chief Financial Officer upon the resignation of Mr. Kelly. The terms of Mr. Moyle’s
Agreement did not change. On September 12, 2022, Mr. Moyle submitted his resignation effective as of September 9, 2022.
Board
of Directors Services Agreements
On
September 15, 2020, the Company entered into a Board of Directors Services Agreement (the “Agreement”) with Messrs. Bloss,
Dear and Balaouras (collectively, the “Directors”). Under the terms of the Agreement, each of the Directors shall provide
services to the Company as a member of the Board of Directors for a period of not less than one year. Each of the Directors shall receive
compensation as follows: (i) Fifteen Thousand and no/100 dollars ($), paid in four (4) equal installments on the last calendar
day of each quarter, and (ii) Fifteen Thousand () 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.
On
March 26, 2021, the Company’s Board of Directors elected to revise the terms of the Board of Directors Services Agreement for each
director. Section 2 (Compensation) was revised such that the directors’ cash compensation was revised to stock compensation in
the following manner: $3,750 divided by the closing stock price on the last business day of each quarter multiplied by 1.10. The remainder
of Section 2 is unchanged.
On
September 30, 2021, the Company’s Board of Directors elected to revise Section 2 (Compensation) of the Agreement back to the original
terms. 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 revision became effective on September 30, 2021.
On
October 17, 2022, the Company’s Board of Directors elected to revise Section 2 (Compensation) of the Agreement such that each Director
shall receive $ of cash compensation per quarter and no shares of the Company’s common stock.
On
September 22, 2022, David Dear submitted his resignation as a director effective as of September 22, 2022.
On
October 26, 2022, the Company’s Board of Directors appointed two new directors, Tom Valensuela and Timothy Luff, effective as of
October 26, 2022.
On
October 27, 2022, the Company changed the composition of its Compensation Committee to include Messrs. Valensuela, Luff, Balaouras and
Radcliffe. Mr. Balaouras will serve as the committee’s Chairman.
Please
see Note 16 — Subsequent Events for further information.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
Note
11 — 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 September 30, 2022, the Company recorded operating lease liabilities of $769,684 and right of use assets for operating leases of $0.
During the nine months ended September 30, 2021, operating cash outflows relating to operating lease liabilities was $0. As of September
30, 2022, the Company’s operating leases had a weighted-average remaining term of 3.6 years.
Rent
expense, incurred pursuant to operating leases for the nine months ended September 30, 2022 and 2021, was $144,000 and $203,242, 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.
MJ
Holdings, Inc. Complaint
On
December 14, 2021, MJ Holdings, Inc. (the “Plaintiff”) filed a Complaint against NCMM, LLC, AP Management, LLC and Valerie
Small (collectively, the “Defendants”)( together, the “Parties”). In the Complaint, the Plaintiff alleges that the Defendants have refused to return
the cannabis that was being stored for Plaintiff under a Storage and Purchase Agreement entered into with AP Management. By failing to
return the cannabis to Plaintiff, or Plaintiff’s designee, the Defendants have deprived Plaintiff of the ability to sell, transfer
or market the product. In addition, the Defendants have sought to unlawfully extort the Plaintiff for illicit payments of thousands of
dollars in money and/or cannabis in exchange for returning the cannabis. The Parties are in active discussions to settle the dispute.
Gappy
and Shaba Compliant
On
December 3, 2021, a Complaint was filed against MJ Holdings, Inc., HDGLV, LLC, Red Earth, LLC (collectively, the “Defendants”)
by Ziad Gappy and David Shaba (collectively, the “Plaintiffs”). In the Complaint, the Plaintiffs allege the Defendants made
misleading statements and/or omissions relating to the Company in the Plaintiffs’ negotiation to purchase shares of MJ Holdings,
Inc. In addition, the Plaintiffs allege that the Defendants have not honored the 2018 Agreements negotiated between the Plaintiffs and
Defendants and that MJ Holdings, Inc. has failed to issue an additional $125,000 in stock due to the Plaintiffs as was agreed to in writing
and the Defendants have failed to start the Western Project.
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. As of the date of this filing, discovery has commenced and written discovery has been exchanged between the parties.
Tierney
Arbitration
On March 9, 2021, Terrence Tierney (“Claimant”),
the Company’s former President and Secretary, who was terminated by the Company for Cause on August 7, 2020, 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 unpaid base pay and unpaid deferred business
compensation (which was not earned nor due), expenses paid on behalf of the Company, accrued vacation and severance pay. On April 7, 2021,
the Company made payment of unpaid base pay against the wage claim in the amount of $62,392, inclusive of $59,583 for wages and $2,854
for accrued vacation plus $8,307.60 for statutory penalties. As such, the Company posits that any compensation claims that Claimant
may have had have been paid in full and that the Company otherwise has no liability. The Company filed a counterclaim in the action declaring
that Tierney breached the contract of employment, committed fraud, malfeasance and other nefarious acts causing substantial damage to
the Company with estimated monetary damages well in excess of any monetary claim made by Tierney. On May 4, 2022, the Arbitrator issued
a ruling concluding that the Arbitrator did not have jurisdiction over Claimant’s statutory wage claim under NRS 608.
On September 19, 2022, Claimant filed a complaint in state court seeking compensation under NRS 608.020. The Company asserts that
the 2-year statute of limitations bars Claimant’s complaint, and further asserts that Claimant has been paid in full pursuant to
the payments issued to Claimant on April 7, 2021. The arbitration is currently scheduled to take place in January 2023.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
Note
12 — 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, 78,591,667 shares of Common Stock
are issued and outstanding as of September 30, 2022. Each holder of Common Stock is entitled to one vote per share on all matters to
be voted upon by the stockholders and are not entitled to cumulative voting for the election of directors. Holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time to time by the board of directors out of funds legally
available therefor subject to the rights of preferred stockholders. The Company has not paid any dividends and does not intend to pay
any cash dividends to the holders of Common Stock in the foreseeable future. The Company anticipates reinvesting its earnings, if any,
for use in the development of its business. In the event of liquidation, dissolution, or winding up of the Company, the holders of Common
Stock are entitled, unless otherwise provided by law or the Company’s Articles of Incorporation, including any certificate of designations
for a series of preferred stock, to share ratably in all assets remaining after payment of liabilities and the preferences of preferred
stockholders. Holders of the Company’s Common Stock do not have preemptive, conversion, or other subscription rights. There are
no redemptions or sinking fund provisions applicable to the Company’s Common Stock.
Common
Stock Issuances
For
the nine months ended September 30, 2022, the Company issued and/or sold the following unregistered securities:
On July 8, 2022,
the Company issued 7,000,000 shares of common stock as per the terms of the Common Stock Purchase Agreement for the purchase of MJH Research,
Inc.
On July 15,
2022, the Company issued a total of 45,000 shares of common stock with a fair market value of $13,072 to three directors for services
rendered during the first quarter of 2022.
On
August 2, 2022, the Company issued a total of 45,000 shares of common stock with a fair market value of $12,128 to three directors for
services rendered during the second quarter of 2022.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
Note
12 — Stockholders’ Equity (Deficit) (continued)
At
September 30, 2022 and December 31, 2021, there are 78,591,667 and 71,501,667 shares of Common Stock issued and outstanding, respectively.
Preferred
Stock
The
Board is authorized, without further approval from our stockholders, to create one or more series of preferred stock, and to designate
the rights, privileges, preferences, restrictions, and limitations of any given series of preferred stock. Accordingly, the Board may,
without stockholder approval, issue shares of preferred stock with dividend, liquidation, conversion, voting, or other rights that could
adversely affect the voting power or other rights of the holders of Common Stock. The issuance of preferred stock could have the effect
of restricting dividends payable to holders of our Common Stock, diluting the voting power of our Common Stock, impairing the liquidation
rights of our Common Stock, or delaying or preventing a change in control of us, all without further action by our stockholders. Of the
5,000,000 shares of preferred stock, par value $0.001 per share, authorized in our Articles of Incorporation, 2,500 shares are designated
as Series A Convertible Preferred Stock.
Series
A Convertible Preferred Stock
Each
share of Series A Preferred Stock is convertible, at the option of the holder, into that number of shares of Common Stock determined
by dividing the stated value of each share of Series A Preferred Stock (currently, $1,000)
by the conversion price (currently, $0.75).
The stated value and the conversion price are subject to adjustment as provided for in the Certificate of Designation. We are prohibited
from effecting a conversion of the Series A Preferred Stock to the extent that, after giving effect to the conversion, the holder (together
with such holder’s affiliates and any persons acting as a group with holder or any of such holder’s affiliates) would beneficially
own in excess of 4.99%
of the number of shares of Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable
upon conversion. A
holder, upon notice to us, may increase or decrease this beneficial ownership limitation; provided, that, in no event can the holder
increase the beneficial ownership limitation in excess of 9.99% of the number of shares of Common Stock outstanding immediately after
giving effect to the issuance of shares of Common Stock upon the conversion of the Series A Preferred Stock then held by holder. Such
increase of the beneficial ownership limitation cannot be effective until the 61st day after such notice is given to us and
shall apply only to such holder. The Series A
Preferred Stock has no voting rights; however, as long as any shares of Series A Preferred Stock are outstanding, we are not permitted,
without the affirmative vote of the holders of a majority of the then outstanding shares of the Series A Preferred Stock to (i) alter
or change adversely the powers, preferences, or rights given to the Series A Preferred Stock or alter or amend the Series A Preferred
Stock Certificate of Designation, (ii) amend our Articles of Incorporation or other charter documents in any manner that adversely affects
any rights of the holders, (iii) increase the number of authorized shares of Series A Preferred Stock, or (iv) enter into any agreement
with respect to any of the forgoing.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
Note
12 — Stockholders’ Equity (Deficit) (continued)
Preferred
Stock Issuances
For
the nine months ended September 30, 2022
None
At
September 30, 2022 and December 31, 2021, there were 0 and 0 shares of Series A Preferred Stock issued and outstanding, respectively.
Note
13 — Basic and Diluted Earnings (Loss) per Common Share
Basic
earnings (loss) per share is computed by dividing the net income or net loss available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted earnings (loss) per share is calculated using the treasury stock method and
reflects the potential dilution that could occur if warrants were exercised and were not anti-dilutive.
For
the nine months ended September 30, 2022, basic and diluted loss per common share were the same since there were no potentially dilutive
shares outstanding during the respective periods. The outstanding options as of September 30, 2022, to purchase 1,500,000 shares of common
stock were not included in the calculations of diluted loss per share because the impact would have been anti-dilutive.
For
the nine months ended September 30, 2022, basic and diluted income per common share were based on 73,701,945 and 71,501,667 shares, respectively.
Note
14 — Stock Based Compensation
Warrants
and Options
A
summary of the warrants and options issued, exercised and expired are below:
Stock
Options
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:
Schedule of Options Issued, Exercised and Expired
| Options: | |
Shares | | |
Weighted Avg. Exercise Price | | |
Remaining Contractual Life in Years | |
| Balance at December 31, 2021 | |
| 1,500,000 | | |
$ | 0.75 | | |
| 1.68 | |
| Issued | |
| - | | |
| - | | |
| - | |
| Exercised | |
| - | | |
| - | | |
| - | |
| Expired | |
| - | | |
| - | | |
| - | |
| Balance at September 30, 2022 | |
| 1,500,000 | | |
$ | 0.75 | | |
| 1.00 | |
| Exercisable at September 30, 2022 | |
| 1,500,000 | | |
$ | 0.75 | | |
| 1.00 | |
Options
outstanding as of September 30, 2022 and December 31, 2021 were 1,500,000 and 1,500,000, respectively.
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:
Schedule of Warrants Issued, Exercised and Expired
| Warrants: | |
Shares | | |
Weighted Avg.
Exercise Price | | |
Remaining
Contractual Life in Years | |
| Balance at December 31, 2021 | |
| 250,000 | | |
$ | 0.10 | | |
| 3.3 | |
| Issued | |
| - | | |
| - | | |
| - | |
| Exercised | |
| - | | |
| - | | |
| - | |
| Expired | |
| - | | |
| - | | |
| - | |
| Balance at September 30, 2022 | |
| 250,000 | | |
$ | 0.10 | | |
| 2.4 | |
Warrants
outstanding as of September 30, 2022 and December 31, 2021 were 250,000 and 250,000, respectively.
MJ
HOLDINGS, INC. and SUBSIDIARIES
Notes
to the Condensed Consolidated Financial Statements
For
the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
Note
15 — Related Party Transactions
On
August 1, 2021, the Company entered into a Memorandum of Understanding and Agreement for Technical Services and Short-Term Funding (the
“Agreement”) with Red Earth, LLC (hereinafter, “Red Earth”), an entity controlled by its Chief Cultivation Officer,
Paris Balaouras. Under the terms of the Agreement, the Company will provide a short-term loan (the “Loan”) to Red Earth for
expenses related to the activation and operation of Red Earth’s cultivation license. The Loan shall bear interest at 12% per annum
and increase to 18% upon default. In addition, the Company shall provide Red Earth pre-opening technical services at a cost of $5,000
to $7,500 per month. As of September 30, 2022, the amount due the Company under the short-term loan is $182,469 and the amount of technical
services income (other income) recorded for the nine months ended September 30, 2022 was $70,000.
On
September 5, 2022, the Company entered into an Amendment (the “Amendment”) with Highland Brothers, LLC (together, the
“Parties’) to amend the original agreement (the “Agreement”) between the Parties dated February 15, 2019.
Under the terms of the Amendment, the term of the Agreement has been extended to fifteen years and the Company shall pay Highland
Brothers, LLC $150,000
as cash consideration within 10 days of execution of the Amendment. The Company made the $150,000
payment on October 6, 2022.
Note
16 — Subsequent Events
The
Company has evaluated events subsequent to the balance sheet through the date the financial statements were issued and noted the following
events requiring disclosure:
On October 26,
2022, the Company’s board of directors appointed two new directors, Tom Valensuela and Timothy Luff, effective as of October 26,
2022.
On October 27,
2022, the Company changed the composition of its Compensation Committee to include Messrs. Valensuela, Luff, Balaouras and Radcliffe.
Mr. Balaouras will serve as the committee’s Chairman.
On November
9, 2022, David Radcliffe submitted his resignation as a director effective as of November 9, 2022.
On November 10, 2022, the Company’s
board of directors elected a new director, Christopher Reasonover, effective as of November 10, 2022.
Note
17 — Restatement
The
Company reversed a $500,000 consulting fee expense for the three months ended March 31, 2022. The reversal of the expense decreased the
Company’s Accumulated Deficit by $500,000 at March 31, 2022.