MJ HOLDINGS, INC. Our Management's Discussion and Analysis should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this quarterly report.
Forward-Looking Statements
This Quarterly Report contains forward-looking statements and information
relating to us that are based on the beliefs of our management as well as
assumptions made by, and information currently available to, our management.
When used in this report, the words "believe," "anticipate," "expect," "will,"
"estimate," "intend", "plan" and similar expressions, as they relate to us or
our management, are intended to identify forward-looking statements. Although we
believe that the plans, objectives, expectations and prospects reflected in or
suggested by our forward-looking statements are reasonable, those statements
involve risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by these
forward-looking statements, and we can give no assurance that our plans,
objectives, expectations and prospects will be achieved. Important factors that
might cause our actual results to differ materially from the results
contemplated by the forward-looking statements are contained in the "Risk
Factors" section of and elsewhere in our Annual Report on Form 10-K for the
fiscal year ended
Company Overview
The Company's assets and operations have expanded significantly over the past
year. The Company raised more than
Current Initiatives include:
? a three-acre, hybrid, outdoor, marijuana-cultivation facility (the
"Cultivation Facility") located in the Amargosa Valley of Nevada . The Company
has the contractual right to manage and cultivate marijuana on this property
until 2026, for which it will receive eighty-five percent (85%) of the net
revenues realized from its management of this facility. The licensed facility
is owned by Acres Cultivation, LLC , a wholly owned subsidiary of Curaleaf
Holdings, Inc. The Company completed its second harvest on this property in
November of 2019 and had anticipated generating revenue from this harvest
until late Q4 of 2020. The impact of COVID-19 greatly impacted the continuing
sale of inventory from this harvest. In April of this year, the Company
planted a one acre auto-flower crop, which it began harvesting in late June.
The Company successfully integrated its cloning program for 2020, and projects
that it will grow approximately 8,000 marijuana plants starting in June of
this year for harvest in mid Q4 2020.
? 260 acres of farmland for the purpose of cultivating additional marijuana (the
"260 Acres") purchased in January of 2019. The Company intends to utilize the
state-of-the-art Cravo® cultivation system for growing an additional five
acres of marijuana on this property, that is contiguous to the three-acre
property that it manages in Amargosa. The Cravo® system will allow multiple
harvests per year and should result in higher annual yields per acre. The land
has more than 180-acre feet of permitted water rights, which will provide more
than sufficient water to markedly increase the Company's marijuana cultivation
capabilities. This facility, upon receipt of required funding, is expected to
become operational in the spring of 2021.
? a nearby commercial trailer and RV park (THC Park - Tiny Home Community ) was
purchased in April of 2019 to supply necessary housing for the Company's farm
employees. After the Company's 2018 harvest, it came to realize that it would
need to find a more efficient method of housing and to bring its cultivation
team to its facilities. The Company purchased the 50-acre plus THC Park for
$600,000 in cash and $50,000 of the Company's restricted common stock. At
present, the Company's construction and completion of this community is
approximately seventy-five present complete. The impact of COVID-19 in
obtaining inspections and permitting has significantly delayed the completion
of this community. The Company anticipates completing the construction and
inspections during the first quarter of 2021.
21
? an agreement to acquire an additional cultivation license and production
license, both currently located in Nye County Nevada . On April 2, 2019 , the
Company executed a Membership Interest Purchase Agreement ("MIPA") 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. The
licenses were required to be perfected pursuant to Nevada Revised Statutes
453A (NRS 453A - Medical Marijuana) and Nevada Revised Statures 453D (NRS453D
- Recreation/Adult Use Marijuana). In January of 2020, the State of Nevada
issued a Conditional Medical Marijuana Cultivation Certificate and a
Conditional Medical Marijuana Production Certificate. On May 1, 2020 , the
State of Nevada issued a Conditional Recreational Marijuana Cultivation
Certificate and a Conditional Recreational Marijuana Production Certificate.
As of October 2019 , the State of Nevada had placed a moratorium on the
transfer of all licenses within the state. The Company does not know when this
moratorium will be lifted, but it expects the newly formed Cannabis Control
Board to expedite transfers beginning in Q4 of 2020. Due to the ongoing impact
of COVID-19 on the Company's business operations, the Company has been unable
to comply with the payment obligations required of it in the MIPA. On February
19, 2020 , the Company received a Demand for Payment (the "Demand") from the
Seller as it related to the MIPA, the Amendment to the MIPA (the "First
Amendment) and Amendment No. 2 to the MIPA (the "Second Amendment"). Under the
terms of the Demand, the Company was to make payment in the amount of $261,533
and enter into a Third Amendment to the MIPA (the "Third Amendment") on or
before March 11, 2020 . As of the date of this filing, the Company has failed
to make the required payment under the Demand, nor has it entered into a Third
Amendment. Please see Note 13 - Subsequent Events for further information.
? indoor cultivation facility build-out in the City of Las Vegas (the "Indoor
Facility"). Through its subsidiary, Red Earth, LLC , the Company holds a
Medical Marijuana Establishment Registration Certificate, Application No.
C012. In August of 2019, the Company entered into a Membership Interest
Purchase Agreement (the "Agreement") with Element NV, LLC ("Element"), to sell
a 49% interest in the license. Under the terms of the Agreement, Element was
required to invest more than $3,500,000 into this Indoor Facility. Element
paid the monthly rent on the facility from December 2019 through March 2020
but failed to make any additional payments. On June 11, 2020 , the Company
entered into the First Amendment ("First Amendment") to the Agreement. Under
the terms of the First Amendment, the Closing Purchase Price was adjusted to
$441,000 , and Element was required to make a capital contribution (the
"Initial Contribution Payment") to the Target Company in the amount of
$120,000 and was required to make an additional cash contribution (the Final
Contribution Payment") in the amount of $240,000 . Due to the ongoing impact of
COVID-19 on the Company's respective business operations, the Company has not
been able to pay the monthly rent. As of the date of this filing, the Company
is in active negotiations with the landlord to find an acceptable resolution
regarding the payment of past due rent. The Company is currently in
discussions with Element regarding the default of payments. There is no
guarantee that Element will agree to remit the required funds to bring them
current under the terms of the Agreement. In the event that Element fails to
make the required payment, the Company may elect to remit a Notice of Default
to Element, terminate the Agreement, fund the development of the facility
through additional sources or sale the license.
The Company may also continue to seek to identify potential acquisitions of revenue producing assets and licenses within legalized cannabis markets that can maximize shareholder value.
The Company may face substantial competition in the operation of cultivation
facilities in
The Company presently occupies an office suite located at
22 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 will result 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 are 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 our financial results, and the anticipated future impact of the pandemic, we have implemented cost control measures and cash management actions, including:
? Furloughing a significant portion of our employees; and
? Implementing 20% salary reductions across our 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.
23 Corporate History
The Company was incorporated on
On
Acquisition of Red Earth
On
The consolidated financial statements after completion of the reverse merger
included: the assets, liabilities, and results of operations of the combined
company from and after the closing date of the reverse merger, with only certain
aspects of pre-consummation stockholders' equity remaining in the consolidated
financial statements. In February of 2019, the Company repurchased, from the
Company's largest shareholder, 20,000,000 of the 26,366,484 shares of common
stock that this shareholder originally received in connection with the Reverse
Merger - for a total purchase price of
Our Business
We commenced cultivation activities on our three-acre managed cultivation facility in August of 2018, harvesting more than 5400 pounds of marijuana through December of 2018. In the fourth quarter of 2019, we completed our 2019 harvest of approximately 4,800 marijuana plants with expected yield of more than 3,300 pounds of marijuana flower and trim. As of the time of this filing, we have completed our 2020 harvest of approximately 7,600 marijuana plants with expected yield of more than 4,700 pounds of marijuana flower and trim. It is our intention to grow our business through the acquisition of existing companies and/or through the development of new opportunities that can provide a 360-degree spectrum of infrastructure (dispensaries), cultivation and production management, and consulting services in the regulated cannabis industry.
Through Red Earth, we hold a provisional
The Company currently operates through the following entities:
MJ Holdings, Inc. This entity, the Parent, serves as a holding company for all of the operating businesses/assets.
Prescott Management, Prescott Management is a wholly owned subsidiary of the LLC
Company that provides day-to-day management and operational
oversight to the Company's operating subsidiaries.
Icon Management, LLC Icon is a wholly owned subsidiary of the Company that
provides Human Resource Management ("HR") services to the
Company. Icon is responsible for all payroll activities and
administration of employee benefit plans and programs.
Farm Road, LLC Farm Road, LLC is a wholly owned subsidiary of the Company
that owns 260 acres of farmland in Amargosa, NV . The Company
acquired all of the membership interests of Farm Road in
January of 2019.
Condo Highrise Condo Highrise Management is a wholly owned subsidiary of
Management, LLC the Company that manages the Company owned Trailer Park in
Amargosa, Nevada .
Red Earth Holdings , Red Earth Holdings, LLC is a wholly owned subsidiary of the
LLC Company that will eventually be the holder of the Company's
primary cannabis license assets. As of the date of this
report, Red Earth Holdings has no operations and holds no
assets.
24
Red Earth, LLC Red Earth, established in 2016, was a wholly owned
subsidiary of the Company from December 15, 2017 until
August 30, 2019 prior to the Company selling a forty-nine
percent (49%) interest in Red Earth to Element NV, LLC , an
unrelated third party (See further description of the
transaction hereinabove). Red Earth's assets consist of: (i)
a cultivation license to grow marijuana within the City of
Las Vegas in the State of Nevada , and (ii) all of the
outstanding membership interests in HDGLV, which holds a
triple net leasehold interest in a 17,298 square-foot
building in Las Vegas, Nevada , which it expects to operate
as an indoor marijuana cultivation facility. The Company
expects to complete construction of this facility in the
first quarter of 2021. In July 2018 , the Company completed
the first phase of construction on this facility, and it
received a City of Las Vegas Business License to operate a
marijuana cultivation facility. The Company expects to
obtain final approval towards perfecting the cultivation
license from the State of Nevada regulatory authorities in
the fourth quarter of 2020, but it can provide no assurances
on the receipt and/or timing of the final approvals.
HDGLV, LLC HDGLV is a wholly owned subsidiary of Red Earth, LLC and is
the holder of a triple net lease on a commercial building in
Las Vegas, Nevada which is being developed to house the
Company's indoor grow facility.
Alternative Alternative Hospitality is a Nevada corporation formed in
Hospitality, Inc. November of 2018. MJ Holdings owns fifty-one percent (51%)
of the company and the remaining forty-nine percent (49%) is
owned by TVK, LLC , a Florida limited liability company.
MJ International MJ International is a wholly owned subsidiary of the Company
Research Company that is headquartered in Dublin, Ireland . MJ International
Limited is the sole shareholder of MJ Holdings International Single
Member S.A. and Gioura International Single Member Private
Company .
Critical Accounting Policies, Judgments and Estimates
There were no material changes to the Company's critical accounting policies and
estimates during the interim period ended
Please see our Annual Report on Form 10-K for the year ended
25 Results of Operations
Three Months Ended
Revenues The Company's revenue was$456,158 for the three months endedMarch 31, 2020 , compared to$580,228 for the three months endedMarch 31, 2019 . Revenue, by class, is as follows: For the three months ended March 31, 2020 2019 Revenues: Rental income (i)$ 22,499 $ 1,950 Management income (ii) 306,112 433,708
Equipment lease income (ii) 127,547 144,570 Total
$ 456,158 $ 580,228
(i) The rental income is from the Company's
(ii) In
Cultivation, LLC , aNevada limited liability company (the "Licensed Operator") that holds a license for the legal cultivation of marijuana for sale under the laws of theState of Nevada . In January of 2019, the Company entered into a revised agreement, which replaced theApril 2018 agreement, with the Licensed Operator in order to be more stringently aligned withNevada 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 untilApril 2026 . InApril 2019 , the Licensed Operator was acquired by Curaleaf Holdings, Inc., a publicly traded Canadian cannabis company.
(iii) In October of 2018, the Company entered into a Revenue Participation Rights
Agreement (the "Agreement") with Let's Roll NV, LLC and Blue Sky Companies,
LLC (together, the "Subscribers"). Under the terms of the Agreement, the
Company transferred its ownership interest in 3.95% of the gross revenue
from the "Amargosa Outdoor Grow" to the Subscribers in exchange for
$100,000 cash payment and a Subscription Agreement in the amount of
$1,142,100 . On or before April 30th for the next 8 years (2019-2026), the
Company shall calculate the pro rata gross revenue due to the Subscribers
with payments being made on or before May 31st of each year. The
Subscribers have agreed to forgo any payments required under the Agreement
until May 2021 .
Operating Expenses
Direct costs of revenues were
For the three months ended
Direct costs of revenue: March 31,
2020 2019
Rental income $ - $ -Management and equipment lease income 472,770 516,007 Total
$ 472,770 $ 516,007
The direct costs of revenue of
General and administrative
For the three months ended
Other Income/(Expense)
For the three months ended
Net Loss
Net loss attributable to common shareholders was
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