MJ Holdings, Inc. - Quarter Report: 2017 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

 or

Commission file number: 333-167824

MJ HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

4141 NE 2nd Avenue, Suite 204-A, Miami, Florida 33137

(Address of principal executive offices) (Zip Code)

(305) 455-1881

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes þ   No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes þ   No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨   No þ

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APPLICABLE TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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MJ HOLDINGS, INC.

TABLE OF CONTENTS

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PART I – FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

MJ HOLDINGS, INC.

Condensed Consolidated Balance Sheets

As of June 30, 2017 and December 31, 2016

(Unaudited)

 See accompanying notes to unaudited condensed consolidated financial statements

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MJ HOLDINGS, INC.

Condensed Consolidated Statements of Operations

For the three and six months ended June 30, 2017 and 2016

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements

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MJ HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

For the six months ended June 30, 2017 and 2016

(unaudited)

See accompanying notes to unaudited condensed consolidated financial statements

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MJ HOLDINGS, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

June 30, 2017

Note 1 — Interim Financial Statements

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, these condensed consolidated financial statements do not include all of the information and footnotes required for audited annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to make the condensed consolidated financial statements not misleading have been included. The balance sheet at December 31, 2016, has been derived from the Company’s audited consolidated financial statements as of that date.

The unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and the notes thereto that are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, that was filed with the SEC on March 30, 2017. The results of operations for the six months ended June 30, 2017, are not necessarily indicative of the results to be expected for the full year.

The unaudited condensed consolidated financial statements include the accounts of the Company and its previously wholly owned subsidiaries, 5353 Joliet, LLC, MJ Havana, LLC, and MJ Sheridan, LLC. Intercompany balances and transactions have been eliminated in consolidation. Effective February 1, 2017, the Company transferred its ownership interests in its wholly owned subsidiaries as part of the exchange transaction discussed below in Note 3.

Note 2 — Summary of Significant Accounting Policies

The significant accounting policies followed by the Company for interim reporting are consistent with those included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. There were no material changes to our significant accounting policies during the interim period ended June 30, 2017.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued guidance to clarify the principles for recognizing revenue. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a comprehensive framework for revenue recognition that supersedes current general revenue guidance and most industry-specific guidance. In addition, the guidance requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. An entity should apply the guidance either retrospectively to each prior reporting period presented or retrospectively with the cumulative adjustment at the date of the initial application. In July 2015, the FASB delayed the effective date of the new guidance to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is now permitted after the original effective date of December 15, 2016. The Company is still evaluating the impact of adopting the new accounting guidance, but does not expect the adoption to have a material impact on its consolidated financial statements.

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Note 3 — Disposition of Real Estate Business

On November 22, 2016, in connection with a plan to divest its real estate business, the Company submitted to its shareholders an offer to exchange (the "Exchange Offer") the Company's 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 the Company's 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 will also assume the senior notes and any and all obligations associated with the real estate properties and business, effective February 1, 2017.

On February 1, 2017, the 1,800,000 shares of the Company's common stock acquired in the Exchange Offer was recorded as an acquisition of treasury stock at a cost equal to the market value of the shares of the Company's common stock accepted in the exchange offer. The difference of $421,893 between the market value of the treasury stock acquired in the Exchange Offer and the net book value of the assets and liabilities exchanged was recorded as additional paid-in capital due to the common controlling interests between the two entities involved with the Exchange Offer. In addition, $135,033 of cash was transferred to MJRE to cover accrued property taxes and security deposits, less prepaid property insurance premiums, held by the Company that were previously collected from the tenants of the real estate properties exchanged.

The historical results of the disposed assets and liabilities are shown in the Company's financial statements as discontinued operations for periods presented before the exchange. In subsequent periods, the Company's financial statements will no longer reflect the assets, liabilities, results of operations or cash flows attributable to the disposed assets and liabilities.

A summary of the difference between the market value of the treasury stock acquired in the Exchange Offer and the net book value of the assets and liabilities exchanged that was recorded as additional paid-in capital on February 1, 2017, is as follows:

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A summary of the results of operations reported as discontinued operations for the three and six months ended June 30, 2017 and 2016, is as follows:

Note 4 — Going Concern

The Company’s financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities and commitments in the normal course of business. During the first quarter of 2017, the Company divested their real estate properties and associated business. During the six months ended June 30, 2017, the Company generated a loss from continuing operations of $273,535 and used $260,466 of cash for continuing operations. Subsequent to the divestiture of its real estate business, the Company does not expect to generate revenues for the next six to nine months. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.

The Company is developing mobile and computer based applications focused on providing cannabis for medical use content and educational materials to licensed medical professionals, in addition to matching patients with medical professionals who are familiar with the therapeutic effects and indications of cannabinoids and making social connections by and between cannabis users.

Our goal is to develop a “freemium” based business model, where we offer our services for free in an effort to build and develop a user-base.  We expect to generate revenues in the future through advertising and by marketing premium products and services to our growing user-base.  

Although we can provide no assurances, we believe our cash on hand will provide sufficient liquidity and capital resources to fund our business for the next twelve months.

In the event the Company experiences liquidity and capital resource constraints because of unanticipated operating losses, we may need to raise additional capital in the form of equity and/or debt financing. If such additional capital is not available on terms acceptable to us or at all, then we may need to curtail our operations and/or take additional measures to conserve and manage our liquidity and capital resources, any of which would have a material adverse effect on our financial position, results of operations, and our ability to continue in existence. These financial statements do not include any adjustments that might result from the outcome of this uncertainty. 

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Note 5 — Related Party Transactions

During the six months ended June 30, 2017 and 2016, the Company paid $45,417 and $136,250, respectively, for interest due pursuant to $2,725,000 of promissory notes held by Chemtov Mortgage Group (“CMG”), an entity wholly-owned by the Company's previous co-CEO and current shareholder, Shawn Chemtov. On February 1, 2017, the promissory notes held by CMG were exchanged as part of the Exchange Offer discussed above in Note 3.

During the six months ended June 30, 2017, the Company paid $75,000 to each of the Company’s co-CEOs, Mr. Laufer and Mr. Chemtov, as a result of one-time bonuses earned as part of employment agreements executed in April 2017.

In May 2017, Mr. Chemtov resigned from his position as co-CEO of the Company and from its Board of Directors. As part of the separation, the Company paid Mr. Chemtov $75,000 during the six months ended June 30, 2017.

In May 2016, the Company invested $150,000 in a $1,750,000 promissory note secured by the assignment of a mortgage on real estate property located in Miami, Florida. The mortgage was held by CMG, an entity wholly-owned by the Company's previous co-CEO and current shareholder, Shawn Chemtov. The Company did not incur any loan origination fees or any other costs associated with the mortgage investment. The promissory note paid interest at 12% per annum and provided for cash interest payments on a monthly basis, commencing on July 1, 2016. The Company earned $2,139 of interest income, recorded as revenue, as a result of the $150,000 investment during the three and six months ended June 30, 2016. The outstanding principal amount and unpaid interest were repaid in September 2016.

Note 6 — Outstanding Warrants

A summary of warrants issued, exercised and expired during the six months ended June 30, 2017, is as follows:

Note 7 — 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 shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is calculated using the treasury stock method and reflects the potential dilution that could occur if warrants were exercised and were not anti-dilutive.

For the three and six months ended June 30, 2017 and 2016, basic and diluted earnings (loss) per common share were the same since there were no potentially dilutive shares outstanding during the respective periods. Outstanding warrants as of June 30, 2017 and 2016, to purchase 166,665 shares of common stock were not included in the calculations of diluted income per share because the impact would have been anti-dilutive for each of the periods presented.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 December 31, 2016, and in our subsequent filings with the SEC, and include, among others, the following: marijuana is illegal under federal law, competition, our business is dependent on laws pertaining to the marijuana industry, government regulation, our business model depends on the availability of private funding, we will be subject to general real estate risks and the availability, if debt payments to note holder are not made we could lose our investment in our real estate properties, terms and deployment of capital. The terms “MJ Holdings, Inc.,” “MJ Holdings,” “MJ,” “we,” “us,” “our,” and the “Company” refer to MJ Holdings, Inc. 

Business Overview

MJ Holdings owned and leased real estate to licensed operators in the regulated cannabis industry.  Additionally, we are developing desktop and mobile social, meet-up and health and wellness applications. Our mobile and computer based applications are focused on providing cannabis for medical use content and educational materials to licensed medical professionals, in addition to matching patients with medical professionals who are familiar with the therapeutic effects and indications of cannabinoids and making social connections by and between cannabis users.

On November 22, 2016 in connection with a plan to divest ourselves of our real estate business, we submitted to our shareholders an offer to exchange (the "Exchange Offer") our common stock for shares in MJ Real Estate Partners, LLC, (“MJRE”) a newly formed LLC formed for the sole purpose of effecting the Exchange Offer. On January 10, 2017, we accepted for exchange 1,800,000 shares of our common stock in exchange for 1,800,000 shares of MJRE's common units, representing membership interests in MJRE. Effective February 1, 2017, we transferred our ownership interests in the real estate properties and our subsidiaries, through which we held ownership of the real estate properties, to MJRE. Effective February 1, 2017, MJRE assumed the senior notes and any and all obligations associated with the real estate properties and business.

The MJ Real Estate Partners separation was due to our inability to scale and expand our real estate business as previously planned and our intention to engage in business opportunities where we believe we have greater growth opportunities to which capital will be more readily available.

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How We Plan to Generate Revenue

Our Digital Assets

We operate and are developing mobile and computer based applications focused on:

·

providing cannabis for medical use content and educational materials to licensed medical professionals,

·

matching patients with medical professionals who are familiar with the therapeutic effects and indications of cannabinoids and;

·

making social connections by and between cannabis users.

We have not generated any revenue from our digital assets and do not anticipate generating revenues in the next six to nine months. Our goal is to develop a “freemium” based business model, where we offer our services for free in an effort to build and develop a user-base.  We expect to generate revenues in the future through advertising and by marketing premium products and services to our growing user-base.  

The Company does not and will not, until such time as Federal law allows, grow, harvest, distribute or sell marijuana or any substances that violate the laws of the United States of America.

Critical Accounting Policies and Estimates

There were no material changes to our critical accounting policies and estimates during the interim period ended June 30, 2017.

Please see our Annual Report on Form 10-K for the year ended December 31, 2016, for a discussion of our critical accounting policies and estimates and their effect, if any, on the Company's financial results.

Results of Operations for the Three and Six Months Ended June 30, 2017, compared to the Three and Six Months Ended June 30, 2016

Revenue

We generated no revenue from continuing operations for the three and six months ended June 30, 2017.

We generated $2,139 of interest income, recorded as revenue, during the three and six months ended June 30, 2016, as a result a $150,000 investment in May 2016. The $150,000 investment was in a $1,750,000 promissory note secured by the assignment of a mortgage on real estate property located in Miami, Florida. The promissory note was held by CMG, an entity wholly-owned by the Company's previous co-CEO and current shareholder, Shawn Chemtov. The promissory note earned interest at 12% per annum and provided for cash interest payments on a monthly basis, commencing on July 1, 2016. The outstanding principal amount and unpaid interest were repaid in September 2016.

Operating Expenses

General and administrative expenses increased by $206,209 and $214,823, respectively, to $246,490 and $273,301 for the three and six months ended June 30, 2017, compared with general and administrative expenses of $40,281 and $58,378, respectively, for the three and six months ended June 30, 2016. The increase in general and administrative expenses during the three and six months ended June 30, 2017, was primarily attributed to $238,942 of compensation recorded for the Company’s current CEO and previous co-CEO, partially offset by a $30,000 reduction in travel expenses incurred during the interim period ended June 30, 2017.

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Loss from Continuing Operations

We had a loss from continuing operations of $246,657 and $273,535, respectively, for the three and six months ended June 30, 2017, compared with a loss from continuing operations of $38,280 and $56,510, respectively, for the three and six months ended June 30, 2016. The increases of $208,377 and $217,025, respectively, in the loss from continuing operations during the three and six months ended June 30, 2017, were primarily driven by the increases in general and administrative expenses discussed above.

Discontinued Operations

As a result of the Exchange Offer, 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, effective February 1, 2017. The historical results of the disposed assets and liabilities are shown in the Company's financial statements as discontinued operations for periods presented before the exchange. In subsequent periods, the Company's financial statements will no longer reflect the assets, liabilities, results of operations or cash flows attributable to the disposed assets and liabilities.

During the three and six months ended June 30, 2017, we generated income from discontinued operations of $0 and $15,301, respectively, compared to income from discontinued operations of $29,961 and $73,642, respectively, during the three and six months ended June 30, 2016. The decreases in income from discontinued operations are primarily attributed to generating one month of income from discontinued operations prior to the divestiture in February 2017, compared with three and six months of income during the interim periods ended June 30, 2016.

Liquidity and Capital Resources

The following table summarizes the cash flows for the six months ended June 30, 2017 and 2016:

The Company had cash of $58,074 at June 30, 2017, compared with cash of $463,773 at December 31, 2016, a decrease of $405,699. The decrease in cash during the six months ended June 30, 2017, was attributed to cash used in operating activities of $207,266 and cash used in investing activities of $135,033.

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Operating Activities

Continuing Operations

We had net cash used in operating activities for continuing operations of $260,466 for the six months ended June 30, 2017, which consisted of a net loss from continuing operations of $273,535; partially offset by depreciation of $334 and an increase in accounts payable and accrued liabilities of $12,735.

We had net cash used in operating activities for continuing operations of $56,301 for the six months ended June 30, 2016, which consisted of a net loss from continuing operations of $56,510 and a decrease in accounts payable and accrued liabilities of $125; partially offset by depreciation of $334.

Discontinued Operations

We had net cash used in operating activities from discontinued operations of $10,200 for the six months ended June 30, 2017, which consisted of income from discontinued operations of $15,301, non-cash charges of $9,760; offset by an increase in working capital requirements of $35,261, consisting of a decrease in accounts payable and accrued liabilities of $41,449, partially offset by a decrease in prepaid and other assets of $6,188.

We had net cash provided by operating activities from discontinued operations of $79,282 for the six months ended June 30, 2016, which consisted of income from discontinued operations of $73,642, non-cash charges of $56,648; partially offset by an increase in working capital requirements of $51,008, consisting of a decrease in accounts payable and accrued liabilities of $26,267 and a decrease in security deposits of $25,035, partially offset by a decrease in prepaid assets and other assets of $294.

Investing Activities

During the six months ended June 30, 2017, $135,033 of cash was transferred to MJRE as part of the Exchange Offer to cover accrued property taxes and security deposits, less prepaid property insurance premiums, that were previously collected from the tenants of the real estate properties divested.

During the six months ended June 30, 2016, we invested $150,000 in a $1,750,000 promissory note secured by the assignment of a mortgage on real estate property located in Miami, Florida. The promissory note paid interest at 12% per annum and provided for cash interest payments on a monthly basis, commencing on July 1, 2016.

Financing Activities

There were no financing activities during the six months ended June 30, 2017 and 2016.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Seasonality

We do not consider our business to be seasonal.

Inflation and Changing Prices

Neither inflation or changing prices for the three and nine months ended September 30, 2016, had a material impact on our operations.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not required for smaller reporting companies.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Co-Chief Executive Officers and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of June 30, 2017. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2017.

Changes in Internal Control Over Financial Reporting

During the interim period ended June 30, 2017, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Securities Exchange Act Rules 13a-15 or 15d-15 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

There are no legal proceedings, which are pending or have been threatened against us or any of our officers, directors or control persons of which management is aware.

Item 1A. Risk Factors

Not required for smaller reporting companies.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

The documents set forth below are filed, incorporated by reference or furnished herewith as indicated.

Index to Exhibits

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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