UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form10-Q

(Mark One)

 

R

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014March 31, 2015

 

or

 

 £

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period fromto

 

Commission file number: 333-167824

 

MJ HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

NEVADA
(State or other jurisdiction of 
incorporation or organization)

20-8235905
(I.R.S. Employer
Identification No.)

 



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

(Address of principal executive offices) (Zip Code)

 

(305) 455-1881455-1800
(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.

 

Large accelerated filer¨

Accelerated filer ¨ 

Non-accelerated filer ¨ 

Smaller reporting company þ

(Do not check if a smaller reporting company)

 

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

 

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.

 

Class

Outstanding as of November 11, 2014May 8, 2015

Common Stock, $0.001

13,878,522

13,902,388


11

 


MJ HOLDINGS, INC.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION



ITEM 1.TABLE OF CONTENTSFINANCIAL STATEMENTS
Page No.
Balance Sheets as of September 30, 2014 (Unaudited) and December 31, 2013PART I – FINANCIAL INFORMATION32
Item 1. Condensed Consolidated Financial Statements of Operations for the Three and Nine Months Ended September 30, 2014 and 2013 (Unaudited)42
Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 (Unaudited)5
Notes to the Unaudited Condensed Consolidated Financial Statements (Unaudited)65
    Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION1511
    Item 3. Quantitative and Qualitative Disclosures about Market Risk
ITEM 4.  CONTROLS AND PROCEDURES20

PART II - OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS2117
    Item 4. Controls and Procedures
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES2117
    PART II - OTHER INFORMATION
ITEM 6.EXHIBITS2118
    Item 1. Legal Proceedings18
SIGNATURESItem 1A. Risk Factors2218
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds18
Item 3. Defaults Upon Senior Securities18
Item 4. Mine Safety Disclosures18
Item 5. Other Information18
Item 6. Exhibits18
SIGNATURES20


2



PART I
FINANCIAL INFORMATION

ITEMItem 1. FINANCIAL STATEMENTSCondensed Consolidated Financial Statements

MJ HOLDINGS, INC.

Condensed Consolidated Balance Sheets

As of September 30, 2014March 31, 2015 (unaudited) and December 31, 20132014

 

 September 30,
2014
 December 31,
2013

March 31,
2015

 

December 31,
2014

 

Assets          
Real estate property:          
Land $551,251  $—   $551,251$551,251
Buildings and improvements  2,419,555   —   2,540,5812,442,188
  2,970,806   —   3,091,8322,993,439
Accumulated depreciation  (7,515)  —   (58,336)(38,173)
Real estate property, net  2,963,291   —   3,033,4962,955,266
Cash  333,547   478 114,823175,792

Deferred leasing costs

178,304202,545

Deferred rent receivable

16,7336,936
Prepaid expenses and other assets  79,410   —   
18,49673,377
Total Assets $3,376,248  $478 $3,361,852$3,413,916
        
Liabilities and Stockholders’ Equity (Deficit)        

Liabilities and Stockholders’ Equity

Current liabilities:        
Note payable - related party $1,800,000  $—   $1,800,000$1,800,000
Security deposits  102,045   —   102,045102,045
Stockholder loans  —     82,362 
Accounts payable and accrued liabilities  67,532   21,338 187,547195,582
Total Liabilities  1,969,577   103,700 2,089,5922,097,627
        
Stockholders’ Equity (Deficit)        
Common stock, par value $0.001, 95,000,000 shares authorized; 13,876,845 and 12,218,205 shares issued and outstanding, respectively  13,877   12,218 

Stockholders’ Equity:

Preferred stock, par value $0.001, 5,000,000 shares authorized; 0 shares issued and outstanding

Common stock, par value $0.001, 95,000,000 shares authorized; 13,886,794 and 13,878,522 shares issued and outstanding, respectively

13,88713,879
Additional paid-in capital  2,578,569   57,190 2,660,1122,640,120
Accumulated deficit  (1,185,775)  (172,630)(1,401,739)(1,337,710)
Total Stockholders’ Equity (Deficit)  1,406,671   (103,222)
Total Liabilities and Stockholders’ Equity (Deficit) $3,376,248  $478 
        
        

Total Stockholders’ Equity

1,272,2601,316,289

Total Liabilities and Stockholders’ Equity

$3,361,852$3,413,916

 

See accompanying notes to unaudited condensed consolidatedfinancial statements

322



MJ HOLDINGS, INC.

Condensed Consolidated Statements of Operations

For the three and ninethree months ended September 30, 2014March 31, 2015 and 20132014

(unaudited)(Unaudited)

 

 

 Three months ended
September 30,
 Nine months ended
September 30,

Three Months Ended
March 31,

 2014 2013 2014 2013

2015

 

2014


Revenues:                    
Rental income $32,347  $—    $36,775  $—       $132,804    $ 
                    
Operating Expenses:                

Operating Expenses:

     
Property expenses  46,494   —     57,175   —    55,703    
General and administrative expenses  614,956   13,677   928,339   21,961  73,508   12,859 
Depreciation expense  5,591   —     7,515   —    20,163    
Total operating expenses  667,041   13,677   993,029   21,961  149,374   12,859 
      
Operating loss  (634,694)  (13,677)  (956,254)  (21,961) (16,570)  (12,859)
                    
Interest expense - related party  (48,563)  (1,505)  (56,891)  (4,035) (47,459)  (1,205)
                      
Loss before income taxes  (683,257)  (15,182)  (1,013,145)  (25,996) (64,029)  (14,064)
                      
Provision for income taxes  —     —     —     —        
                      
Net Loss $(683,257) $(15,182) $(1,013,145) $(25,996)$(64,029) $(14,064)
                      
Basic and diluted net loss per common share:                     
Weighted average shares outstanding  13,856,245   12,218,205   13,316,054   12,218,205  13,885,227   12,260,983 
Net loss per common share $(0.049) $(0.001) $(0.076) $(0.002)$(0.005) $(0.001)

 

 

See accompanying notes to unaudited condensed consolidated financial statements

433


MJ HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

For the three months ended March 31, 2015 and 2014

(unaudited)

Three Months Ended
March 31,


2015

  

2014

 

Cash flow from operating activities:

    

Net loss

$(64,029) $(14,064)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

       

Depreciation

 20,163    

Stock-based compensation

 20,000    

Deferred rental income

 (9,797)   

Amortization of deferred leasing and debt costs

 9,190    

Changes in operating assets and liabilities:

       

Deferred leasing costs

 17,510    

Prepaid and other assets

 52,422    

Accounts payable and accrued liabilities

 (8,035)  6,421 

Net Cash Provided by (Used in) Operating Activities

 37,424   (7,643)
        

Cash flow from investing activities:

       

Acquisition of real estate property

 (98,393)   

Net Cash Used in Investing Activities

 (98,393)   
        

Cash flow from financing activities:

       

Proceeds from the sale of common stock

    895,000 

Proceeds from loans from stockholders

    5,277 

Net Cash Provided by Financing Activities

    900,277 
        

Net increase (decrease) in cash

 (60,969)  892,634 
        

Cash at beginning of period

 175,792   478 

Cash at end of period

$114,823  $893,112 
        

Supplemental disclosure of cash flow information:

       

Cash paid for interest to related party

$45,000  $ 
        

Supplemental schedule of non-cash financing activities:

       

Accounts payable paid by principal stockholders

$  $7,665 

 

MJ HOLDINGS, INC.

Statement of Cash Flows

For the six months ended September 30, 2014 and 2013

(unaudited)

  For the Nine Months Ended
September 30,
  2014 2013
Cash flow from operating activities:        
Net Loss $(1,013,145) $(25,996)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation  7,515   892 
Stock-based compensation  800,923   —   
Changes in operating assets and liabilities:        
Prepaid and other assets  (60,258)  —   
Security deposits  102,045   —   
 Accounts payable and accrued liabilities  70,747   2,165 
Net Cash Used in Operating Activities  (92,173)  (22,939)
         
Cash flow from investing activities:        
Acquisition of real estate property  (2,970,806)  —   
Net Cash Used in Investing Activities  (2,970,806)  —   
         
Cash flow from financing activities:        
Proceeds from the sale of common stock  1,615,000   —   
Proceeds from note payable  1,800,000   —   
Payment for debt issuance costs  (19,152)  —   
Proceeds from loans from stockholders  200   22,866 
Net Cash Provided by Financing Activities  3,396,048   22,866 
         
Net increase in cash  333,069   (73)
         
Cash at beginning of period  478   299 
Cash at end of period $333,547  $226 
         
Supplemental disclosure of cash flow information:        
Cash paid for interest $35,918  $—   
         
Supplemental schedule of non-cash financing activities:        
Accounts payable paid by principal stockholders $7,665  $—   
Stockholder loans and accrued interest converted to common stock $99,450  $—   
         

See accompanying notes to unaudited condensed consolidated financial statements


MJ HOLDINGS, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (unaudited)

September 30, 2014March 31, 2015

 

NOTENote 1 - ORGANIZATION AND BASIS OF PRESENTATIONInterim Financial Statements

Business description

MJ Holdings acquires and leases real estate to licensed marijuana operators, including but not limited to providing complete turnkey growing space and related facilities to licensed marijuana growers and dispensary owners. Additionally, MJ Holdings plans to explore ancillary opportunities in the regulated marijuana industry.

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.

Basis of presentation

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, 2013,2014, has been derived from the Company’s audited consolidated financial statements as of that date.

 

TheseThe unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2014,included herein should be read in conjunction with the audited consolidated financial statements and relatedthe notes thereto as of and for the year ended December 31, 2013,that are included in the Company’s Annual Report on Form 10-K for suchthe year asended December 31, 2014, that was filed with the SEC on March 31, 2014. Operating30, 2015. The results of operations for the three and nine months ended September 30, 2014,March 31, 2015, are not necessarily indicative of the results that mayto be expected for the full year ending December 31, 2014, or any other period.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESyear.

 

The accounting and reporting policies of the Company conform with GAAP. A summary of the more significant policies is set forth below:

Principles of Consolidation 

Theunaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, 5353 Joliet, LLC and MJ Havana, LLC. Intercompany balances and transactions have been eliminated in consolidation.

 

UseNote 2 — Summary of EstimatesSignificant Accounting Policies

 

The preparationsignificant 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, 2014. There were no material changes to our significant accounting policies during the interim period ended March 31, 2015.

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. The new guidance was originally set to become effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period and early adoption was not permitted. However, on April 29, 2015, the FASB issued for public comment a proposed update that would defer the effective date of the new guidance to annual reporting periods beginning after December 15, 2017, but would allow early adoption for annual reporting periods beginning after December 15, 2016. The Company is currently in conformity with GAAPthe process of evaluating the impact of adoption of the new accounting guidance on its consolidated financial statements and has not determined the impact of adoption on its consolidated financial statements.

In August 2014, FASB issued guidance that requires management to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern, and to provide certain disclosures when it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. The new guidance is effective for the annual period ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. Since this guidance primarily addresses certain disclosures to the financial statements, we anticipate no impact on our financial position, results of operations or cash flows from adopting this standard. The Company is currently in the process of evaluating the additional disclosure requirements of the new guidance and has not determined the impact of adoption on its financial statement disclosures.

In April 2015, the FASB issued guidance to simplify the presentation of debt issuance costs. This guidance provides that debt issuance costs related to a recognized liability be presented in the balance sheet as a direct reduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance is effective for fiscal years and interim periods beginning after December 15, 2015 and is required to be applied on a retrospective basis. Early adoption is permitted for financial statements that have not been previously issued. As of March 31, 2015, we had $11,475 in debt issuance costs associated with a $1.8 million note payable that would be reclassified from other assets to a reduction in the carrying amount of the note payable. The adoption of this standard is not expected to have a material impact on our financial position and will not impact our results of operations or cash flows.

55



Note 3Going 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 three months ended March 31, 2015, the Company incurred a net loss of $64,029. The Company had an accumulated deficit of $1,401,739 as of March 31, 2015. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.

The Company’s future success is dependent upon its ability to achieve profitable operations, generate cash from operating activities and obtain additional financing. Although we can provide no assurances, we believe our cash on hand, coupled with revenues generated by rental income and our ability to refinance our equity in the real estate we own, 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.

Note 4Real Estate Property Acquisitions

5353 Joliet Street

In June 2014, through its wholly-owned subsidiary, 5353 Joliet LLC, the Company acquired an owner-occupied 22,144 square foot industrial building situated on 1.4 acres of land in Denver, Colorado for $2,214,000. The acquisition was funded with proceeds from the issuance of a secured promissory note in the amount of $1,800,000 and $414,000 of cash on-hand. The promissory note is held by Chemtov Mortgage Group ("CMG"), an entity wholly-owned by the Company's co-CEO, Shawn Chemtov. CMG has assigned all ownership and security interest granted to it pursuant to the promissory note to 5353 Mortgage Loan, LLC, a single purpose entity created solely for the purpose of this transaction. CMG invested $100,000 of the $1,800,000 of funds used to finance the purchase of the promissory note. CMG acts as the loan servicing entity for the promissory note, administering the note, processing payments from the Company, and transferring all payments to 5353 Mortgage Loan, LLC. CMG charges no administration fees for servicing the promissory note.

The promissory note bears interest at 10% per annum, provides for cash interest payments on a monthly basis, matures on June 1, 2016, and is callable at the option of the Company at any time after June 19, 2015. The Company has guaranteed the promissory note and has pledged its ownership interest in 5353 Joliet LLC, and as such its fee-simple ownership interest in the property as security for the promissory note. The promissory note does not restrict the Company's ability to incur future indebtedness. For the three months ended March 31, 2015, the Company recorded $45,000 of interest expense related to the promissory note.

In September 2014, the Company entered into a lease agreement contingent upon the lessee obtaining city and state licenses and permits for its intended operations at the premises. The contingencies were met by the lessee, and the lease agreement became effective December 1, 2014. The lease agreement is for a term of seven years and a monthly rent obligation of $25,835, subject to annual increases of 2% per year. Insurance and real property taxes shall be paid by the Company and, subsequently, charged to the lessee as additional rent based on the actual expenses incurred - see Note 5 below for additional lease details.

66


503 Havana Street

In September 2014, through its wholly-owned subsidiary, MJ Havana LLC, acquired an owner-occupied 1,250 square foot building situated on 23,625 square feet of land in Aurora, Colorado for $756,000, exclusive of closing costs. The acquisition was funded with cash on-hand. The property is zoned B-2 and has been approved by the city of Aurora as a retail dispensary for recreational marijuana.

Prior to closing on the property acquisition, the Company had pre-negotiated a 10-year lease agreement with a third-party, a licensed marijuana dispensary company serving both medical and adult (21+) customers in Colorado. Once the closing of the property was completed with the seller, the pre-negotiated lease was executed in September 2014 with the third-party. Pursuant to the terms of the lease agreement, the Company agreed to contribute $150,000 to improvements to the property - see Note 5 below for additional lease details. As of March 31, 2015, the Company had paid $121,026 towards the tenant's building improvements.

A summary of real estate property at March 31, 2015, is as follows:

Estimated

 

March 31,

 


Life

 

2015

 


Buildings and improvements

30 years  $2,540,581 

Land

Not depreciated   551,251 

Total real estate property

      3,091,832 

Less: Accumulated depreciation

      (58,336)

Real estate property, net

     $3,033,496 

Note 5Operating Leases

The Company generates revenues by leasing its acquired real estate properties through operating leasing arrangements. A summary of revenues generated from our rental properties for the three months ended March 31, 2015 and 2014, is as follows:

For the three months ended
March 31,

2015

2014

 


Revenues:

    

Rental payments

$111,254  $ 

Reimbursed operating expenses

 11,753    

Deferred rental income

 9,797    

Total revenues from rental properties

$132,804  $ 

503 Havana Street

In September 2014, the Company entered into a non-cancelable operating lease agreement with a marijuana dispensary (the "Lessee") to move into the Company's acquired property located at 503 Havana Street in Aurora, Colorado. The lease agreement is for a term of ten years and a monthly rent obligation of $11,250, subject to annual increases of 3% per year. Insurance and real property taxes shall be paid by the Company and, subsequently, charged to the Lessee as additional rent based on the actual expenses incurred. Pursuant to the terms of the lease agreement, the Company has agreed to contribute $150,000 to improvements to the property.

77


Upon the expiration of the term of ten years, the Lessee has the option to renew the lease agreement for one additional ten-year term, on the same terms as provided in the lease agreement. During the third year of the lease agreement, the Lessee may exercise an option to purchase the Property.

5353 Joliet Street

In September 2014, the Company entered into a lease agreement for its property and warehouse building located at 5353 Joliet Street in Denver, Colorado. The lease agreement is for a term of seven years and a monthly rent obligation of $25,835, subject to annual increases of 2% per year. Insurance and real property taxes shall be paid by the Company and, subsequently, charged to the lessee as additional rent based on the actual expenses incurred.

The lease was contingent upon the lessee, obtaining city and state licenses and permits for its intended operations at the premises, within the dates provided in the lease agreement. The contingencies were met by the lessee, and the lease agreement became effective December 1, 2014.

Upon the expiration of the seven-year term, the lessee has the option to renew the lease for two separate five-year terms, subject to rent reviews and adjustments, as set out in the lease agreement.

Future minimum rental payments, excluding the reimbursement of specified operating expenses, for non-cancelable operating lease agreements are as follows as of March 31, 2015:

2015

$336,325 

2016

 457,890 

2017

 468,449 

2018

 479,261 

2019

 490,332 

Thereafter

 1,368,512 

Total minimal rental payments

$3,600,769 

Note 6Related Party Transactions

In February 2014, in connection with the change in control of the Company, the principal stockholders paid $7,665 of the Company's accounts payable, which was recorded as a capital contribution to the Company.

During the three months ended March 31, 2014, the Company borrowed $5,277 from its principal stockholders.

During the three months ended March 31, 2015, the Company paid $45,000 for interest due pursuant to the $1.8 million promissory note held by CMG, wholly-owned by the Company's co-CEO and shareholder, Shawn Chemtov - see Note 4 above for additional details regarding promissory note held by related party. 

Note 7Stockholder Loans Payable

Stockholder loans payable consisted of three promissory notes with two of its stockholders in which the company may borrow up to $25,000, $20,000, and $10,000, respectively.  These borrowings accrued interest at 5%, 8%, and 8% per annum, respectively.  They were due in part in December 2014 and December 2016.  

In February 2014, in connection with the change of control of the Company, Messrs. Chemtov and Laufer, purchased the Stock holder loans from Messrs. Peraman and Sarfoh.

On August 31, 2014, the outstanding balance of $99,450 for the stockholder loans and the associated accrued interest were converted to 19,890 shares of the Company's common stock at a conversion price of $5.00 per share.

For the three months ended March 31, 2014, the Company accrued interest expense of $1,205 related to the outstanding stockholder loans.

88


Note 8Sale of Unregistered Securities

The Company conducted a private placement of its shares of common stock, whereby we sold 1,615,000 shares of common stock for an aggregate of $1,615,000. We began accepting subscriptions on March 24, 2014 and closed the private placement on April 9, 2014.

For the three months ended March 31, 2014, the Company received proceeds from the private placement of $895,000.

The shares were issued pursuant to an exemption from the registration requirements under Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 506 of Regulation D promulgated thereunder (“Regulation D”) since, among other things, the transactions did not involve a public offering and the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof. Offers and sales were made solely to persons qualifying as “accredited investors” (as such term is defined by Rule 501 of Regulation D).

The securities offered will not be and have not been registered under the Securities Act, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

Note 9Stock Based Compensation

Warrants

A summary of warrants issued, exercised and expired during the three months ended March 31, 2015, is as follows:

Weighted

Avg.

Exercise

Warrants:

Shares

Price

Balance at January 1, 2015

�� 166,665  $5.88 

Issued

      

Exercised

      

Expired

      

Balance at March 31, 2015

  166,665  $5.88 
         

Common Stock

During the three months ended March 31, 2015, the Company issued 8,272 shares of common stock for consulting services and recorded $20,000 of stock-based compensation expense for these consulting services, which has been classified as General and administrative expenses. The stock-based compensation expense was calculated based on the grant date fair value of the common stock shares issued in exchange for the consulting services.

99


Note 10 — Subsequent Events

On May 4, 2015, the Company acquired real estate property located at 1126 South Sheridan Boulevard in Denver, Colorado, for $771,750, exclusive of closing costs. The Company funded the acquisition through the issuance of a promissory note in the amount of $925,000 of which $771,750 was used to purchase the property. The balance of the funds will be used by the Company as working capital. The promissory note bears interest at 10% per annum and matures on June 1. 2017. The promissory note is collateralized with the Company's ownership interest in the newly acquired property and its previously acquired property located at 503 Havana Street in Aurora, Colorado. The newly acquired property is 17,729 square feet with a 3,828 square foot one story free-standing building. The property is zoned B-2 and has been approved by the city of Denver as a retail dispensary for recreational marijuana.

On May 4, 2015, the Company entered into a lease agreement for the newly acquired property with the existing tenant of the property. The lease is for a term of 10 years and a total rent obligation of approximately $1,327,088. Insurance and real property taxes shall be paid by the Company and subsequently charged to the tenant as additional rent, based on the actual expenses incurred. Upon the expiration of the initial lease term of 10 years, the tenant has the option to renew the lease for one additional ten-year term on the same terms as provided in the lease. During the third year of the lease, the tenant may exercise an option to purchase the property, subject to the terms of the lease.

The acquisition of the real estate property, including the new lease agreement, will be accounted for as a business combination. Due to the timing of the acquisition, certain disclosures, including the preliminary allocation of the purchase price, have been omitted from this Quarterly Report on Form 10-Q because the initial accounting for the business combination was incomplete as of the filing date. The Company expects to complete the initial accounting for the acquisition during the interim period ended June 30, 2015, and include the required disclosures for the business combination in the Company's Quarterly Report on Form 10-Q for the second quarter of 2015.

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Item2. 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, 2014 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 acquires and leases real estate to licensed marijuana operators. As of March 31, 2015, we have acquired two real estate properties in Colorado that are leased to state licensed marijuana operators and generating $44,268 in monthly rental income.

Additionally, MJ Holdings plans to explore ancillary opportunities in the regulated marijuana industry.

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.

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As a participant in the regulated marijuana industry, we intend to:

  • Acquire and lease real estate zoned for legalized marijuana operations;
  • Finance real estate acquisitions and facilitate loan programs backed by real estate assets;
  • Offer real estate structures that maximize working capital to legal marijuana operators; and,
  • Position ourselves to operate legal marijuana operations in the U.S. if and when Federal laws reconcile with state laws and marijuana becomes legal under federal law.

We have devised our current business strategy based on certain limitations related to the legal status of marijuana under federal law and the fact that we are a public company and make certain representations and warranties in connection with our public filings with the United States Securities and Exchange Commission. We recognize the significant opportunities in the legalized marijuana space and believe that using our current business model, we can position ourselves to not only develop a significant business along our current path, but be able to leverage our position, relationships and assets to capitalize on additional opportunities in the future, if and when federal law reconciles with state law; resulting in the federal legalization of marijuana.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts reported in the financial statementsof assets, liabilities, revenues and accompanying notes. Significant estimates and assumptions are required in the determination of the fair value of

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financial instrumentsexpenses, and the valuationrelated disclosure of long-livedcontingent assets and indefinite-lived assets. Someliabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of thesewhich form the basis for making judgments can be subjectiveabout the carrying values of assets and complex, and, consequently, actualliabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

 

An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimate that are reasonably likely to occur, could materially impact the consolidated financial statements. We believe that the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of the consolidated financial statements:

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Deferred Leasing Costs

Commissions and other direct costs associated with the acquisition of tenants, or lessees, are capitalized and amortized on a straight-line basis over the terms of the related leases. Costs associated with unsuccessful leasing opportunities are expensed.

Deferred leasing costs charged to property expenses for the three months ended March 31, 2015 and 2014, were $6,731 and $0, respectively. As of March 31, 2015, $178,304 of deferred leasing costs are included on the Balance Sheet as a deferred asset.

Debt Issuance Costs

 

Costs associated with obtaining, closing, and modifying loans and/or debt instruments such as, but not limited to placement agent fees, attorney fees and state documentary fees are capitalized and charged to interest expense over the term of the loan.

 

Debt issuance costs of $19,152 and $0 were capitalized during the nine months ended September 30, 2014 and 2013, respectively. Debt issuance costs charged to interest expense for the ninethree months ended September 30,March 31, 2015 and 2014, and 2013, were $2,759$2,459 and $0, respectively. As of September 30, 2014, $16,393March 31, 2015, $11,475 of debt issuance costs are included on the Balance Sheet within the Prepaid expenses and other assets line item.assets.

Real Estate Property

 

Real estate property is recorded at cost, less accumulated depreciation and amortization. Real estate property, excluding land, is depreciated using the straight-line method over the estimated useful life of the respective assets. Leasehold improvements are amortized using the straight-line method over the shorter of the related lease term or useful life. Maintenance, repairs, and minor improvements are charged to expense as incurred; major renewals and betterments that extend the useful life of the associated asset are capitalized. When real estate property is sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in results of operations for the period.

 

Long –lived AssetsRevenue Recognition

 

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 notBefore revenue can 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 real estate property and intangible assets are considered to be impaired, the impairment to be recognized, equals the amount by which the carrying value of the assets exceeds its fair value. We did not record any impairments of long-lived assets during the nine months ended September 30, 2014.

Revenue Recognition 

The Company must meet four basic criteria before revenue canmust be recognized:met: persuasive evidence of an arrangement exists; the delivery has occurred or services have been rendered; the fee is fixed or determinable; and collectability is reasonably assured.

The Company's revenues are rental income generated by leasing acquired real estate properties to licensed marijuana operators. All leases are classified as operating leases. Rental income is recognized on a straight-line basis over the terms of the leases. Straight-line rent is recognized for all tenants with contractual fixed increases in rent. Deferred rent receivable represents rental revenue recognized on a straight-line basis in excess of billed rents. Reimbursements from tenants for real estate taxes and other recoverable operating expenses are recognized as rental income in the period the applicable costs are incurred. 

 

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Stock-Based Compensation

 

The Company estimates the fair values of share-based payments on the date of grant using a Black-Scholes option pricing model, which requires assumptions for the expected volatility of the share price of our common stock, the expected dividend yield, and a risk-free interest rate over the expected term of the stock-based financial instrument.

 

Since the number of outstanding and free-trading shares of the Company’s common stock is limited and the trading volume is relatively low, we do not have sufficient company specific information regarding the volatility of our share price on which to base an estimate of expected volatility. As a result, we use the average historical volatilities of similar entities within our industry as the expected volatility of our share price.

 

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 remaining term equal to the expected term of the stock-based award.

 

For stock-based financial instruments issued to parties other than employees, we use the contractual term of the financial instruments as the expected term of the stock-based financial instruments.

 

The assumptions used in calculating the fair value of stock-based financial instruments represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.

 

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 carryforwards. 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.

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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. The new guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. 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. The Company is currently in the process of evaluating the impact of adoption of the new accounting guidance on its consolidated financial statements and has not determined the impact of adoption on its financial statements.

In June 2014, FASB issued guidance that eliminates the definition of a development stage entity thereby removing the incremental financial reporting requirements from U.S. GAAP for development stage entities, primarily the presentation of inception to date financial statements. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2014. Early adoption is permitted. The Company elected to adopt the new guidance for development stage entities for the interim period ended June 30, 2014, and accordingly, is no longer presenting the inception-to-date financial information and disclosures formerly required.

NOTE 3 - REAL ESTATE PROPERTY ACQUISITIONS

5353 Joliet Street

In June 2014, through its wholly-owned subsidiary, 5353 Joliet LLC, the Company acquired an owner-occupied 22,144 square foot industrial building situated on 1.4 acres of land in Denver, Colorado for $2,214,000. The acquisition was funded with proceeds from the issuance of a secured promissory note in the amount of $1,800,000 and $414,000 of cash on-hand. The promissory note is held by Chemtov Mortgage Group ("CMG"), an entity wholly-owned by the Company's co-CEO, Shawn Chemtov. CMG derives no financial benefit in connection with the transaction, and serves solely as a pass-through entity.

The promissory note bears interest at 10% per annum, provides for cash interest payments on a monthly basis, matures on June 1, 2016, and is callable at the option of the Company at any time after June 19, 2015. The Company has guaranteed the promissory note and has pledged its ownership interest in 5353 Joliet LLC, and as such its fee-simple ownership interest in the property as security for the promissory note. The promissory note does not restrict the Company's ability to incur future indebtedness.

The Company entered into a short-term lease agreement with the previous property owner for monthly rent of $11,070, excluding contractual payments for real estate taxes and other recoverable operating expenses. The lease expired on September 1, 2014.

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503 Havana Street

In September 2014, through its wholly-owned subsidiary, MJ Havana LLC, acquired an owner-occupied 1,250 square foot building situated on 23,625 square feet of land in Aurora, Colorado for $756,000, exclusive of closing costs. The acquisition was funded with cash on-hand. The property is zoned B-2 and has been approved by the city of Aurora as a retail dispensary for recreational marijuana.

Prior to closing on the property acquisition, the company had pre-negotiated a 10-year lease agreement with a third-party, a licensed marijuana dispensary company serving both medical and adult (21+) customers in Colorado. Once the closing of the property was completed with the seller, the pre-negotiated lease was executed in September 2014 with the third-party - see Note 5 below for additional lease details.

A summary of real estate property at September 30, 2014, is as follows:

  Estimated September 30,
  Life 2014
Buildings 30 years $2,419,555 
Land Not depreciated  551,251 
Total real estate property    2,970,806 
Less: Accumulated depreciation    (7,515)
Real estate property, net   $2,963,291 
       

NOTE 4 - OPERATING LEASES

The Company generates revenues by leasing its acquired real estate properties through operating leasing arrangements. A summary of revenues generated from our rental properties for the three and nine months ended September 30, 2014 and 2013, is as follows:

  Three months ended
September 30,
 Nine months ended
September 30,
  2014 2013 2014 2013
Revenues:                
Rental payments $24,765  $—    $29,193  $—   
Reimbursed operating expenses  7,199   —     7,199   —   
Deferred rent revenue  383   —     383   —   
Total revenues from rental properties $32,347  $—    $36,775  $—   
                 

503 Havana Street

In September 2014, the Company entered into a non-cancelable operating lease agreement with a marijuana dispensary (the "Lessee") to move into the Company's recently acquired property located at 503 Havana Street in Aurora, Colorado. The lease agreement is for a term of ten years and a monthly rent obligation of $11,250, subject to annual increases of 3% per year. Insurance and real property taxes shall be paid by the Company and, subsequently, charged to the Lessee as additional rent based on the actual expenses incurred. Pursuant to the terms of the lease agreement, the Company has agreed to contribute $150,000 to improvements to the property.

Upon the expiration of the term of ten years, the Lessee has the option to renew the lease agreement for one additional ten-year term, on the same terms as provided in the lease agreement. During the third year of the lease agreement, the Lessee may exercise an option to purchase the Property.

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Future minimum rental revenues, excluding the reimbursement of specified operating expenses, for non-cancelable lease agreements are as follows as of September 30, 2014:

2014$33,750
2015 136,013
2016 140,093
2017 144,296
2018 148,625
Thereafter 944,847
Total minimal rental revenues$1,547,624
   

5353 Joliet Street

In September 2014, the Company entered into a lease agreement for its property and warehouse building located at 5353 Joliet Street in Denver, Colorado. The lease agreement is for a term of seven years and a monthly rent obligation of $25,835, subject to annual increases of 2% per year. Insurance and real property taxes shall be paid by the Company and, subsequently, charged to the lessee as additional rent based on the actual expenses incurred.

The lease is contingent upon the lessee, obtaining city and state licenses and permits for its intended operations at the premises, within the dates provided in the lease agreement. Should the lessee fail to procure and provide said licenses to the Company, the lessee shall forfeit its security deposit of $77,500 and either party may terminate the lease agreement in accordance with the terms of the lease.

Upon the expiration of the term of seven years, the lessee has the option to renew the lease for two separate five-year terms, subject to rent reviews and adjustments, as set out in the lease agreement.

NOTE 5 - RELATED PARTY TRANSACTIONS

On February 10, 2014, in connection with the change in control of the Company, the principal stockholders paid $7,665 of the Company's accounts payable, which was recorded as a capital contribution to the Company.

During the nine months ended September 30, 2014, the Company paid $35,918 for interest due pursuant to the promissory note held by CMG, an unaffiliated entity, wholly-owned by the Company's co-CEO, Shawn Chemtov.

During the nine months ended September 30, 2014, the Company borrowed $5,277 from its principal stockholders and repaid $5,077 of the borrowings to its principal shareholders, resulting in $200 of net borrowings from related parties.

See Note 3 above regarding the promissory note held by related party.

NOTE 6 - STOCKHOLDER LOANS PAYABLE

Stockholder loans payable consisted of three promissory notes with two of its stockholders in which the company may borrow up to $25,000, $20,000, and $10,000, respectively.  These borrowings accrued interest at 5%, 8%, and 8% per annum, respectively.  They were due in part in December of 2014 and December of 2016.  The Company paid no interest to the stockholders as of September 30, 2014.

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For the nine months ended September 30, 2014 and 2013, the Company had accrued interest of $16,888 and $13,509, respectively.

On February 10, 2014, in connection with the change of control of the Company, Messrs. Chemtov and Laufer, purchased the Stock holder loans from Messrs. Peraman and Sarfoh.

On August 31, 2014, the outstanding balance of $99,450 for the stockholder loans and the associated accrued interest were converted to 19,890 shares of the Company's common stock at a conversion price of $5.00 per share.

NOTE 7 – SALE OF UNREGISTERED SECURITIES

The Company conducted a private placement of its shares of common stock, whereby we sold 1,615,000 shares of common stock for an aggregate of $1,615,000. We began accepting subscriptions on March 24, 2014 and closed the private placement on April 9, 2014.

For the nine months ended September 30, 2014, the Company received  proceeds from the private placement of $1,615,000.

The shares were issued pursuant to an exemption from the registration requirements under Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 506 of Regulation D promulgated thereunder (“Regulation D”) since, among other things, the transactions did not involve a public offering and the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof. Offers and sales were made solely to persons qualifying as “accredited investors” (as such term is defined by Rule 501 of Regulation D).

The securities offered will not be and have not been registered under the Securities Act, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

NOTE 8 - STOCK-BASED COMPENSATION

Warrants

On May 19, 2014, the Company entered into a consulting services agreement for the generation of qualified leads and referrals  for the Company’s real estate financing products, with a  wholly-owned subsidiary of Medbox, Inc, a leader in dispensing technologies and consulting services in the regulated marijuana industry.

During the term of the Agreement, the Company will  pay to Medbox (i) 50% of any management fee and (ii) 50% of the Net Revenue generated by the Medbox clients. Additionally, during the term of the agreement, Medbox shall receive warrants to purchase 33,000 shares of the Company’s common stock each month until Medbox has been issued an aggregate of 600,000 warrants. The warrants have a five-year term, and an exercise price to be determined upon issuance, equal to the volume weighted average price of the common stock for the thirty days prior to the date of issuance.

The Agreement's initial term is for six months, and renews automatically for successive one month terms. and can be canceled by either party with 5 days written notice.

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The fair values of the warrants granted during the nine months ended September 30, 2014, were determined using the Black-Scholes option pricing model with the following weighted-average assumptions:

Risk-free interest rate:1.68%
Expected term:   5 years
Expected dividend yield:0.00%
Expected volatility:131.56%

For the nine months ended September 30, 2014, the Company recorded $728,423 of stock-based compensation expense related to warrants issued for services, which has been classified as General and administrative expenses.

On May 27, 2014, Medbox exercised 33,333 shares of warrants pursuant to a cashless exercise provision, in which Medbox received 10,825 shares of the Company's common stock based on an exercise price of $6.42 per share.

A summary of warrants issued, exercised and expired during the nine months ended September 30, 2014, is as follows:

     Weighted
     Avg.
     Exercise
Warrants: Shares  Price
Balance at January 1, 2014  —   $— 
Issued  166,665   6.65
Exercised  (33,333)  6.42
Expired  —    — 
Balance at September 30, 2014  133,332  $6.70
        

In October 2014, the agreement with Medbox, Inc. was terminated and no additional warrants after the 33,333 warrants issued in October 2014 will be issued to Medbox, Inc. pursuant to the agreement.

Common Stock

During the nine months ended September 30, 2014, the Company issued 12,925 shares of common stock for consulting services and recorded $72,500 of stock-based compensation expense for these consulting services, which has been classified as General and administrative expenses. The stock-based compensation expense was calculated based on the grant date fair value of the common stock shares issued in exchange for the consulting services.

NOTE 9 - 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 nine months ended September 30, 2014, the Company has incurred a net loss of $1,013,145.  The Company has an accumulated deficit of $1,185,775 since inception. The Company recorded $36,775

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of revenue during the nine months ended September 30, 2014.  These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.

The Company’s future success is dependent upon its ability to achieve profitable operations, generate cash from operating activities and obtain additional financing.  There is no assurance that the Company will be able to generate sufficient cash from operations, sell additional shares of common stock or borrow additional funds from its stockholders.

The Company’s inability to obtain additional cash could have a material adverse effect on its financial position, results of operations, and its ability to continue in existence.  These financial statements do not include any adjustments that might result from the outcome of this uncertainty.

NOTE 10 - INCOME TAXES

As of December 31, 2013, the Company had net operating loss carryovers of approximately $168,000, which expire from 2025 through 2033. Net operating loss carry-forwards for Federal income tax purposes are subject to annual limitations. Due to the change in controlling interest of the Company's outstanding shares in February 2014, the net operating loss carry forwards may be limited as to use in future years.

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.

Based on management's assessment, the Company has established a full valuation allowance to offset the deferred tax assets since it is more likely than not that all of the deferred tax assets will not be realized. As of September 30, 2014, net deferred assets are $0.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

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, 2013 and in our subsequent filings with the SEC, and include, among others, the following: marijuana is illegal under federal law, competition, our business is dependant 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 acquires and leases real estate to licensed marijuana operators, including but not limited to providing complete turnkey growing space and related facilities to licensed marijuana growers and dispensary owners.  Additionally, MJ Holdings plans to explore ancillary opportunities in the regulated marijuana industry.

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.

As a participant in the regulated marijuana industry, we intend to:

·Acquire and lease real estate zoned for legalized marijuana operations;

·Lease and manage turnkey grow, retail and commercial kitchen solutions for licensed marijuana operators;

·Finance real estate acquisitions and facilitate loan programs backed by real estate assets;

·Offer real estate structures that maximize working capital to legal marijuana operators;

·Establish marijuana grow and retail operations in jurisdictions where we are legally allowed to do so, ie. Canada and Uruguay; and,

·Position ourselves to operate legal marijuana operations in the U.S. if and when Federal laws reconcile with state laws and marijuana becomes legal under federal law.

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We have devised our current business strategy based on certain limitations related to the legal status of marijuana under federal law and the fact that we are a public company and make certain representations and warranties in connection with our public filings with the United States Securities and Exchange Commission. We recognize the significant opportunities in the legalized marijuana space and believe that using our current business model, we can position ourselves to not only develop a significant business along our current path, but be able to leverage our position, relationships and assets to capitalize on additional opportunities in the future, if and when federal law reconciles with state law; resulting in the federal legalization of marijuana.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimate that are reasonably likely to occur, could materially impact the consolidated financial statements. We believe that the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of the consolidated financial statements.

Revenue Recognition 

The Company must meet four basic criteria before revenue can be recognized: persuasive evidence of an arrangement exists; the delivery has occurred or services have been rendered; the fee is fixed or determinable; and collectability is reasonably assured. All leases are classified as operating leases. Rental income is recognized on a straight-line basis over the terms of the leases. Straight-line rent is recognized for all tenants with contractual fixed increases in rent. Deferred rent receivable represents rental revenue recognized on a straight-line basis in excess of billed rents. Reimbursements from tenants for real estate taxes and other recoverable operating expenses are recognized as rental income in the period the applicable costs are incurred. 

Stock-Based Compensation 

The Company estimates the fair values of share-based payments on the date of grant using a Black-Scholes option pricing model, which requires assumptions for the expected volatility of the share price of our common stock, the expected dividend yield, and a risk-free interest rate over the expected term of the stock-based financial instrument.

Since the number of outstanding and free-trading shares of the Company’s common stock is limited and the trading volume is relatively low, we do not have sufficient company specific information regarding the volatility of our share price on which to base an estimate of expected volatility. As a result, we use the average historical volatilities of similar entities within our industry as the expected volatility of our share price.

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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 remaining term equal to the expected term of the stock-based award.

For stock-based financial instruments issued to parties other than employees, we use the contractual term of the financial instruments as the expected term of the stock-based financial instruments.

The assumptions used in calculating the fair value of stock-based financial instruments represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.

Results of Operations For the Three and Nine MonthsMonths Ended September 30, 2014,March 31, 2015 Compared to the Three and Nine Months Ended September 30, 2013March 31, 2014

Revenue

 

Revenue for the three and nine months ended September 30, 2014,March 31, 2015, was $32,347 and $36,775, respectively,$132,804 compared with revenue of $0 for the three and nine months ended September 30, 2013.March 31, 2014. Revenue duringfor the three and nine months ended September 30, 2014,March 31, 2015, was generated as a result of paymentsrental income from operating leases for two real estate properties acquired in June 2014 and September 2014.

 

Property expenses consist of those costs associated with acquiring and leasing real estate properties. These expenses include costs for inspections, appraisals, real property taxes, insurance, repairs and maintenance. For the three and nine months ended September 30, 2014, we incurred $46,494 and $57,175, respectively, compared with $0 for the three and nine months ended September 30, 2013. The property expenses for the three and nine months ended September 30, 2014, were the result of costs incurred from the two properties acquired in June 2014 and September 2014 and from costs incurred analyzing potential real estate acquisition opportunities.

Certain property expenses are reimbursable to the Company through our existing leasing arrangements, duringarrangements. During the three and nine months ended September 30, 2014,March 31, 2015, the Company recorded $7,199$11,753 of revenue pursuant to operating lease agreements to offset a portion of the property expenses incurred during the respective periods.

 

Operating Expenses

Property expenses consist of those costs associated with acquiring and leasing real estate properties. These expenses include costs for commissions, appraisals, real property taxes, insurance, repairs and maintenance. For the three months ended March 31, 2015, we incurred property expenses of $55,703 compared with $0 for the three months ended March 31, 2014. The property expenses for the three months ended March 31, 2015, were the result of costs incurred from the two real estate properties acquired in June 2014 and September 2014 and from costs incurred as a result of analyzing potential real estate acquisition opportunities.

General and administrative expenses for the three months ended March 31, 2015, increased by $60,649 to $73,508 compared with general and administrative expenses of $12,859 for the three months ended March 31, 2014. The increase in general and administrative expenses for the three months ended September 30, 2014, increased by $601,279 to $614,956 compared with general and administrative expenses of $13,677 for the three months ended September 30, 2013. For the nine months ended September 30, 2014, general and administrative expenses increased by $906,378 to $928,339 compared with general and administrative expenses of $21,961 for the nine months ended September 30, 2013. The increases in general and administrative expenses wereMarch 31, 2015, was attributed to increases in legalprofessional fees, professionallegal fees, and overhead expenses due to the ramp up of our business during the latter portion of 2014, of which $800,923$20,000 was associated withfor non-cash stock-based compensation for consulting services.

 

1414



Depreciation expense for the three and nine months ended September 30, 2014,March 31, 2015, was $5,591 and $7,515, respectively,$20,163 compared with depreciation expense of $0 for the three and nine months ended September 30, 2013.March 31, 2014. Depreciation expense for the three and nine months ended September 30, 2014,March 31, 2015, was associated with the deprecation of two buildings acquired in real estate purchases completedproperties acquired in June 2014 and September 2014.

 

Other Expenses

17

 

Interest expense for the three months ended September 30, 2014,March 31, 2015, increased by $47,058$46,254 to $48,563$47,459 compared with interest expense of $1,505$1,205 for the three months ended September 30, 2013. Interest expense for the nine months ended September 30, 2014, increased by $52,856 to $56,891 compared with interest expense of $4,035 for the nine months ended September 30, 2013.March 31, 2014. The increasesincrease in interest expense for the three and nine months ended September 30, 2014,March 31, 2015, was primarily the result ofdue to $45,000 and $50,918, respectively, of interest expense incurred on a $1.8 million promissory note from a related party used to fund the acquisition ofa $2.2 million ofreal estate property acquisition in June 2014.

Net Loss

   

We had a net loss of $683,257,$64,029, or a basic and diluted loss per share of $0.049,$0.005, for the three months ended September 30, 2014,March 31, 2015, compared with a net loss of $15,182,$14,064, or a basic and diluted loss per share of $0.001, for the three months ended September 30, 2013. We had a net loss of $1,013,145, or a basic and diluted loss per share of $0.076, for the nine months ended September 30, 2014, compared with a net loss of $25,996, or a basic and diluted loss per share of $0.002, for the nine months ended September 30, 2013.March 31, 2014. The increase in the net loss was primarily due to increases in operating expenses general and administrative expenses, depreciation expense, and interest expense as a result of the implementation ofchange in our business strategy, designedmodel in February 2014 to acquire and lease real estate to licensed marijuana operators, during 2014.operators.

 

Liquidity and Capital Resources

The following table summarizes the cash flows for the three months ended March 31, 2015 and 2014:

For the Three Months Ended
March 31,

2015

 

2014


Cash Flows:

     

Net cash provided by (used in) operating activities

$37,424  $(7,643)

Net cash used in investing activities

  (98,393)   

Net cash provided by financing activities

     900,277 
         

Net increase (decrease) in cash

  (60,969)  892,634 

Cash at beginning of period

  175,792   478 
         

Cash at end of period

 $114,823  $893,112 
         

 

The Company had cash of $333,547$114,823 at September 30, 2014,March 31, 2015, compared with cash of $478$175,792 at December 31, 2013, an increase2014, a decrease of $333,069.$60,969. The increasedecrease in cash forduring the ninethree months ended September 30, 2014,March 31, 2015, was primarily attributed to proceeds$98,393 of $1,800,000 received from a promissory note and proceedscash used for improvements to one of $1,615,000 received from the sale of common stock, offset by the purchase of twoour real estate properties, for $2,970,806, debt issuance costs of $19,152 andpartially offset by cash used inprovided by operating activities of $92,173.$37,424.

1515



Operating Activities

 

AsWe had net cash provided by operating activities of September 30, 2014, we had an accumulated deficit $1,185,775. This was an increase$37,424 for the three months ended March 31, 2015, which consisted of $1,013,145 since December 31, 2013,a decrease of which $800,923 was for$52,422 in prepaid and other assets, non-cash stock compensation expense incurred during 2014.

Operating Activitiescharges of $39,556, and a decrease in deferred leasing costs of $17,510, partially offset by a net loss of $64,029 and a decrease of $8,035 in accounts payable and accrued liabilities.

 

We had net cash used in operating activities of $92,173$7,643 for the ninethree months ended September 30,March 31, 2014, which consisted of a net loss of $1,013,145 and$14,064, partially offset by an increase of $60,258 in prepaid and other assets, partially offset by non-cash charges of $808,438, an increase of $70,747$5,215 in accounts payable and accrued liabilities and receiptan increase in accrued interest on stockholder loans of $102,045 in security deposits associated with new operating leases.$1,206.

 

The net cash used in operating activitiesInvesting Activities

Pursuant to the terms of $92,173the lease agreement for the ninereal estate property located in Aurora, Colorado, the Company agreed to contribute $150,000 to improvements to the property. For the three months ended September 30, 2014, represented an increaseMarch 31, 2015, we incurred $98,393 for building improvements to the property in Aurora, Colorado. As of $69,234, compared with net cash used in operating activitiesMarch 31, 2015, the Company had paid $121,026 of $22,939 for the nine months ended September 30, 2013.$150,0000 towards the improvements to the property.

 

Investing Activities

In June 2014 and September 2014, we acquired real estate properties for $2,970,806 in Denver and Aurora, Colorado.

18

Financing Activities

 

We had $3,396,048$900,277 in net cash provided by financing activities for the ninethree months ended September 30, 2014. This was an increaseMarch 31, 2014, which consisted of $3,373,182 as compared to net cash provided by financing activities of $22,866 for the nine months ended September 30, 2013. The increase in net cash provided by financing activities was primarily due to due to proceeds of $1,800,000 from the issuance of a promissory note and proceeds of $1,615,000$895,000 received from the sale of common stock partially offset by debt issuance costsand proceeds of $19,152 during$5,277 received from loans from the nine months ended September 30, 2014.principal stockholders.

 

Although we can provide no assurances, we believe our cash on hand, coupled with revenues generated by rental income and our ability to refinance our equity in the real estate we own, will provide sufficient liquidity and capital resources to fund our business for the next twelve months. In the event we experience liquidity and capital resources 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 business, results of operations and financial condition.

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 months ended March 31, 20142015, had a material impact on our operations.

191616



Item3. Quantitative and Qualitative Disclosures about Market Risk

ITEM

Not required for smaller reporting companies.

Item 4. CONTROLS AND PROCEDURESControls and Procedures

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our ChiefCo-Chief Executive OfficerOfficers 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 September 30, 2014.March 31, 2015. Based on that evaluation, our Co-Chief Executive Officers and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2014.March 31, 2015.

Changes in Internal Control Over Financial Reporting

 

During the quarter ended September 30, 2014,March 31, 2015, 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.

 

This quarterly report does not include an attestation report of the Company’s registered public accounting firm regarding internal controls over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this quarterly report.

 

20
1717


PART II - OTHER INFORMATION

 

ITEMItem 1. LEGAL PROCEEDINGSLegal 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 2.  UNREGISTERED SALES OF EQUITY SECURITIESItem1A. Risk Factors

 

TheThere have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014. Please refer to the “Risks Factors” section in our Annual Report for a discussion of risks to which our business, financial condition, results of operations and cash flows are subject.

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

During the three months ended March 31, 2015, the Company conducted a private placement of itsissued 8,272 shares of common stock whereby we sold 1,615,000 shares of common stock for an aggregate of $1,615,000. We began accepting subscriptions on March 24, 2014 and closed the private placement on April 9, 2014. Reference is made to the Form 8-K, as filed by the registrant, on April 9, 2014, the contents of which are incorporated hereto. The securities were issued in reliance upon the exemptions from registration provided by Section 4(2) of the Securities Act of 1933, as amended.

On May 27, 2014, the Company issued 10,825 shares of common stock upon the cashless exercise of outstanding warrants. The securities were issued in reliance upon the exemptions from registration provided by Section 4(2) of the Securities Act of 1933, as amended.

On August 31, 2014, the Company issued 19,890 shares of common stock upon the conversion of outstanding stockholder loans and the associated accrued interest in the amount of $99,450 at a conversion price of $5.00 per share. The securities were issued in reliance upon the exemptions from registration provided by Section 4(2) of the Securities Act of 1933, as amended.

During the nine months ended September 30, 2014, the Company issued 12,925 shares of common stockexchange for consulting services. The securities were issued in reliance upon the exemptions from registration provided by Section 4(2) of the Securities Act of 1933, as amended.

 

ITEM 6.  EXHIBITSItem3. Defaults Upon Senior Securities

 

None.

Item4. Mine Safety Disclosures

Not applicable.

Item5. Other Information

None.

Item6. Exhibits

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

 

1818


Index to Exhibits

 

Exhibit No,

Description of Exhibit

31.1*

Rule 13a14(a)/15d-14(a) Certification of co-Chief Executive Officer

31.2*

Rule 13a14(a)/15d-14(a) Certification of Chief Financial Officer

31.3*

Rule 13a14(a)/15d-14(a) Certification of co-Chief Executive Officer

32.1*

Section 1350 Certification of Chief Executive Officer

32.2*

Section 1350 Certification of Chief Financial Officer

32.3*

Section 1350 Certification of Chief Executive Officer

101.INS**

XBRL Instance Document

101.SCH**

XBRL Taxonomy Extension Schema Document

101.CAL**

XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB**

XBRL Taxonomy Extension Label Linkbase Document

101.PRE**

XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF**

XBRL Taxonomy Definition Linkbase Document

 

*

Filed Herewith

**

Furnished herewith (not filed).

211919



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.

 


MJ HOLDINGS, INC.

Date: NovemberMay 14, 20142015

By:

/s/ Adam Laufer

 

Adam Laufer

Co-Chief Executive Officer
            (co-Principal Executive Officer)Officer )


MJ HOLDINGS, INC.

    

Date: May 14, 2015

By:

MJ HOLDINGS, INC.
Date: November 14, 2014By:  

/s/ Shawn Chemtov

 

Shawn Chemtov

Co-Chief Executive Officer and
Chief Financial
Officer (co-Principal

Executive Officer,  Principal Financial
Officer and Principal Accounting Officer)Officer )

  

222020