WASHINGTON, D.C. 20549
Form 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 2019
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
For the transition period from _______________________ to __________________________
Commission File Number 000-53571
CANNABIS SATIVA, INC.
(Exact name of registrant as specified in charter)
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NEVADA
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20-1898270
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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PO Box 1602, Mesquite, NV
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89024
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(Address of principal executive offices)
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(Zip Code)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $0.001
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.
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 past 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 x No ¨
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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 x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (22.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
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.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company x
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Indicate by check mark whether the issuer is a shell company (as defined in rule 12b-2 of the Exchange Act).
Yes ¨ No x
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. ☐
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.
The market value of the voting and non-voting common stock held by non-affiliates was $10,680,898. This amount was calculated based on 17,509,670 shares held by non-affiliates and the closing price on the OTCQB market on April 20, 2020 of $0.61 which approximates the average bid and ask prices of the common shares on that date.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ¨ No ¨
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(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of April 20, 2020, there were 25,653,712 (including 419,475 net amount shares held in escrow that are not considered outstanding for financial reporting purposes) shares of the issuer’s common stock outstanding. On April 20, 2020, there were also 1,073,543 shares of preferred stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).
None.
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CANNABIS SATIVA, INC.
TABLE OF CONTENTS TO ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2019
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FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements reflect the Company’s views with respect to future events based upon information available to it at this time. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from these statements. These uncertainties and other factors include, but are not limited to: the ability of the Company to locate business opportunities for acquisition or participation by the Company; the terms of the Company’s acquisition of or participation in a business opportunity; the operating and financial performance of any business opportunity following its acquisition or participation by the Company and the risk factors described herein under the caption “Risk Factors.” The words “anticipates,” “believes,” “estimates,” “expects,” “plans,” “projects,” “targets” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, changes in assumptions, future events or otherwise.
Part I
Item 1. Description of Business
Company Background
Cannabis Sativa, Inc., formerly named Ultra Sun Corporation, was incorporated under laws of Nevada in November 2005. In 2019, we conducted our operations through our subsidiaries PrestoCorp, Inc. (“PrestoCorp”), a 51% owned Delaware corporation engaged in the telemedicine business, and iBudtender, Inc. (iBudtender”), a 50.1% owned Colorado corporation that is developing an application software program to provide information on the marijuana industry, products, and retailers. Early in 2020, we completed the acquisition of certain assets and established GK Manufacturing and Packaging, Inc., a California corporation that serves as a contract manufacturer of products containing hemp-based CBD. We also own 100% of the following subsidiaries: Wild Earth Naturals, Inc. (“Wild Earth”), a Nevada corporation, Eden Holdings LLC (“Eden”), a Virginia limited liability company, Kubby Patent and Licenses, Limited Liability Company (“KPAL”), a Texas limited liability company and Hi Brands International Inc. (“Hi Brands”), a Nevada corporation. Wild Earth, Eden, KPAL, and Hi Brands are currently inactive. Our business strategy is discussed below.
Our common stock is quoted for trading on the OTCQB Market under the symbol CBDS.
We currently maintain virtual principal executive offices with our staff and contractors located remotely and typically working out of their home offices. Our mailing address is P.O. Box 1602, Mesquite, Nevada 89024. Our telephone number is (702) 763-3123.
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Business Strategy
Heading into 2020, we are focused on continuing to grow our business in three divisions, telemedicine, contract manufacturing, and brand development and marketing of products and services to the cannabidiol (“CBD”) and marijuana industries.
Telemedicine
PrestoCorp (“PrestoDoctor”), offers an online telemedicine platform providing customer access to knowledgeable physicians to obtain a medical marijuana recommendation. PrestoDoctor uses secure video conferencing technology (https://prestodoctor.com) to provide a safe and confidential forum for the Doctor patient interview in accordance with state regulations governing issuance of medical marijuana cards. Appointments through PrestoDoctor's website generally take 10-15 minutes and can be scheduled and completed in the same day. This convenience eliminates the need for patients to travel to a clinic. More than 100,000 users have registered to consult with PrestoDoctor's 15+ licensed physicians across the United States. PrestoDoctor currently offers services in California, Nevada, New York, Missouri, and Oklahoma, and is actively targeting expansion into multiple additional states in the coming months.
Management is currently evaluating opportunities to expand the platform for medical marijuana evaluations into other states and is reviewing other telemedicine applications. The COVID-19 pandemic has been a catalyst for expansion of telemedicine services across the United States, and our existing systems and infrastructure are well suited to providing other similar medical evaluations. The continuing growth of wearable devices and remote monitoring capabilities are further evidence that telemedicine will continue to grow in the coming periods. Growth of the platform to take advantage of these opportunities will require capital for development of new features and capabilities necessary to provide a new service, expansion of personnel and expansion of our contracted physician pool. No assurances can be given that our efforts to expand into new areas and/or provide new services will be successful.
Contract Manufacturing
Early in 2020, we completed the acquisition of certain manufacturing equipment, licenses, and personnel to commence operations as a contract manufacturer of products containing hemp-based CBD. Our 51% owned subsidiary, GK Manufacturing and Packaging, Inc. (“GKMP”) recently signed a lease for a 16,000 square foot facility in Anaheim, California, and is now setting up its manufacturing lines and is commencing operations out of the new facility in May. Previously, GKMP operated out of a 2,400 square foot facility in nearby Placentia, California. The new facility will allow GKMP to attract new and higher volume customers for its contract manufacturing capabilities and is currently working with several larger customers to complete test runs that may lead to new contracts later this year.
Contract manufacturing is a competitive sector, particularly in the CBD and marijuana space. GKMP intends to differentiate its business model by providing significant product formulation capabilities and expertise, and by providing best in class customer service. The on-site
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management team has experience in developing successful proprietary products and in working with customers to produce and package customer specified products that conform exactly to the customers’ expectations.
Capabilities include packaging design, printing, label design, product formulation, mixing, bottling, and logistics. In response to the COVID-19 demand, the Company recently introduced a hand sanitizer product line and will begin offering it to customers immediately. This product is expected to see strong demand until the coronavirus threat is mitigated.
Brand Development and Product Marketing
We have assembled a portfolio of brands, products, intangible assets, and expertise to allow research, development, acquisition and licensing of specialized cannabis and CBD related products, including cannabis and CBD formulas, edibles, topicals, strains, recipes and delivery systems. We also are engaged in marketing and branding within the cannabis and CBD spaces, including our trademark pending "hi" brand and others. We hold a license for a proprietary cannabis lozenge delivery methodology, and a proprietary cannabis trauma cream formula. We received a U.S. patent for a strain of cannabis plant named Ecuadorian Sativa (also referred to as CTS-A or CTA). We also have U.S. patents pending on cannabis-based composition and methods of treating hypertension. In 2019, we were not able to focus on further development of these assets due to limitations on availability of capital and the need to devote our energies to growth in the telemedicine space and efforts to acquire contract manufacturing capabilities.
In 2020, we plan to begin to license our intellectual property, including patents, branding and know-how to companies licensed under, and in full compliance with, state regulations applicable to cannabis businesses. Descriptions of our brand portfolio follow:
Wild Earth Naturals, Inc. Wild Earth Naturals, Inc. is an herbal skin care products formulation and marketing company that targets the growing natural health care products market in the United States and abroad. We intend to develop and manufacture high-quality, herbal based skin care products providing healthier choices to consumers. We use specialized ingredient mixing processes to produce plant glycerite/mineral herbal blends and oil extractions, which we believe will be unique to the natural health products industry. The ingredients for our products are selected to meet a number of criteria, including, but not limited to, safety, potency, purity, stability, bio-availability, and efficacy. We plan to control the quality of our products beginning at the formulation stage and continuing through controlled sourcing of raw ingredients, manufacturing, packaging, and labeling.
Hi Brands International Inc. On February 6, 2015, the Company formed Hi Brands International Inc., a Nevada Corporation and wholly owned subsidiary of the Company ("Hi Brands"). Hi Brands entered into a Purchase, Supply and Joint Venture Agreement (the "Agreement"), with Centuria Natural Foods, Inc. ("Centuria") to develop a supply of proprietary CBD (Cannabidiol) Rich Hemp Oil products, but the agreement was never implemented and no business was ever transacted. As a result, Hi Brands International, Inc. has been inactive for the last several years. Although the Hi Brands business has been inactive, the Company believes that there is value in the name and that it may afford a sound outlet for the Company’s products as we build out our
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product portfolio and as we bring our contract manufacturing capabilities on-line in 2020.
In order to capitalize on the Hi Brands concept, the Company will require capital for a virtual storefront design, online web presence, virtual shopping cart and e-payment capabilities. The concept may also be an attractive base for physical locations, which would then require capital for facilities, physical storefront and interior design, staffing, inventory, and marketing. Until a suitable capital formation plan can be developed and funded, the Hi Brands concept is likely to remain inactive.
Patents and Intangible Assets. The Company holds a U.S. plant patent (PP 27,475) for a strain of cannabis plant named "Ecuadorian Sativa" (also known as CTS-A and CTA). The patent is assigned to our wholly owned subsidiary, Kubby Patent and Licenses Limited Liability Company. The CTA strain has unique energizing and motivating properties rather than creating the lethargy, sleepiness and increased food consumption common from use of other cannabis plant products. The Company believes products derived from Ecuadorian Sativa may be particularly suited to members of the baby boom generation that want to experience the benefits of marijuana use without the incapacitating high common with more psychoactive strains. The aging population has shown a willingness to use marijuana to address aches and pains caused by normal aging but may be unwilling to have their faculties significantly impaired in the process. The Company is currently evaluating Ecuadorian Sativa for further development and expects the evaluation to continue in 2020. The patented strain is also licensed on a non-exclusive basis to Kush, Inc., formerly a subsidiary of the Company that was spun out as a separate entity in 2017. The Company and Kush are working together on plans for further development of products utilizing the patented strain, but it is possible that Kush could become a competitor of ours at some point in the future.
The Company is also pursuing additional patents and proprietary formulations on cannabis-based compositions and methods of treating hypertension and lozenge delivery systems. These proprietary products will be added to the overall product portfolio and branding platform at an appropriate future date.
iBudtender. We have also been developing proprietary software, and an application (the “iBudtender App”) focused on sharing information between cannabis products, patients and businesses. iBudtender's software has been designed to help cannabis patients find cannabis products that are right for them via patient reviews, to provide nutritional information, directions, warnings and information on local availability, and to order products locally for pickup or delivery. The iBudtender business platform for dispensary owners, delivery services owners and manufacturers is designed to increase business as well as promote data sharing in an effort to help patients find the best and most effective products. The development of the iBudtender App in 2019 was slowed by limited availability of growth capital. We intend to monetize this technology through advertisements, business to business sales and additional technology offerings. With changes in the markets and the general downturn in the economy resulting from the COVID-19 pandemic, we are currently evaluating the course for further development of the iBudtender App. While we believe there is still a need for the iBudtender App, as the marijuana market has matured, competition has intensified, and the window of opportunity may be narrowing. Further evaluation will take place in the second quarter of 2020 and a decision will be
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made then on further development of the iBudtender App.
Other Opportunities. In addition to licensing, branding and technology, we have the ability to offer, free of charge to patients, mainstream medical prescription discount cards, for which the Company will receive a small percentage on each prescription refill with the hi Benefits Discount Pharmacy Card. This concept has not been implemented and is likely to be a lower priority than the other opportunities mentioned above.
The Company continues to seek the acquisition of companies, intellectual property and other assets that fit within the company's strategic plan of assembling a portfolio of cannabis industry related businesses that have a high growth potential and are accretive to shareholder value.
Perceived Cannabis Industry Trends
We believe the cannabis industry will be characterized by the following principal trends: an increased emphasis on high quality products; an increased emphasis on scientific validation for products in the market place; more liberal regulation in regard to cannabis, even under the current administration as states' rights continue to emerge; more consolidation, take-over, and buy-out of companies in the retail, wholesale, and supply side channels; more mainstream companies entering the marketplace; and more funded research on the potential long-term health benefits of cannabis as well as its potential curative properties.
Vision
Our vision is to become a highly visible, diversified, international business promoting superior quality branded products and services and offering effective customer service, fair compensation, sound management and a great working environment. Over time, we plan to expand our branding, research and development, intellectual properties and licensing activities to reach markets worldwide covering telemedicine, education (through the iBudtender App or some other framework). In order to achieve this vision, our goal is to develop and/or acquire manufacturing capabilities, intellectual property, and brands which will allow our licensees to provide innovative and effective medicinal cannabis products and cost-effective alternatives for customers seeking quality, affordable natural health products to aid in wellness and appearance. In conducting our day-to-day operations, we will strive to:
• Treat all colleagues and co-workers with respect & fairness.
• Follow a philosophy that says, "Delivering quality and customer satisfaction is our business."
• Develop and enhance the skills of our associates with the intention of providing financially rewarding business opportunities.
Through a long-term commitment to this vision statement, we hope to become known as a company that is committed to its customers, associates, and communities.
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Products
Online Telemedicine. Through PrestoDoctor we provide access to knowledgeable physicians for a safe and confidential way to get a medical marijuana recommendation using secure video conferencing technology. Our online telemedicine generates over 95% of our revenues.
Contract Manufacturing Services. Through GK Manufacturing and Packaging, Inc., we are beginning to provide contract manufacturing capabilities to a wide range of customers for a wide range of products for the hemp based-CBD market sector. We did not generate revenues from contract manufacturing in 2019 but expect this operating division to be revenue and cash flow positive in 2020.
Consumer Products. Through December 31, 2019, the products discussed below in this section are conceptual and have produced no significant revenues. In the remainder of 2020, we expect to begin production on some of these products using our contract manufacturing arm for manufacturing when feasible. Our goal for 2020 is to solidify the branding and product marketing programs for the
Proprietary Cannabis Strain. The Company owns a patented cannabis sativa plant strain known as Ecuadorian Sativa or "CTA". The Company intends to further research the CTA strain and to ultimately monetize this intellectual property through licensing agreements in conjunction with state medical marijuana laws as well as establish business relationships with scientific research organizations to develop agricultural biologic applications based upon specific plant strain research and development methodologies.
Lozenges and Edibles. The Company owns intellectual property (recipes and process/methods) for use in medical marijuana edibles and lozenges. The Company's proprietary lozenge offers rapid relief, unlike other edibles of which may take up to an hour or more to take effect. Based upon preliminary results, our lozenges generally take effect within a period of five to 15 minutes. We believe the rapid acting characteristics of our lozenges will overcome a major issue with cannabis consumption, which has been the need to inhale cannabis in order to receive a rapid response. In addition to the lozenges, we have other forms of edibles under development.
Recover. Recover Deep Penetrating Healing Balm is a fast-acting anti-inflammatory pain reliever for sore muscles, joints, arthritic and back pain. Organic with hemp seed oil, menthol, capsicum, and black pepper.
Trauma Cream. Developed for blended infusion of cannabinoids and THC; Arnica is a primary ingredient for its numbing effect.
Face Garden. An antioxidant, moisturizing cream for the face. The ingredients in this formula include DMAE, Vitamins Ester C, B5, Oils of Evening Primrose and Borage Seed, which are believed to firm the skin and reduce puffiness and wrinkles, while restoring the skin to a natural glow and supple appearance. Hempseed, Neem, and Jojoba Oils are added to lock in moisture.
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Body Garden. A moisturizing body lotion designed to relieve itchy dry skin and protect against sun damage. The ingredients in this formula include Hempseed Oil, Green Tea, and Blue Green Algae. The organic herbs, essential oils, butters, and minerals used in "Body Garden" have been formulated to provide nutrition to the skin which we believe encourages the dermis to remain healthy or return to health.
Lip Garden. An emollient balm containing Vitamin E and Hemp Butter that we believe can assist with healing of the lips while keeping them supple and moist.
Clothing and Merchandise. We offer Wild Earth Naturals and "hi" branded logo men's and women's fashion tee shirts and sweatshirts from American Apparel, as well as caps and coffee mugs through the Company's www.wildearthnaturals.com website. However, as of the date of this filing the website is not operational. We expect that it will be operational again later in 2020.
Cut Cream. Through the acquisition and initiation of operations of GK Manufacturing and Packaging, we acquired a cut cream product formulation that has proven effective at healing the effects of bare knuckle fighting, boxing and MMA fighting. We also recently retained Stitch Duran, a preeminent cut man with a world-wide reputation in the fight industry, to promote the product.
Objectives
Our current strategy is to continue to promote and grow the telemedicine business under our PrestoDoctor brand, while also focusing on the start-up and ramp up of operations in our contract manufacturing business. We also intend to develop and acquire new patents when warranted, as well as developing or acquiring trade secrets, trademarks and other intellectual property that extends our reach in our targeted markets. In addition, we will seek new branding and licensing opportunities for our intellectual property, and we will seek strategic corporate and product acquisitions.
Marketing & Distribution
Market Conditions in the Cannabis Industry. Our target markets are located in states that have legalized the production and use of cannabis. Eleven states plus the District of Columbia have approved measures to legalize cannabis for adult recreational use. Thirty-three states, the District of Columbia and the territories of Guam and Puerto Rico have legalized the use of cannabis for medical use in some form. However, it may take multiple years for a state to establish regulations and for cannabis businesses to begin generating revenue from operations in a given state.
Non-Infused Products and Merchandise. We launched our www.wildearthnaturals.com website in August 2013, employing high quality graphic artists and designers. We intend to use social media, primarily Facebook, to drive traffic to our websites. Our online stores at www.wildearthnaturals.com are not producing revenue at this time, but the website is active and
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ready to process sales orders once the Company rolls out the brand development and product marketing plan for our consumer products lines.
During 2020, we plan to utilize direct business to business sales, internet advertising, social media market, and trade show participation to generate sales leads, orders and to entry into leading retailers and wholesalers throughout the U.S. No assurances can be given that we will be successful in such efforts.
Infused Products. For cannabis infused products, we are developing our customer base through licensing agreements with third parties who are compliant with state cannabis laws in the states in which they conduct business.
We plan to build brand awareness by utilizing a mix of social media, trade shows, education efforts, and direct marketing to targeted businesses.
Geographic Presence. We plan to build brand awareness for our products in states where medical cannabis is legal, and to sell non-infused products throughout the United States.
Competition
Cannabis Industry. While we do not sell cannabis, we expect to license our intellectual property to others in the future to businesses that will sell cannabis in states where medicinal cannabis is legal. Therefore, we look to the participants in the medical cannabis market for information on competition, as such competition will have an effect on our ability to license our branding and other intellectual property.
We believe the competition in the cannabis market will include numerous cannabis product companies that are highly fragmented in terms of geographic market coverage, distribution channels and product categories – with companies taking a state by state approach. We believe that competition is principally based upon price, quality, efficacy of products, branding, marketing, customer service, and trade support. We anticipate that large pharmaceutical companies will eventually begin to more aggressively compete in the cannabis product market. These companies and certain larger entities may have broader product lines and/or larger sales volumes than companies such as ours our those of our licensees. Larger entities entering this market may have significantly greater financial and other resources available to them and possess extensive manufacturing, distribution and marketing capabilities. We anticipate that many of the larger competitors will be able to compete more effectively due to a greater extent of vertical integration. The entry of larger competitors could have a material adverse effect on our results of operations and financial condition.
Skin Care. Our competition includes numerous skin care companies that are highly fragmented in terms of geographic market coverage, distribution channels, and product categories. In addition, large pharmaceutical companies compete with us in the skin care market. These companies and certain large entities have broader product lines and larger sales volumes than us and have greater financial and other resources available to them and possess extensive manufacturing, distribution and marketing capabilities. Among our more prominent competitors
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are: Earthly Body, Burt's Bees, Melaleuca and Clarins, all of which have substantially longer track records and greater financial resources and operating efficiencies than do we. As a company with limited capital resources, we believe we will be at a competitive disadvantage until such time as we develop a broad portfolio of products that are known and accepted in the industry and we are able to demonstrate a history of financial stability. There can be no assurance that we will be able to compete effectively in the market.
Technology. The competition against our information technology platform iBudtender.com and the iBudtender App, both of which we hope to release in 2020, include companies such as Weedmaps, Leafly, MassRoots, and Leafstrain. Competition in the information technology market for cannabis is growing rapidly and many of our competitors have more experience and greater financial resources than do we. As a company with limited capital resources, we may be at a competitive disadvantage in a rapidly changing information technology market.
Raw Materials and Suppliers
Our products are produced using ingredients that we believe to be readily available from several sources. We purchase our raw materials from a number of different vendors. Our apparel and merchandise are procured through Printful.com. While we expect the raw materials we use to be readily available in normal times, the current COVID-19 pandemic has disrupted elements of the supply chain and we cannot determine the effect such disruptions may have on the availability of raw materials in future periods.
Intellectual Property
We hold certain intellectual property (the "IP") consisting of recipes and process/methods to maximize the cannabinoid concentrations to be used to make a medical marijuana ("MMJ") edible or to make a MMJ lozenge. We also hold rights to a proprietary recipe and process/method to maximize the cannabinoid concentrations to be used to make a salve/ointment containing CBD and Arnica Montana.
We also hold the rights of a patent for the CTA strain of cannabis and we hold two patent applications filed with the U.S. Patent and Trademark Office with regard to use of the CTA strain in a lozenge and as a treatment for hypertension. We are continuing to pursue these applications; however, no assurances can be given that the remaining patent applications will result in the issuance of any patents.
We are also pursuing the "hi" mark in several categories filed with the U.S. Patent and Trademark Office. An objection has been filed by Tweed Corporation which wishes to use the mark on apparel. Settlement talks are ongoing. The Company uses (or licenses) the "hi" branding for skin care products, edibles (infused and non-infused), apparel and branded merchandise.
We hold a Federal trademark on the name and stylized branding of "Wild Earth Naturals". We have acquired the following registered U.S. Trademarks: Cannabis*Sativa(R), DISPENSARxY(R), and CannaRx(R). The IP identifiers are Cannabis*Sativa(R), Registration
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Number 4,868,622, DISPENSARxY(R), Registration Number 4,642,830 and CannaRx(R), Registration Number 4,725,687. The Marks are registered in CL 35 under Goods and Services. No assurance can be given that such steps as the company has and will take will provide sufficient protection against potential competitors and we may be unable to successfully assert our intellectual property rights or these rights may be invalidated, circumvented or challenged. Any such invalidity, particularly with respect to our product names, or a successful intellectual property challenge or infringement proceeding against us, could have a material adverse effect on our business.
Effect of Existing or Probable Governmental Regulations on the Business
Currently, our products consist of a telemedicine service and we are establishing contract manufacturing capabilities for products containing Hemp-based CBD. We do not, at this time cultivate, process or sell products derived from cannabis plants or products containing THC. We do hold patents and intellectual property relating to cannabis and cannabis derived products, and our business plan envisions that we may seek to begin selling cannabis or cannabis derived products at some point in the future. Accordingly, while the following discussion on governmental regulation is not directly applicable to the Company today, we may become subject to these regulations in the near future.
Cannabis is currently a Schedule I controlled substance under the Controlled Substances Act (CSA) and is, therefore, illegal under federal law. Even in those states in which the use of cannabis has been legalized pursuant to state law, its use, possession or cultivation remains a violation of federal law. A Schedule I controlled substance is defined as one that has no currently accepted medical use in the United States, a lack of safety for use under medical supervision and a high potential for abuse. The U.S. Department of Justice (the "DOJ") defines Schedule I controlled substances as "the most dangerous drugs of all the drug schedules with potentially severe psychological or physical dependence." If the federal government decides to enforce the CSA, persons that are charged with distributing, possessing with intent to distribute or growing cannabis could be subject to fines and/or terms of imprisonment, the maximum being life imprisonment and a $50 million fine, even though these persons are in compliance with state law.
In light of such conflict between federal laws and state laws regarding cannabis, the previous administration under President Obama had effectively stated that it was not an efficient use of resources to direct federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical cannabis. The new administration under President Trump could decide to strongly enforce the federal laws applicable to cannabis. See Justice Department Memo on Marijuana Enforcement discussed below. Any such change in the federal government's enforcement of current federal laws could cause significant financial damage to us. While we do not currently harvest, distribute or sell cannabis, we may be irreparably harmed by a change in enforcement policies of the federal government.
The Company and our licensed products will also be subject to a number of other federal, state and local laws, rules and regulations. We anticipate that our licensees and vendors will be required to manufacture our products in accordance with the Good Manufacturing Practices
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guidelines and will be subject to regulations relating to employee safety, working conditions, protection of the environment, and other items. The current administration has indicated that it will closely scrutinize the cannabis industry, in particular, recreational marijuana. Changes in laws, rules and regulations or the recall of any product by a regulatory authority, could have a material adverse effect on our business and financial condition.
In addition to cannabis related regulations, our skincare and nutraceutical products are subject to a number of federal, state and local laws, rules and regulations. We are required to manufacture our products in accordance with the Good Manufacturing Practices guidelines and we are also subject to regulations relating to employee safety, working conditions, protection of the environment, and other items. Changes in such laws, rules and regulations or the recall of any product by a regulatory authority, could have a material adverse effect on our business and financial condition.
Justice Department Memo on Marijuana Enforcement
Because of the inconsistencies in federal and state law, on January 4, 2018, the Department of Justice (DOJ) issued a memo on federal marijuana enforcement policy announcing what it deemed to be a return to the rule of law and the rescission of previous guidance documents, including the so called Cole Memorandum. Since the passage of the Controlled Substances Act in 1970, Congress has generally prohibited the cultivation, distribution, and possession of marijuana. In the memorandum, Attorney General Jeff Sessions directs all U.S. Attorneys to enforce the laws enacted by Congress and to follow well-established principles when pursuing prosecutions related to marijuana activities. The DOJ asserts this return to the rule of law is also a return of trust and local control to federal prosecutors who know where and how to deploy Justice Department resources most effectively to reduce violent crime, stem the tide of the drug crisis, and dismantle criminal gangs.
"It is the mission of the Department of Justice to enforce the laws of the United States, and the previous issuance of guidance undermines the rule of law and the ability of our local, state, tribal, and federal law enforcement partners to carry out this mission," said Attorney General Jeff Sessions. "Therefore, today's memo on federal marijuana enforcement simply directs all U.S. Attorneys to use previously established prosecutorial principles that provide them all the necessary tools to disrupt criminal organizations, tackle the growing drug crisis, and thwart violent crime across our country."
We intend to conduct rigorous due diligence to verify the legality of all activities that we engage in and ensure that our activities do not interfere with any of the enforcement priorities of the Department of Justice.
COVID-19
In March 2020, COVID-19 was declared a pandemic by the World Health Organization and the Centers for Disease Control and Prevention. Its rapid spread around the world and throughout the United States prompted many countries, including the United States, to institute restrictions on travel, public gatherings and certain business operations. These restrictions significantly
15
disrupted economic activity in the United States and Worldwide. As of March 31, 2020, the disruption did not materially impact the Company’s financial statements. However, if the severity of the economic disruptions increase as the duration of the COVID-19 pandemic continues, the negative financial impact due to reduced demand could be significantly greater in future periods than in the first quarter.
The effects of the continued outbreak of COVID-19 and related government responses could also include extended disruptions to supply chains and capital markets, reduced labor availability and a prolonged reduction in economic activity. These effects could have a variety of adverse impacts to the Company, including our ability to operate our facilities. As of March 31, 2020, there were no material adverse impacts to the Registrants’ operations due to COVID-19.
In addition, the economic disruptions caused by COVID-19 could also adversely impact the impairment risks for certain long-lived assets, equity method investments and goodwill. Management evaluated these impairment considerations and determined that no such impairments occurred as of December 31, 2019 and through March 31, 2020.
Research and Development
We plan to conduct research, develop products and engage in development activities with an initial focus on the following:
•Consider and research telemedicine platforms and expansion opportunities that can supplement or enhance the PrestoDoctor platform and business operations;
•Identify and research Hemp derived CBD oils and related products to determine quality, availability, and efficacy in order to formulate and manufacture new CBD products;
•Identify and research new strains of cannabis and combinations of cannabis and cannabinoid nutrients that may be candidates for new products;
•Identify and research products, including intellectual property, that will benefit enhance or benefit the cannabis industry, from cultivation to consumers;
•Introduce new herbal ingredients for use in supplements;
•Study the metabolic activities of existing and newly identified ingredients;
•Enhance existing products, as new discoveries in cannabis are made;
•Formulate products to meet diverse regulatory requirements across all of its markets;
•Investigate processes for improving the production of its formulated products; and
•Investigate activities of natural extracts and formulated products in laboratory and clinical settings.
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It is through our internal research and development efforts and our relationships with outside research organizations and health care providers that we believe we will be able to develop high quality products. We plan for our research and development activities to include developing products that are new to the industry, updating existing formulas to keep them current with the latest science, and adapting existing formulas to meet ever-changing regulations in new and existing domestic markets. We will select our ingredients to meet a number of criteria, including, but not limited to, safety, potency, purity, stability, bioavailability, and efficacy. We will require our licensees and vendors to control the quality of our products beginning at the formulation stage and maintain quality control through controlled sourcing of raw ingredients, manufacturing, packaging, and labeling. Going forward, we intend to increase our spending and resources for research and development.
Environmental Laws
We have no known costs, and none are anticipated, from environmental laws, rules and regulations.
Number of Total Employees and Number of Full Time Employees
As of April 20, 2020, we have no employees in Cannabis Sativa, Inc. During the year ended December 31, 2019, the Company had independent contractor arrangements with five officers and directors, and eleven outside service providers. PrestoCorp has five employees, including two officers of PrestoCorp, and GK Manufacturing and Packaging, Inc. has seven employees, including two officers of GK. Our employees are not represented by unions and we consider our relationship with our employees to be good. The Company also has relationships with several independent contractors who provide services to the Company on a regular and on-going basis.
Facilities
During all of 2019, we operated out of leased office and warehouse facilities located at 1646 W. Pioneer Blvd., Suite 120, Mesquite, Nevada. The leased space comprised a total of approximately 900 square feet. The original lease expired, and we renewed on a month to month basis in September of 2019. We terminated the lease in February of 2020 and are currently operating our business virtually from the offices of our Officers and Directors.
Our subsidiary PrestoDoctor leases an office in New York on a month-to-month basis for $2,444 per month. Our subsidiary GK Manufacturing and Packaging Inc. operates out of a 16,000 square foot facility in Anaheim, California. The monthly lease for the office, manufacturing and warehouse space in Anaheim is $9,000 per month plus triple net charges of $2,120 per month or $11,120 per month total. The Anaheim lease term runs from April 1, 2020, through March 31, 2021.
Item 1A. Risk Factors
Not required. However, the Company filed an 8-K on March 30, 2020 to take advantage of an extension of time to file its annual report on Form 10-K for the year ended December 31, 2019
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due to the COVID-19 pandemic. As a condition of the extension of time to file the annual report, the Company agreed to include the following Risk Factor in this Report.
The occurrence of the COVID-19 pandemic may negatively affect our operations depending on the severity and longevity of the pandemic.
The COVID-19 pandemic is currently impacting countries, communities, supply chains, and markets. The global financial markets have also been severely impacted. The response to the pandemic has so far been focused on social distancing, travel bans, and quarantines in an effort to slow the spread of the disease. This may limit or restrict access to customers, facilities, inventory supplies, personnel, and advisors. Government agencies and regulatory bodies are also impacted. All of these impacts are being felt by the Company now and they may have a significant and lasting effect on our businesses and on our efforts to expand our business through acquisitions and similar transactions. The impacts may also affect our ability to comply with regulatory requirements, including making timely filings with the Securities and Exchange Commission. Depending on the longevity and severity of the COVID-19 pandemic, our business, customers, and shareholders may experience significant negative impacts.
Item 1B. Unresolved Staff Comments.
None
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Item 3. Legal Proceedings.
We are not a party to any material legal proceedings, and, to the best of our knowledge, no such legal proceedings have been threatened against us.
Item 4. Mine Safety Disclosures.
Not Applicable.
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our shares of common stock are quoted on the OTCQB by the OTC Markets Group Inc. of the Financial Industry Regulatory Authority, Inc. (“FINRA”) under the symbol “CBDS”. Set forth below are the high and low closing bid prices for our common stock for each quarter of 2018 and 2019. All prices listed herein reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not represent actual transactions.
|
Period
|
High
|
Low
|
|
January 1, 2018 through March 31, 2018
|
$9.74
|
$3.84
|
|
April 1, 2018 through June 30, 2018
|
$5.29
|
$3.00
|
|
July 1, 2018 through September 30, 2018
|
$8.50
|
$1.92
|
|
October 1, 2018 through December 31, 2018
|
$5.89
|
$2.60
|
|
January 1, 2019 through March 31, 2019
|
$4.50
|
$2.41
|
|
April 1, 2019 through June 30, 2019
|
$2.98
|
$1.35
|
|
July 1, 2019 through September 30, 2019
|
$2.21
|
$0.85
|
|
October 1, 2019 through December 31, 2019
|
$1.20
|
$0.45
|
On April 20, 2020, the stock closed at $0.61.
Holders of Record
On April 20, 2020, there were 67 holders of record of our common stock, as reported by the Company’s transfer agent. In computing the number of holders of record, each broker-dealer and clearing corporation holding shares on behalf of its customers is counted as a single stockholder.
No Dividends
No dividends have ever been paid on our securities, and we have no current plans to pay dividends in the foreseeable future.
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Equity Compensation Plan
During 2017, the Company adopted the Cannabis Sativa, Inc. 2017 Stock Plan which authorizes the board of directors to issue up an aggregate of 3,000,000 shares of common stock to allow the Company to compensate employees and consultants from time to time by issuing them shares of Company common stock in return for services provided to the Company rather than paying for the services in cash thereby depleting the cash assets of the Company. Under the plan there were no set issuances of stock to which any party is entitled. Distributions are only allowed pursuant to the discretion of the board of directors if and when it is in the best interest of the Company to make any distribution. As of April 20, 2020, the Company had issued 2,045,280 shares under the 2017 Stock Plan, leaving 954,720 shares available for future issuance under the Plan.
Transfer Agent
Colonial Stock Transfer Co., Inc., 66 Exchange Place, Suite 100, Salt Lake City, Utah 84111, telephone (801) 355-5740, serves as the transfer agent and registrar for our common stock.
Recent Sales of Unregistered Securities
During the year ended December 31, 2019, the Company issued 125,000 shares of restricted common stock for private investment of $50,000. The Company also issued 262,405 shares of preferred stock to one of our officers for compensation and 852,998 shares of common stock to various officers and consultants for compensation. Aggregate compensation paid in stock and for stock payable for officers, directors and consultants totaled $1,813,639 for the year. The Company also had stock payable for compensation at year end totaling $640,685. This amount was paid through issuance of shares in the quarter ended March 31, 2020.
During the year ended December 31, 2018, the Company issued 27,426 shares of preferred stock to one of our officers and 714,557 shares of common stock to various officers and consultants. Aggregate compensation paid in stock and for stock payable for officers, directors and consultants totaled $2,818,663 for the year. The Company also had stock payable for compensation at year end totaling $532,146. This amount was paid through issuance of shares in the quarter ended March 31, 2019.
Special Sales Practice Requirements with Regard to “Penny Stocks”
To protect investors from patterns of fraud and abuse that have occurred in the market for low priced securities commonly referred to as “penny stocks,” the SEC has adopted regulations that generally define a “penny stock” to be any equity security having a market price (as defined) less than $5.00 per share, or an exercise price of less than $5.00 per share, subject to certain exceptions. Our stock is subject to the “penny stock” regulations during periods in which the price is below $5.00 per share. During any such periods, broker-dealers selling our common stock are subject to additional sales practices when they sell our stock to persons other than established clients and “accredited investors.” For transactions covered by these rules, before the transaction is executed, the broker-dealer must make a special customer suitability determination, receive the purchaser’s written consent to the transaction and deliver a risk
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disclosure document relating to the penny stock market. The broker-dealer must also disclose the commission payable to both the broker-dealer and the registered representative taking the order, current quotations for the securities and, if applicable, the fact that the broker-dealer is the sole market maker and the broker-dealer’s presumed control over the market. Monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Such “penny stock” rules may restrict trading in our common stock and may deter broker-dealers from effecting transactions in our common stock.
Item 6. Selected Financial Data
Not Applicable. The Company is a “smaller reporting company” and not subject to the Selected Financial Data requirement of Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements in this Report constitute “forward-looking statements.” Such forward-looking statements involve known and unknown 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 such forward-looking statements. Factors that might cause such a difference include, among others, uncertainties relating to general economic and business conditions; industry trends; changes in demand for our products and services; uncertainties relating to customer plans and commitments and the timing of orders received from customers; announcements or changes in our pricing policies or that of our competitors; unanticipated delays in the development, market acceptance or installation of our products and services; changes in government regulations; availability of management and other key personnel; availability, terms and deployment of capital; relationships with third-party equipment suppliers; and worldwide political stability and economic growth. The words “believe,” “expect,” “anticipate,” “intend” and “plan” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made.
Results of Operations
Fiscal year ended December 31, 2019 compared with fiscal year ended December 31, 2018
Revenue for the fiscal years ended December 31, 2019 and 2018 were $1,159,737 and $505,705, respectively. Cost of revenues for the fiscal years ended December 31, 2019 and 2018 were $462,940 and $209,871, respectively. Gross profit for the fiscal years ended December 31, 2019 and 2018 were $696,797 and $295,834, respectively. The increases for 2019 are a result of the improved business operations of PrestoCorp, our 51% owned subsidiary. Telemedicine is a growth area, especially now with the COVID-19 pandemic, and this growth drove revenues higher in 2019.
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Net loss for the fiscal year ended December 31, 2019 was $4,006,713 compared to net loss of $4,909,769 for the fiscal year ended December 31, 2018. The decrease in the net loss resulted primarily from a significant reduction in professional fees to $547,284 in 2019, compared to $1,304,735 in 2018 and a decrease in general and administrative expenses to $1,427,402 in 2019 compared to $1,965,767 in 2018. These decreases were partially offset by an increase in wages and salaries to $393,310 in 2019 compared to $226,029 in 2018 and an increase in advertising to $195,879 in 2019 compared to $104,018 in 2018. Depreciation and amortization was essentially unchanged on a year over year basis. In 2019, we reduced our reliance on outside professionals and focused primarily on building our PrestoCorp subsidiary while looking for other acquisition candidates to expand our base business. As noted in the description of our business, in 2019 we negotiated the acquisition of certain production equipment and in February 2020, we closed on the acquisition and established a new operating subsidiary to engage in contract manufacturing of products containing hemp based CBD.
Total operating expenses were $4,501,902 for the year ended December 31, 2019 compared to $5,336,005 for the fiscal year ended December 31, 2018. The bulk of the operating expenses for both years were paid using the Company’s common stock and therefore required minimal cash. During 2019 and 2018, the Company impaired its goodwill and intangible assets an aggregate of $1,376,593 and $1,173,000, respectively. Impairment expense is also a non-cash item. Despite the large net loss amounts for both years, because of non-cash transactions, the Company had positive net cash provided by operations in 2019 of $94,648, compared to net cash used in operating activities of $689,876 for 2018.
Fiscal year ended December 31, 2018 compared with fiscal year ended December 31, 2017
Revenue for the fiscal years ended December 31, 2018 and 2017 was $505,705 and $317,985, respectively. Cost of revenues for the fiscal years ended December 31, 2018 and 2017 was $209,871 and $154,451, respectively. Gross profit for the fiscal years ended December 31, 2018 and 2017 was $295,834 and $163,534, respectively. The increase in each of the numbers for 2018 is primarily a result of the increased impact of the business operations of PrestoCorp, our 51% owned subsidiary, on the business operations of the Company.
Net loss for the fiscal year ended December 31, 2018 was $4,909,769 compared to net loss of $7,811,489 for the fiscal year ended December 31, 2017. The decrease resulted primarily from a change in our compensation structure in 2018 for members of management, consultants, board members, and attorneys. In 2017, these persons were compensated primarily with the issuance of set amounts of stock. Compensation expense during 2017 rose with the rise in our stock price resulting in a higher net loss. In 2018, we changed our compensation arrangements with persons being issued stock based upon the value of the stock at the time of issuance rather than a set number of shares.
Total operating expenses were $5,336,005 for the fiscal year ended December 31, 2018 and $8,010,622 for the fiscal year ended December 31, 2017. The bulk of the expenses for both years were paid using the Company’s common stock and therefore required no cash. In 2018, consulting and legal services were incurred in the amount of $2,186,796. In 2017, the large non-cash transaction was also stock issued for services in the amount of $4,729,452. During 2018
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and 2017, the Company impaired its goodwill and intangible assets an aggregate of $1,173,000 and $980,944, respectively. Despite the large net loss amounts for both years, because of non-cash transactions, the net cash used in operating activities was $689,876 for 2018 and $964,661 for 2017. Also, during the year ended December 31, 2018, 332,447 shares were returned due to cancellation of a service contract that was originated in 2017. The value of the shares returned was approximately $991,000 which was recorded as a reduction of the professional fees incurred since the inception of the contract.
Liquidity and Capital Resources
As stated above, our operations generated $94,648 in cash for the year ended December 31, 2019. During the same year, financing activities provided cash of $141,882, consisting of proceeds from sales of restricted stock in the amount of $50,000 and from proceeds from related parties in the amount of $91,882. We ended 2019 with $336,107 in cash on hand.
In the year ended December 31, 2018, our operations used $689,876 in cash. During the same year, financing activities provided cash of $665,295. Cash required during 2018 came from cash proceeds from sales of restricted stock and warrant exercises in the amount of $361,750 and from proceeds from related parties in the amount of $303,545. We ended 2018 with $151,946 in cash on hand.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. We incurred net losses of $3,936,386 and $4,128,346, respectively, for the years ended December 31, 2019 and 2018 and had an accumulated deficit of $74,855,147 as of December 31, 2019. The Company may seek to raise money for working capital purposes through a public offering of its equity capital or through a private placement of equity capital or convertible debt. It will be important for the Company to be successful in its efforts to raise capital in this manner if it is going to be able to further its business plan in an aggressive manner. Raising capital in this manner will cause dilution to current shareholders.
As of April 20, 2020, the Company had cash on hand of approximately $134,000. As a result, the Company has does not have sufficient liquidity to meet the immediate needs of our current operations. Cash represents cash deposits held at financial institutions. Cash is held at major financial institutions and insured by the Federal Deposit Insurance Corporation (FDIC) up to federal insurance limits.
Off Balance Sheet Arrangements
None
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Not Applicable. The Company is a “smaller reporting company.”
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Item 8. Financial Statements
The following financial statements are being filed with this report and are located immediately following the signature page.
Financial Statements, December 31, 2019 and 2018
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets, December 31, 2019 and 2018
Consolidated Statements of Operations for the Years Ended December 31, 2019 and 2018
Consolidated Statements of Changes in Stockholders’ Equity from January 1, 2018 through
December 31, 2019
Consolidated Statements of Cash Flows for the years ended December 31, 2019 and 2018
Notes to the Consolidated Financial Statements
Item 9. Changes in and Disagreements with Accountants on Accounts and Financial Disclosure
None
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Management Report on Internal Control Over Financial Reporting
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Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Under the supervision of and with the participation of our CEO and our CFO and with the oversight of the Board of Directors, our management conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“2013 Framework”).
A system of controls, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
We identified material weaknesses in our internal controls over equity issuances as compensation for services, period end cut-off for recording payables, and communications between accounting personnel and management concerning related party and inter-company transactions.
Based on our evaluation under the framework described above, our management concluded that, due to the material weakness, our internal control over financial reporting was not effective as of December 31, 2019 in accordance with Item 308(a)(3) of Regulation S-K.
Notwithstanding the identified material weaknesses, management has concluded that the consolidated financial statements included in this annual report on Form 10-K fairly present in all material respects the Company’s financial position, results of operations and cash flows at and for the periods presented in accordance with U.S. generally accepted accounting principles (“GAAP”).
Remedial Actions
Management is committed to maintaining a strong internal control environment. We plan to address the material weaknesses identified by adding additional accounting personnel and
25
functions, and by designing additional controls over the documentation and application of technical accounting guidance to our business. We are also reviewing our period end cut-off procedures and reconciliation procedures to strengthen our controls in these areas, and we are focused on improving our communications to deliver information where and when needed.
Management believes that the remediation efforts to be undertaken will effectively address the material weaknesses. As we continue to evaluate and work to improve our internal control over financial reporting, management may determine to take additional measures to address control deficiencies or determine to modify the remediation plan described above. We cannot assure you, however, when we will remediate such weaknesses, nor can we be certain of whether additional actions will be required or the costs of any such actions.
Changes in Internal Controls
Other than the identification and assessment of the material weaknesses described above, there was no change in our internal control over financial reporting during the year ended December 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Directors and Executive Officers
The following table indicates the name, age, term of office and position held by each of our executive officers and directors. The term of office for each officer position is for one year or until his or her successor is duly elected and qualified by the board of directors. The term of office for a director is for one year or until his or her successor is duly elected and qualified by the stockholders.
|
Name
|
Age
|
Incumbency
|
Positions Held
|
|
Catherine Carroll
|
79
|
2014
|
Treasurer, Director
|
|
Brad E. Herr
|
65
|
2020
|
CFO, Director
|
|
Trevor Reed
|
56
|
2016
|
Director
|
|
Robert N. Tankson III
|
33
|
2020
|
Director
|
|
David Tobias
|
69
|
2014
|
CEO, Secretary and Director
|
Certain biographical information with respect to our executive officers and directors.
David Tobias. Mr. Tobias has served as President of Wild Earth Naturals, Inc. since May, 2013. He also served as the President of Hemp, Inc. from August 2011 to January 9, 2014. Prior to
26
that, from October 2009 until May 2011, Mr. Tobias held the position of Vice President at Medical Marijuana Inc. where he was instrumental in bringing forward and culminating the merger between CannaBank and Medical Marijuana, Inc. He was earlier Sales Manager for Tulsa custom builder Xcite Homes, from October 2008 to August 2009. Among other qualifications, Mr. Tobias brings to the Board executive leadership experience, including his service as a president of a public company, along with extensive entrepreneurial experience. Mr. Tobias also has a keen sense of the social, political, and economic environment in which the company operates. On January 1, 2019, Mr. Tobias was appointed CEO as a result of the resignation of Mr. Gravel.
Catherine Carroll. Ms. Carroll has been self-employed since 1984. Ms. Carroll brings an extensive background in accounting, tax preparation, IRS audits, and tax appeals to the company. The Board believes that her insights gained from teaching basic tax preparation classes for 15 years, being an expert witness in tax court; along with her “Life Time Limited Services” teacher’s credential in accounting at Delta College in Stockton, CA for 6 years brings the company a valuable perspective. Ms. Carroll had been serving as the CFO, Director and as the Treasurer of the Company since July of 2013. Effective January 30, 2017, she no longer serves as the Company’s CFO and will focus her efforts on her positions as Treasurer and Director and keeping the books of the Company.
Trevor Reed. Mr. Reed has experience as a contractor, builder and cannabis producer. Mr. Reed started his first company 1989, a hardwood flooring company in Santa Fe, New Mexico. That experience led 15-year career as a custom builder of spec homes in New Mexico. Mr. Reed also engaged in small scale land development and commercial construction in New Mexico. In 2008, Trevor moved to Bend, Oregon to be closer to family. During his time in Oregon, Mr. Reed began to learn about the cannabis business and started growing cannabis. Mr. Reed then returned to New Mexico where he became one of the twenty-five licensed producers of cannabis in the State of New Mexico. Mr. Reed’s curiosity and tenacity have led him to be the number one cannabis producer in the State of New Mexico for three years in a row. Mr. Reed has also consulted with State regulatory authorities regarding the development of their state cannabis programs. Under Mr. Reed’s direction Natural Rx in New Mexico was the first dispensary to become a United Food and Commercial Workers International Union (UFCW) cannabis division member company in 2014. In 2015, Mr. Reed (with partners) established several cannabis dispensaries and cannabis farms in the State of Oregon.
Brad Herr. Mr. Herr is a Principal of Nexit Opportunities LLC, a financial consulting firm, and also serves as CFO for MJ Harvest, Inc., a publicly traded company providing agricultural and horticultural tools and supplies to the marijuana and hemp industries. Brad graduated from the University of Montana with a Bachelor of Science Degree in Business Accounting in 1977 and a Juris Doctorate in 1983. In 2005, Mr. Herr received an MBA from Gonzaga University.
Brad practiced law for 13 years focusing primarily on business representation and securities law. In 1996, Brad left the practice of law to pursue a career in business. Brad participated as legal counsel or principal in private and public offerings raising more than $75 million over his career.
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Brad has served in a number of increasingly responsible management positions over his career. Brad was Director of Finance, Vice-President of Business Development and later President of AC Data Systems, Inc., in Post Falls, Idaho. AC Data is a privately held manufacturing business engaged in the design, manufacture and sale of surge suppression products marketed primarily to the telecommunications industry. In 2006, Brad left AC Data to join Command Center, Inc., a publicly traded temporary labor business as Chief Financial Officer. Command Center operated 80 offices in 20 states with annual revenues of nearly $100 million. In 2009, Brad joined Echelon LLC as Chief Financial Officer and was promoted to President of Echelon in May of 2010. Echelon was a tribal entity operated under the auspices of the Coeur d’Alene Tribe in Northern Idaho. Echelon manufactured fuel tanks for the US Government and designed and manufactured a line of portable and expandable shipping containers to serve as military facilities including laboratories, field hospitals, and data centers. In 2010, Brad joined Spur Industries, a metals manufacturing firm with a proprietary bonding system for dissimilar metals.
Brad brings a diverse business development, accounting and legal background to his current positions.
Robert Tankson. Mr. Tankson worked for Google from 2011 through 2012. After leaving Google in 2012, to pursue his passion for business finance and technology, Rob saw an opportunity in the cannabis space to develop a telemedicine platform. This led to the cofounding of PrestoCorp. The PrestoCorp platform, known as PrestoDoctor, is an online medical cannabis evaluation service that connects patients with cannabis friendly doctors in California, Nevada, New York, Oklahoma and Missouri, with more states in the pipeline. As an executive of PrestoCrop, Rob directed the search for a business partner and ultimately the acquisition of 51% of PrestoCorp by Cannabis Sativa, Inc., in August 2017. Rob continues as an executive of PrestoCorp and is now helping to direct the rapid expansion of the PrestoDoctor platform in the rapidly changing world during and after the Covid-19 pandemic.
The following is a brief description of the specific experience and qualifications, attributes or skills of each director that led to the conclusion that such person should serve as a director of the Company.
Mr. David Tobias’ knowledge regarding the business of Wild Earth and the implementation of its business plan, provides a critical link between management and the board, enabling the board to provide its oversight function with the benefit of management’s perspective of the business.
Ms. Carroll’s knowledge regarding the history, operations and financial condition of Wild Earth provides a critical link between management and the board, enabling the board to provide its oversight function with the benefit of management’s perspective of the business.
Mr. Reed’s knowledge of the cannabis industry and his work with state regulators in connection with cannabis legislation brings valuable insight regarding the emerging cannabis industry and regulation to the board of directors.
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Mr. Herr’s experience as an attorney and CPA along with his extensive experience advising boards of directors of public and private companies will assist the board in evaluating opportunities, following best corporate governance practices, and providing oversight to the officers of the company and its subsidiaries as they execute the strategic business plan.
Mr. Tankson’s experience in the telemedicine space and his position as an executive of PrestoCorp will provide the Board with insights into the company’s attempts to grow the telemedicine business as telemedicine becomes an ever more important aspect of life after the COVID-19 pandemic abates.
Family Relationships
There are no family relationships between any of our officers and directors.
Term of Office
The term of office of each director is one year and until his or her successor is elected at the annual stockholders' meeting and is qualified, subject to removal by the stockholders. The term of office for each officer is for one year and until his or her successor is elected at the annual meeting of the board of directors and is qualified, subject to removal by the board of directors. David Tobias was appointed President of the Company on March 29, 2016, and CEO of the Company on January 9, 2019. Cathy Carroll joined the Board in 2013 and also serves as Treasurer of the Company. Trevor Reed joined the Board in 2017. Brad E. Herr was appointed CFO and Director on January 2, 2020. Robert Tankson joined the Board on January 31, 2020.
Directors during 2019 also included Stephen Downing and Deborah Goldsberry, both of whom resigned during the year.
Board of Directors
Our board of directors consists of five persons. One director, Trevor Reed, is "independent" within the meaning of Rule 5605(a)(3) of the NASDAQ Marketplace. The four that are not independent are officers of the Company or a subsidiary.
Our board of directors designated an audit committee to be comprised of two independent directors. At this time, the Company only has one independent director, Trevor Reed. The board also does not have an independent "financial expert" to serve on the audit committee. As a result, the Company is not able to designate an audit committee and the function of the audit committee is currently being performed by the entire Board.
The board of directors has designated a compensation committee comprised of two independent directors. At this time, the Company only has one independent director, Trevor Reed. As a result, the Company is not able to designate a compensation committee and the function of the compensation committee is currently being performed by the entire Board.
29
The Company does not have a standing nominating committee and the Company's Board of Directors performs the functions that would customarily be performed by a nominating committee. The Board of Directors does not believe a separate nominating committee is required at this time due to the limited resources of the Company. The Board of Directors has not established policies with regard to the consideration of director candidates recommended by security holders or the minimum qualifications of such candidates.
Director Meetings
Generally, the Company’s Board of Directors meetings were every two weeks during 2018 and 2019. At almost every meeting every director was in attendance. In 2020, meetings will be held at least once per month and more often if needed. Actions may also be taken without formal meeting by consent signed by each of the directors.
Communications with Directors
Stockholders may communicate with the Board of Directors by sending written communications addressed to the Board of Directors, or any individual director, to: Cannabis Sativa, Inc., Attention: Corporate Secretary, PO Box 1602, Mesquite, NV 89024. All communications will be compiled by the corporate secretary and forwarded to the Board of Directors or any individual director, as appropriate. In order to facilitate a response to any such communication, the Company’s Board of Directors suggests, but does not require, that any such submission include the name and contact information of the shareholder submitting the communication.
30
Code of Ethics
We have not adopted a Code of Ethics that applies to our executive officers, including our principal executive, financial and accounting officers. We do not believe the adoption of a code of ethics at this time would provide any meaningful additional protection to the Company because we have only four executive officers and our business operations are not complex.
During the past ten years none of our directors, executive officers, promoters, or control persons was:
1.the subject of any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
2.convicted in a criminal proceeding or is subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
3.subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
4.found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own more than 10 percent of a registered class of our equity securities to file reports of securities ownership and changes in such ownership with the SEC. Officers, directors, and greater than ten percent shareholders also are required by rules promulgated by the SEC to furnish us with copies of all Section 16(a) reports they file. Based solely on a review of the copies of such reports furnished to us, we believe that one of our directors needs to file a Form 3.
Item 11. Executive Compensation
The following table sets forth certain information regarding the annual compensation paid to our principal executive officer and principal financial officer in all capacities for the fiscal years ended December 31, 2019 and 2018. No other person served as an executive officer of the Company or received total annual compensation from the Company in excess of $100,000 other than Mr. Gravel, Mr. Tobias, Ms. Carroll, and Mr. Lundbom as set forth in the table.
31
Summary Compensation Table
|
Name and Position
|
Year
|
Salary ($)
|
Stock Awards
|
Total ($)
|
|
|
2018
|
$--
|
$152,564
|
$152,564
|
|
Mike Gravel, CEO (1)
|
2019
|
$--
|
$ --
|
$ --
|
|
|
2018
|
$--
|
$273,076
|
$273,076
|
|
David Tobias, President and Secretary
|
2019
|
$--
|
$428,572
|
$428,572
|
|
|
2018
|
$--
|
$111,111
|
$111,111
|
|
Catherine Carroll, CFO and Treasurer (2)
|
2019
|
$--
|
$111,112
|
$111,112
|
|
|
2018
|
$--
|
$344,337
|
$344,337
|
|
Donald J. Lundbom, CFO, CAO ( 3)
|
2019
|
$--
|
$343,332
|
$343,332
|
1.Mr. Gravel resigned his position as Chief Executive Officer on December 31, 2018.
2.Catherine Carroll serves as Treasurer and Director of the Company and also keep the books of the Company.
3.Mr. Lundbom served as Chief Financial Officer and Chief Accounting Officer through December 31, 2019. Mr. Lundbom resigned his positions effective December 31, 2019.
We do not have any retirement, pension or profit-sharing plans covering our officers or directors, and we are not contemplating implementing any such plans at this time.
Director Compensation
Our directors are issued shares of common stock quarterly for their service on the board of directors. During 2018 and 2019, the Directors were paid $10,000 and the Chairman was paid $12,500 each quarter, payable in shares of common stock of the Company. On January 1, 2020, the compensation for directors, including the Chairman of the Board, was changed to $5,000 of shares quarterly.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth as of April 20, 2020, the number of shares of our common stock, par value $0.001, owned of record or beneficially by each person known to be the beneficial owner of 5% or more of our issued and outstanding shares of common stock, and by each of our officers and directors, and by all officers and directors as a group. On such date, there were 24,710,631 shares of our common stock issued and outstanding. As of such date, we had 1,254,012 shares of preferred stock issued and outstanding that are convertible into shares of common stock on a share for share basis. For purposes of the ownership table, the Preferred Shares are considered equivalent to the Common Shares are included on an “as if” converted basis. Total shares outstanding at April 20, 2020 on an “as if” converted basis would be 26,727,255. Share references in the Table use “C” for Common and “P” for Preferred.
32
Unless indicated otherwise, the address for any shareholder is the same as the address of the Registrant.
SHARE OWNERSHIP
|
Name and Address of Beneficial Owner
|
Amount of Direct Ownership
|
Amount of Indirect Ownership
|
Total Beneficial Ownership
|
Percentage
|
|
Principal Stockholders
|
Common
|
Preferred
|
Common
|
Preferred
|
|
Sadia Barrameda (1)
|
661,046
|
-
|
2,760,771
|
151,884
|
3,573,701
|
13.4 %
|
|
New Compendium Corp. (2)
|
2,760,771
|
151,884
|
661,046
|
-
|
3,573,701
|
13.4 %
|
|
David Tobias
|
3,431,837
|
785,320
|
-
|
-
|
4,217,157
|
15.8 %
|
|
|
|
|
|
|
|
|
|
Officers and Directors
|
|
|
|
|
|
|
|
David Tobias
|
3,431,837
|
785,320
|
-
|
-
|
4,217,157
|
15.8 %
|
|
Catherine Carroll
|
458,246
|
-
|
-
|
-
|
458,246
|
1.7 %
|
|
Brad E. Herr
|
248,695
|
-
|
-
|
-
|
248,695
|
0.9 %
|
|
Trevor Reed
|
105,172
|
-
|
-
|
-
|
105,172
|
0.4 %
|
|
Robert Tankson
|
181,451
|
-
|
-
|
-
|
181,451
|
0.7 %
|
|
Deborah Goldsberry
|
7,770
|
-
|
-
|
-
|
7,770
|
*
|
|
Mike Gravel
|
23,148
|
-
|
-
|
-
|
23,148
|
0.1 %
|
|
Donald J. Lundbom
|
402,245
|
-
|
-
|
-
|
402,245
|
1.5 %
|
|
All Officers and Directors as a Group
|
4,858,564
|
785,320
|
-
|
-
|
5,643,884
|
21.1 %
|
(1) Ms. Barrameda is deemed to be the beneficial owner of the 2,760,771 Common shares and 151,884 Preferred shares owned by New Compendium Corporation as a result of her status as an officer, director and significant shareholder of New Compendium. Ms. Barrameda’s address is P.O. Box 1363, Discovery Bay, CA 94505.
(2) New Compendium Corp. is deemed the beneficial owner of 661,046 Common shares owned by Sadia Barrameda. Ms. Barrameda is an affiliate of New Compendium Corp. New Comendium’s address is P.O. Box 1363, Discovery Bay, CA 94505.
(3) Ms. Goldsberry, Mr. Gravel and Mr. Lundblom resigned between December 31, 2018 and December 31, 2019 and are no longer officers or directors of the Company.
* Less than 1%.
Item 13. Certain Relationships and Related Transactions, and Director Independence
During the year ended December 31, 2019 the Company received additional short-term advances from related parties and officers of the Company to cover operating expenses. As of December 31, 2019, net advances to the Company were $1,018,520. The Company has imputed interest on these sums at rates between 5% and 8% per annum and has recorded interest expense related to these balances in the amount of $49,608 during 2019.
33
Approval of Related Party Transactions
Related party transactions are reviewed and approved or denied by the board of directors of the Company. If the related party to a transaction is a member of the board of directors, the transaction must be approved by a majority of the board that does not include the related party.
Item 14. Principal Accounting Fees and Services
The following table presents aggregate fees that were billed or expected to be billed for the fiscal years ended December 31, 2019, and 2018, for professional services rendered by Decoria Maichel & Teague, P.S. and Hall & Company, Inc.
|
|
Hall &Co
2018
|
Decoria Maichel
& Teague, P.S.
2019
|
|
Audit Fees
|
$ 73,500
|
$ 61,000
|
|
Audit-Related Fees
|
$ 10,000
|
-
|
|
Tax Fees
|
-
|
-
|
|
Other Fees
|
-
|
-
|
|
Total
|
$ 83,500
|
$ 61,000
|
“Audit Fees” represents fees for professional services provided in connection with the audit of our annual financial statements, review of financial statements included in our quarterly reports and related services normally provided in connection with statutory and regulatory filings and engagements and consents.
“Audit-Related Fees” represent fees for professional services provided in connection with the audit of the financial statements of Presto Corp.
“Tax Fees” consists of fees for professional services rendered by our principal accountants for tax compliance, tax advice and tax planning.
“Other Fees” consists of fees for products and services provided by our principal accountants, other than the services reported under “Audit Fees,” “Audit-Related Fees,” or “Tax Fees” above.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
It is the policy of the Company for all work performed by our principal accountant to be approved in advance by our audit committee. Currently the audit committee does not have the requisite number of independent Board Members. Accordingly, the functions of the audit committee are now being performed by the Full Board. All of the services described above in this Item 14 were approved in advance by our Board of Directors.
34
Item 15. Exhibits, Financial Statement Schedules.
The following documents are included as exhibits to this report.
(a) Exhibits
|
Exhibit
Number
|
|
SEC Reference Number
|
|
Title of Document
|
|
Location
|
|
|
|
|
|
|
|
|
|
2.1
|
|
2
|
|
Agreement and Plan of Reorganization among Ultra Sun Corporation, Ultra Merger Corp. and Wild Earth Naturals, Inc., dated as of July 12, 2013*
|
|
Incorporated by
Reference(1)
|
|
2.2
|
|
2
|
|
Articles of Merger among Ultra Merger Corp. and Wild Earth Naturals dated as of July 12, 2013
|
|
Incorporated by Reference(1)
|
|
2.3
|
|
2
|
|
Plan of Merger among Ultra Merger Corp. and Wild Earth Naturals dated as of July 12, 2013
|
|
Incorporated by Reference(1)
|
|
3.1
|
|
3
|
|
Articles of Incorporation
|
|
Incorporated by Reference(2)
|
|
3.2
|
|
3
|
|
Bylaws
|
|
Incorporated by Reference(2)
|
|
10.1
|
|
10
|
|
Consulting Agreement dated July 12, 2013 between Ultra Sun Corporation and Neil Blosch
|
|
Incorporated by Reference(1)
|
|
10.2
|
|
10
|
|
Form of Convertible Promissory Notes dated as of April 22, 2013 and Schedule of Notes Beneficially Owned by Officers, Directors and Principal Stockholders as of July 15, 2013
|
|
Incorporated by
Reference(1)
|
|
10.3
|
|
10
|
|
Offer for Purchase and Sale of Business and Assets Between LST Utah, LLC and the Registrant dated August 23, 2013 and related agreements
|
|
Incorporated by
Reference(3)
|
|
10.4
|
|
10
|
|
Noncompetition Agreement among the Registrant, David Tobias and LST Utah, LLC dated as of September 27, 2013.
|
|
Incorporated by
Reference(3)
|
|
Exhibit
Number
|
|
SEC Reference Number
|
|
Title of Document
|
|
Location
|
|
31.1
|
|
31
|
|
Section 302 Certification of Chief Executive Officer
|
|
This Filing
|
|
31.2
|
|
31
|
|
Section 302 Certification of Chief Financial Officer
|
|
This Filing
|
|
32.1
|
|
32
|
|
Section 1350 Certification of Chief Executive Officer
|
|
This Filing
|
|
32.2
|
|
32
|
|
Section 1350 Certification of Chief Financial Officer
|
|
This Filing
|
|
101.INS(4)
|
|
|
|
XBRL Instance Document
|
|
|
|
101.SCH(4)
|
|
|
|
XBRL Taxonomy Extension Schema
|
|
|
|
101.CAL(4)
|
|
|
|
XBRL Taxonomy Extension Calculation Linkbase
|
|
|
|
101.DEF(4)
|
|
|
|
XBRL Taxonomy Extension Definition Linkbase
|
|
|
|
101.LAB(4)
|
|
|
|
XBRL Taxonomy Extension Label Linkbase
|
|
|
|
101.PRE(4)
|
|
|
|
XBRL Taxonomy Extension Presentation Linkbase
|
|
|
35
* The exhibits and schedules to the Agreement and Plan of Reorganization are not included in the foregoing exhibit. The Registrant undertakes to furnish the Commission with supplemental copies of any omitted items on request.
(1) Incorporated by reference to the Company’s current report on Form 8-K report filed July 18, 2013.
(2) Incorporated by reference to Exhibits 3(i) and 3(ii) of the Company’ s registration statement on Form 10-12G, filed with the SEC on January 28, 2009.
(3) Incorporated by reference to the Company’s current report on Form 8-K filed October 25, 2013.
(4) XBRL information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, and is not subject to liability under those sections, is not part of any registration statement or prospectus to which it relates and is not incorporated or deemed to be incorporated by reference into any registration statement, prospectus or other document. These files will be added by amendment.
[SIGNATURES ON NEXT PAGE]
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
|
Cannabis Sativa, Inc.
|
|
|
(Registrant)
|
|
|
|
|
|
Dated: May 14, 2020
|
By: /s/ David Tobias
|
|
|
David Tobias
|
|
|
Chief Executive Officer and Director
|
|
|
(Principal Executive Officer)
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
|
/s/ David Tobias
|
|
Dated: May 14, 2020
|
David Tobias
|
|
|
Chief Executive Officer and Director
|
|
|
(Principal Executive Officer)
|
|
|
|
|
|
/s/ Brad E. Herr
|
|
Dated: May 14, 2020
|
Brad E. Herr
|
|
|
Chief Financial Officer and Director
|
|
|
(Principal Financial Officer)
|
|
|
(Principal Accounting Officer)
|
|
|
|
|
|
/s/ Catherine Carroll
|
|
Dated: May 14, 2020
|
Catherine Carroll
|
|
|
Director
|
|
|
|
|
|
/s/ Trevor Reed
|
|
Dated: May 14, 2020
|
Trevor Reed
|
|
|
Director
|
|
|
|
|
|
/s/ Robert N. Tankson III
|
|
Dated: May 14, 2020
|
Robert N. Tankson III
|
|
|
Director
|
37
CANNABIS SATIVA, INC.
Contents
|
|
Page
|
|
|
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
FS - 2
|
|
|
|
|
|
|
|
FINANCIAL STATEMENTS:
|
|
|
|
|
|
Consolidated balance sheets
|
FS - 4
|
|
|
|
|
Consolidated statements of operations
|
FS - 5
|
|
|
|
|
Consolidated statements of changes in stockholders’ equity
|
FS - 6
|
|
|
|
|
Consolidated statements of cash flows
|
FS - 7
|
|
|
|
|
Notes to consolidated financial statements
|
FS - 8 through FS - 20
|
38
Report of Independent Registered Public Accounting Firm
To the stockholders and the board of directors of Cannabis Sativa, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Cannabis Sativa, Inc. the "Company") as of December 31, 2019, the related consolidated statement of operations, changes in stockholders’ equity and cash flows for the year then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
The Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 7 to the financial statements, the Company has negative working capital and accumulated deficit. These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 7. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/DeCoria, Maichel & Teague, P.S./
We have served as the Company's independent auditor since 2019.
Spokane, Washington
May 14, 2020
FS - 2
HALL&COMPANY Certified Public Accountants, Inc.
111 PACIFICA, SUITE 300
IRVINE, CA 92618
(949) 910-HALL (4255)
FAX (949) 910-4256
WWW.HALLCPAS.COM
TAX, FINANCIAL AND MANAGEMENT CONSULTING SERVICES
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Cannabis Sativa, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Cannabis Sativa, Inc. and subsidiaries (the "Company") as of December 31, 2018, the related consolidated statements of operations, stockholders’ equity and cash flows for the year ended December 31, 2018, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the year ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Emphasis of Matter Regarding Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 7 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 7. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provide a reasonable basis for our opinion.
/s/Hall & Company
We have served as the Company’s auditor since 2017
Irvine, CA
April 1, 2019
.
FS - 3
|
CANNABIS SATIVA, INC.
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
December 31,
|
2019
|
|
2018
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
Current Assets
|
|
|
|
|
Cash
|
$ 336,107
|
|
$ 151,946
|
|
Accounts receivable, net
|
4,551
|
|
10,646
|
|
Prepaid consulting and other current assets
|
3,999
|
|
29,853
|
|
Advance for acquisition
|
50,000
|
|
—
|
|
Inventories
|
—
|
|
5,714
|
|
|
|
|
|
|
Total Current Assets
|
394,657
|
|
198,159
|
|
|
|
|
|
|
Investment, at fair value
|
48,000
|
|
200,000
|
|
Property and equipment, net
|
6,440
|
|
6,548
|
|
Intangible assets, net
|
695,218
|
|
2,294,101
|
|
Goodwill
|
1,837,202
|
|
2,173,869
|
|
|
|
|
|
|
Total Assets
|
$ 2,981,517
|
|
$ 4,872,677
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
Current Liabilities
|
|
|
|
|
Accounts payable and accrued expenses
|
$ 161,558
|
|
$ 110,065
|
|
Due to related parties
|
1,018,520
|
|
926,638
|
|
|
|
|
|
|
Total Current Liabilities
|
1,180,078
|
|
1,036,703
|
|
|
|
|
|
|
Long-Term Liabilities
|
|
|
|
|
Stock payable
|
640,685
|
|
532,146
|
|
|
|
|
|
|
Total Liabilities
|
1,820,763
|
|
1,568,849
|
|
|
|
|
|
|
Commitments and contingencies (Notes 6 and 8)
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity:
|
|
|
|
|
Preferred stock $0.001 par value; 5,000,000 shares authorized;
|
|
|
|
|
1,021,849 and 759,444 issued and outstanding, respectively
|
1,021
|
|
759
|
|
Common stock $0.001 par value; 45,000,000 shares authorized;
|
|
|
|
|
22,224,199 and 21,316,201 shares issued and outstanding, respectively
|
22,226
|
|
21,318
|
|
Additional paid-in capital
|
74,834,032
|
|
72,971,563
|
|
Accumulated deficit
|
(74,855,147)
|
|
(70,918,761)
|
|
|
|
|
|
|
Total Cannabis Sativa, Inc. Stockholders' Equity
|
2,132
|
|
2,074,879
|
|
|
|
|
|
|
Non-Controlling Interests
|
1,158,622
|
|
1,228,949
|
|
|
|
|
|
|
Total Stockholders' Equity
|
1,160,754
|
|
3,303,828
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
$ 2,981,517
|
|
$ 4,872,677
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
FS - 4
|
CANNABIS SATIVA, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$ 1,159,737
|
|
$ 505,705
|
|
|
|
|
|
|
|
|
Cost of Revenues
|
|
|
462,940
|
|
209,871
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
696,797
|
|
295,834
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
Impairment of intangibles
|
|
|
1,039,926
|
|
—
|
|
Impairment of PrestoCorp goodwill
|
|
|
—
|
|
1,173,000
|
|
Impairment of iBudtender goodwill
|
|
|
336,667
|
|
—
|
|
Professional fees
|
|
|
547,284
|
|
1,304,735
|
|
Depreciation and amortization
|
|
|
561,434
|
|
562,456
|
|
Wages and salaries
|
|
|
393,310
|
|
226,029
|
|
Advertising
|
|
|
195,879
|
|
104,018
|
|
General and administrative
|
|
|
1,427,402
|
|
1,965,767
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
4,501,902
|
|
5,336,005
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(3,805,105)
|
|
(5,040,171)
|
|
|
|
|
|
|
|
|
Other (Income) and Expenses
|
|
|
|
|
|
|
Realized gain on settlement of digital currency
|
|
|
—
|
|
(200,000)
|
|
Impairment of digital currency
|
|
|
—
|
|
30,169
|
|
Unrealized loss on investment
|
|
|
152,000
|
|
—
|
|
Interest expense
|
|
|
49,608
|
|
39,429
|
|
|
|
|
|
|
|
|
Total Other (Income) Expenses, Net
|
|
|
201,608
|
|
(130,402)
|
|
|
|
|
|
|
|
|
Loss Before Income Taxes
|
|
|
(4,006,713)
|
|
(4,909,769)
|
|
|
|
|
|
|
|
|
Income Taxes
|
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
(4,006,713)
|
|
(4,909,769)
|
|
Loss attributable to non-controlling interest - iBudTender
|
|
|
(72,312)
|
|
(31,426)
|
|
Gain (loss) attributable to non-controlling interest - PrestoCorp
|
|
|
1,985
|
|
(749,997)
|
|
|
|
|
|
|
|
|
Net Loss Attributable To Cannabis Sativa, Inc.
|
|
|
$ (3,936,386)
|
|
$ (4,128,346)
|
|
|
|
|
|
|
|
|
Net Loss per Common Share:
|
|
|
|
|
|
|
Basic & Diluted
|
|
|
$ (0.18)
|
|
$ (0.20)
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding:
|
|
|
|
|
|
|
Basic & Diluted
|
|
|
21,664,986
|
|
21,016,230
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
FS - 5
|
CANNABIS SATIVA, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net loss
|
|
$ (4,006,713)
|
|
|
$ (4,909,769)
|
|
|
Adjustments to reconcile net loss to net cash
|
|
|
|
|
|
|
|
(used in) provided by operating activities:
|
|
|
|
|
|
|
|
Gain on sale of fixed assets
|
|
—
|
|
|
(115)
|
|
|
Write down to cost basis - digital currency
|
|
—
|
|
|
11,022
|
|
|
Impairment of digital currency
|
|
—
|
|
|
30,169
|
|
|
Realized gain on settlement of digital currency
|
|
—
|
|
|
(200,000)
|
|
|
Unrealized loss on investment
|
|
152,000
|
|
|
—
|
|
|
Impairment of intangibles
|
|
1,039,926
|
|
|
—
|
|
|
Impairment of PrestoCorp goodwill
|
|
—
|
|
|
1,173,000
|
|
|
Impairment of iBudTender goodwill
|
|
336,667
|
|
|
—
|
|
|
Depreciation and amortization
|
|
561,434
|
|
|
562,456
|
|
|
Stock issued and to be issued for services
|
|
1,922,178
|
|
|
2,583,156
|
|
|
Amortization of stock based prepaids
|
|
—
|
|
|
84,472
|
|
|
Changes in Assets and Liabilities:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
6,095
|
|
|
1,211
|
|
|
Inventories
|
|
5,714
|
|
|
2,797
|
|
|
Prepaid consulting and other current assets
|
|
25,854
|
|
|
(30,187)
|
|
|
Accounts payable and accrued expenses
|
|
51,493
|
|
|
1,912
|
|
|
Net Cash (Used in) Provided by Operating Activities:
|
|
94,648
|
|
|
(689,876)
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
Purchase of fixed assets
|
|
(2,369)
|
|
|
(630)
|
|
|
Advance for acquisition
|
|
(50,000)
|
|
|
—
|
|
|
Proceeds from sales of fixed assets
|
|
—
|
|
|
1,300
|
|
Net Cash Provided by (Used In) Investing Activities:
|
|
(52,369)
|
|
|
670
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
Proceeds received from warrant exercises
|
|
—
|
|
|
361,750
|
|
|
Proceeds received from sales of common stock and warrants
|
|
50,000
|
|
|
—
|
|
|
Proceeds from related parties, net
|
|
91,882
|
|
|
303,545
|
|
|
Net Cash Provided by Financing Activities:
|
|
141,882
|
|
|
665,295
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH
|
|
184,161
|
|
|
(23,911)
|
|
|
|
|
|
|
|
|
|
CASH AT BEGINNING OF YEAR
|
|
151,946
|
|
|
175,857
|
|
|
|
|
|
|
|
|
|
CASH AT END OF YEAR
|
|
$ 336,107
|
|
|
$ 151,946
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Non Cash Activities:
|
|
|
|
|
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
Cancellation and retirement of shares
|
|
$ —
|
|
|
$ —
|
|
|
Purchase of investment with digital currency
|
|
$ —
|
|
|
$ 200,000
|
|
|
Common stock issued for stock payable
|
|
$ 454,296
|
|
|
$ 735,604
|
|
|
Rescinded transaction & elimination of prepaid expense, net
|
|
$ —
|
|
|
$ 639,822
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
FS - 7
CANNABIS SATIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
1. Organization and Summary of Significant Accounting Policies
Nature of Corporation:
Cannabis Sativa, Inc. (the “Company,” “us”, “we” or “our”) was incorporated as Ultra Sun Corp. under the laws of Nevada in November 2004. On November 13, 2013, we changed our name to Cannabis Sativa, Inc. We operate through several subsidiaries including PrestoCorp, Inc. (“PrestoCorp”), iBudtender, Inc. (“iBudtender”), Wild Earth Naturals, Inc. (“Wild Earth”), Kubby Patent and Licenses Limited Liability Company, (“KPAL”), Hi Brands, International, Inc. (“Hi Brands”), and Eden Holdings LLC (“Eden”). PrestoCorp is a 51% owned subsidiary and iBudtender is 50.1% owned. Wild Earth, KPAL, Hi Brands, and Eden are wholly owned subsidiaries. Currently, PrestoCorp and iBudtender are operating subsidiaries, although iBudtender is not currently generating any revenue. The Company is reviewing opportunities for business development relating to Wild Earth, KPAL, and Hi Brands. Eden is not operating and had no activity for the years ended December 31, 2019 and 2018.
Our primary operations in 2019 were through PrestoCorp, which provides telemedicine online referral services for customers desiring medical marijuana cards in states where medical marijuana has been legalized. The Company is also actively seeking new business opportunities for acquisition and is continually reviewing opportunities for product and brand development through our Wild Earth, Hi Brands, and KPAL subsidiaries. iBudtender is also working to complete and commercialize an application (the iBudtender App) that will provide a convenient means for sharing information about cannabis products, patients and businesses.
Principles of Consolidation:
The consolidated financial statements include the accounts of Cannabis Sativa, Inc., and its wholly-owned subsidiaries; Wild Earth Naturals, Inc., Hi-Brands International, Inc., Eden Holdings LLC, our 50.1% ownership of iBudtender Inc. and our 51% ownership of PrestoCorp, (collectively referred to as the “Company”). All significant inter-company balances have been eliminated in consolidation. We hold controlling interests in iBudTender and PrestoCorp and exercise control through management practices and oversight by the Company’s Board of Directors.
Non-controlling Interests:
Non-controlling interests are portions of entities included in the consolidated financial statements that are not attributable to the Company. Non-controlling interest are identified separately from the Company’s stockholders’ equity and its net income (loss). Non-controlling interests equity balances include the non-controlling entity’s initial contribution at the date of the original acquisition, ongoing contributions, distributions, and percentage share of earnings since inception. The non-controlling interests are calculated based on percentages of ownership.
Use of Estimates:
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company bases its estimates on historical experience, current business factors, and various other assumptions that the Company believes are necessary to form a basis for making judgments about the carrying values of assets and liabilities, the recorded amounts of revenue and expenses, and the disclosure of contingent assets and liabilities. The Company is subject to uncertainties such as the impact of future events, economic and political factors, and changes in the Company’s business environment; therefore, actual results could differ from these estimates. Accordingly, the accounting estimates used in the preparation of the Company’s consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment evolves.
FS - 8
CANNABIS SATIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
Use of Estimates, Continued:
Changes in estimates are made when circumstances warrant. Such changes in estimates and refinements in estimation methodologies are reflected in reported results of operations and if material, the effects of changes in estimates are disclosed in the notes to the consolidated financial statements. Significant estimates and assumptions by management affect the allowance for doubtful accounts, the carrying value of long-lived assets (including goodwill and intangible assets), the provision for income taxes and related deferred tax accounts, certain accrued liabilities, revenue recognition, contingencies, and the value attributed to stock-based awards.
Accounts Receivable:
We estimate credit loss reserves for accounts receivable on an individual receivable basis. A specific allowance reserve is established based on expected future cash flows and the financial condition of the debtor. We charge off customer balances in part or in full when it is more likely than not that we will not collect that amount of the balance due. We consider any balance unpaid after the contract payment period to be past due.
Inventories:
Inventory costs, when applicable, include those costs directly attributable to the manufacture of the product before sale. Inventory consists of raw materials and finished goods and is carried at the lower of cost or net realizable value, using first-in, first-out method of determining cost. As of December 31, 2019, the Company had $-0- in finished goods and raw materials inventory. As of December 31, 2018, the Company had $5,714 in raw materials, consisting of the components used in the production of CBD and cannabis consumer products and $-0- in finished goods inventory. In 2018, the Company discontinued its manufacturing processes and at December 31, 2019, did not maintain inventory of raw materials or finished goods.
Property and Equipment:
Property and equipment are recorded at cost. Depreciation is provided for on the straight-line method over the estimated useful lives of the assets. The average lives range from five (5) to ten (10) years. Leasehold improvements are amortized on the straight-line method over the lesser of the lease term or the useful life. Maintenance and repairs that neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Betterments or renewals are capitalized when incurred.
Fair Value of Financial Instruments:
The carrying amounts of cash and cash equivalents and amounts due to related parties approximate fair value given their short-term nature.
Cash:
Cash is held at major financial institutions and insured by the Federal Deposit Insurance Corporation (FDIC) up to federal insurance limits. The Company considers all highly liquid investments purchased with an original maturity of three months or less when acquired to be cash equivalents.
FS - 9
CANNABIS SATIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
Net Loss per Share:
Net loss per share is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding for the period and contains no dilutive securities. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of the Company. Potentially dilutive shares are excluded from the calculation of diluted net loss per share because the effect is anti-dilutive. At December 31, 2019 and 2018 the Company had 174,900 and 49,900 outstanding warrants, respectively, that would be dilutive to future periods net income. Also, at December 31, 2019 and 2018 the Company had 1,021,849 and 759,444 shares of convertible Series A preferred stock, respectively, that would be dilutive to future periods net income. See Note 6.
Revenue Recognition:
Revenues are recognized when control of the promised goods or services are transferred to a customer, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. The Company recognizes revenue from the sale of products and services in accordance with ASC 606,” Revenue Recognition”. The Company applies the following five steps in order to determine the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements:
|
·
|
identify the contract with a customer;
|
|
·
|
identify the performance obligations in the contract;
|
|
·
|
determine the transaction price;
|
|
·
|
allocate the transaction price to performance obligations in the contract; and
|
|
·
|
recognize revenue as the performance obligation is satisfied.
|
Provision for sales incentives, discounts and returns and allowances, if applicable, are accounted for as reductions of revenue in the period the related sales are recorded. The company had no warranty costs associated with the sales of its products in the periods presented in the accompanying Consolidated Statements of Operations and no provision for warranty expenses has been included.
The Company generates revenue based on a per telehealth visit basis for clients looking to obtain a permit to use marijuana for medical purposes in states that have legalized medical marijuana. Revenues are recognized when the Company satisfies its performance obligation to stand ready to provide telehealth services. This occurs at the time an online client subscribes for the visit and gains access to our network of health care professionals. Revenue is recognized in an amount that reflects the consideration that is received in exchange for the service.
The Company operates as one reportable segment.
Investments
Investments in equity securities are stated at fair value. The Company’s investments consist of ownership of less than 20% of the company in which the investment is held. The Company recognizes unrealized holding gains and losses in other (Income) Expenses in the consolidated statement of operations. On disposal of an investment, the difference between the disposal proceeds and the carrying amount is recognized as income or loss on the consolidated statement of operations.
Intangible Assets and Goodwill:
We account for intangible assets and goodwill in accordance with ASC 350 “Intangibles-Goodwill and Other” (“ASC 350”).
FS - 10
CANNABIS SATIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
Intangible asset amounts represent the acquisition date fair values of identifiable intangible assets acquired. The fair values of the intangible assets were determined by using the income approach, discounting projected future cash flows based on management’s expectations of the current and future operating environment. The rates used to discount projected future cash flows reflected a weighted average cost of capital based on our industry, capital structure and risk premiums including those reflected in the current market capitalization. Definite-lived intangible assets are amortized over their useful lives, which have historically ranged from5 to 10 years. The carrying amounts of our definite-lived intangible assets are evaluated for recoverability whenever events or changes in circumstances indicate that the entity may be unable to recover the asset’s carrying amount. We do not have any indefinite-lived intangible assets recorded from acquisitions.
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired in a business combination. Goodwill is not amortized but is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset may be impaired. The fair value of the reporting unit is evaluated on qualitative factors to determine if the reported value may be impaired. If the qualitative factors indicate a likelihood of impairment, we then evaluate carrying value of the reporting unit based on quantitative factors using the income approach. An impairment charge is recognized for the excess of the carrying value of goodwill for the reporting unit over its implied fair value.
Advertising Expense:
Advertising costs are expensed as incurred and are included in general and administrative expense in the accompanying consolidated statements of operations. Advertising costs were $195,879 and $104,018 for the years ended December 31, 2019 and 2018, respectively.
Stock-Based Compensation:
Stock-based compensation is computed in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718. FASB ASC 718 requires all share-based payments to employees and non-employees be recognized as compensation expense in the consolidated financial statements based on their fair values. The expense is recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). The Company uses the Black-Scholes option pricing model when necessary as the most appropriate fair value method for awards. Although most awards have been restricted stock or shares of stock issued under the Company’s 2017 Stock Plan. See Note 6. The Company currently recognizes compensation costs immediately as our awards are 100% vested at the time of issuance.
Business Combinations:
We account for business combinations by recognizing the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair values on the acquisition date. The final purchase price may be adjusted up to one year from the date of the acquisition. Identifying the fair value of the tangible and intangible assets and liabilities acquired requires the use of estimates by management and was based upon currently available data. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to macro-economic factors, future expected cash flows from product sales, support agreements, consulting contracts, other customer contracts, acquired technologies and patents, and discount rates utilized in valuation estimates.
Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results. Additionally, any change in the fair value of the acquisition-related contingent consideration subsequent to the acquisition date, including changes from events after the acquisition date, such as changes in our estimate of relevant revenue or other targets, will be recognized in earnings in the period of the
FS - 11
CANNABIS SATIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
estimated fair value change. A change in fair value of the acquisition-related contingent consideration or the occurrence of events that cause results to differ from our estimates or assumptions could have a material effect on the consolidated statements of operations, financial position and cash flows in the period of the change in the estimate.
Income Taxes:
The Company utilizes the liability method of accounting for income taxes which requires that deferred tax assets and liabilities be recorded to reflect the future tax consequences of temporary differences between the book and tax basis of various assets and liabilities. 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. Additionally, deferred tax assets are evaluated, and a valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. There can be no assurance that the Company’s future operations will produce sufficient earnings so that the deferred tax asset can be fully utilized. The Company currently maintains a full valuation allowance against net deferred tax assets.
Recent Accounting Pronouncements:
In February 2016, the FASB issued ASU 2016-02, Leases. The standard requires lessees to recognize lease assets and lease liabilities on the consolidated balance sheet and requires expanded disclosures about leasing arrangements. We adopted the standard on January 1, 2019. Based on our assessment of the new standard on our consolidated financial statements, we have concluded that there is no impact to our consolidated financial statements based on the short-term nature of our leases and our election of such practical expediency.
In June 2018, the FASB issued ASU 2018-07, Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The update aligns the accounting for share-based payment awards issued to nonemployees with those issued to employees. Under the new guidance, the nonemployee awards will be measured on the grant date and compensation costs will be recognized when achievement of the performance condition is probable. This new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The update simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount. This update is effective for annual and interim periods beginning after December 15, 2019, and interim periods within that reporting period. While the Company is still in the process of completing our analysis on the impact this guidance will have on the consolidated financial statements and related disclosures, the Company does not expect the impact to be material.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurement. The update modifies the disclosure requirements for recurring and nonrecurring fair value measurements, primarily those surrounding Level 3 fair value measurements and transfers between Level 1 and Level 2. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period. The Company is currently evaluating the new guidance and does not expect it to have a material impact on its consolidated financial statements.
FS - 12
CANNABIS SATIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
In November 2018, the FASB issued ASU 2018-18, Clarifying the Interaction Between Topic 808 and Topic 606, which clarifies when transactions between participants in a collaborative arrangement are within the scope of the FASB’s revenue standard, Topic 606. This ASU becomes effective for the Company in the year ending December 31, 2020 and early adoption is permitted. The Company is currently assessing the impact that this ASU will have on its consolidated financial statements.
Fair Value Measurements
We adopted ASC Topic 820 for financial instruments measured at fair value, whether on a recurring basis or non-recurring basis. ASC Topic 820 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about fair value measurements.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:
Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
The estimated fair values for financial instruments are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. We measure our investment in marketable securities at fair value on a recurring basis. The Company’s available for sale securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within the fair value hierarchy. Investments are valued on a recurring basis.
2. Fixed Assets
Property and equipment consisted of the following at December 31, 2019 and 2018:
|
December 31,
|
2019
|
2018
|
|
Furniture and Equipment
|
$ 17,414
|
$ 15,045
|
|
Leasehold Improvements
|
2,500
|
2,500
|
|
|
19,914
|
17,545
|
|
Less: Accumulated Depreciation
|
(13,474)
|
(10,997)
|
|
|
|
|
|
Net Property and Equipment
|
$ 6,440
|
$ 6,548
|
Depreciation expense for the years ended December 31, 2019 and 2018 was $2,477 and $3,497, respectively.
FS - 13
CANNABIS SATIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
3. Intangibles and Goodwill
The Company considers all intangibles to be definite-lived assets with lives of 5 to 10 years. Intangibles consisted of the following at December 31, 2019 and 2018:
|
December 31,
|
2019
|
2018
|
|
CBDS.com website (Cannabis Sativa)
|
$ 13,999
|
$ 13,999
|
|
Intellectual Property Rights (Cannabis Sativa)
|
––
|
1,484,250
|
|
Intellectual Property Rights Vaporpenz (Cannabis Sativa)
|
––
|
210,100
|
|
Intellectual Property Rights (iBudtender)
|
––
|
330,000
|
|
Intellectual Property Rights (PrestoCorp)
|
240,000
|
240,000
|
|
Patents and Trademarks (Cannabis Sativa)
|
––
|
8,410
|
|
Patents and Trademarks (Wild Earth)
|
––
|
4,425
|
|
Patents and Trademarks (KPAL)
|
1,281,411
|
1,410,000
|
|
Total Intangibles
|
1,535,410
|
3,701,184
|
|
Less: Accumulated Amortization
|
(840,192)
|
(1,407,083)
|
|
Net Intangible Assets
|
$ 695,218
|
$ 2,294,101
|
Amortization expense for the years ended December 31, 2019 and 2018 was $558,958 each year. Impairment expense of intangible assets for the year ended December 31, 2019 was $1,039,926. The determination of fair value of the intangible assets was based on management estimates of product demand and market factors that were not readily observable. The assets, consisting of intellectual property rights and patents and trademarks were considered impaired due to delays in commercializing products using or based on the intangibles and the uncertainty surrounding the future revenue generation from the assets.
Amortization of intangibles for each of the next five years is:
|
2020
|
$205,270
|
|
2021
|
$169,142
|
|
2022
|
$161,865
|
|
2023
|
$151,686
|
|
2024
|
$ 7,255
|
Goodwill in the amount of $3,010,202 was recorded as part of the acquisition of PrestoCorp that occurred on August 1, 2017. For the year ended December 31, 2018 the Company recorded a $1,173,000 impairment of the PrestoCorp goodwill. The 2018 impairment of the PrestoCorp goodwill was based on the slower than expected revenue growth associated with the acquisition and the uncertainties about the long-term prospects of the business. Impairment of the PrestoCorp goodwill was estimated using the income approach. Cumulative impairment of the PrestoCorp goodwill totals $1,173,000 as of December 31, 2019.
Goodwill in the amount of $336,667 was recorded as part of the acquisition of iBudtender that occurred on August 8, 2016. For the year ended December 31, 2019 the Company recorded a $336,667 impairment of the iBudtender goodwill. The impairment of the iBudtender goodwill was due to delays in completion of the iBudTender software and mobile app, and failure to commence viable business operations, as well as the uncertainty surrounding the future of the business opportunity. Impairment of the iBudTender goodwill was estimated using the income approach. Cumulative impairment of the iBudTender goodwill totals $336,667 as of December 31, 2019.
FS - 14
CANNABIS SATIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
The changes in the carrying amount of goodwill during the years ended December 31, 2019 and 2018 are as follows:
|
December 31,
|
2019
|
2018
|
|
|
|
|
|
Beginning Balance
|
$ 2,173,869
|
$ 3,346,869
|
|
Impairment – PrestoCorp
|
--
|
(1,173,000)
|
|
Impairment – iBudtender
|
(336,667)
|
|
|
Ending Balance
|
$ 1,837,202
|
$ 2,173,869
|
4. Related Party Transactions
The Company has received advances from related parties and officers of the Company to cover operating expenses. As of December 31, 2019 and 2018 amounts due to the related parties were $1,018,520 and $926,638, respectively. During the years ended December 31, 2019 and 2018, the Company recorded interest expense related to these advances at the rates between 5% and 8% per annum and in the amount of $49,608 and $39,429, respectively. The Company does not have written notes payable for these balances but has a verbal understanding with the related parties that written notes will be created in 2020 to reflect the balances due and payable December 31, 2025. At December 31, 2019 and 2018, there was $87,979 and $39,611, respectively, of accrued interest on these notes included in accounts payable and other accrued liabilities on the consolidated balance sheets.
At December 31, 2019 and 2018, the Company had a note payable to the founder of iBudtender of $10,142 and $9,197, respectively, which is included in due to related parties on the consolidated balance sheets. The note earns interest at 0% and was due on December 2019. The note has not yet been paid pending further review of the iBudtender business and adjustment of the agreements between the parties.
During each of the years ended December 31, 2019 and 2018, the Company incurred approximately $69,000 for consulting services from a nephew of the Company’s president. These services were paid in shares of common stock.
During the years ended December 31, 2019 and 2018, the Company paid the officers and directors in shares of common stock. The shares were recorded at fair value at the time of issuance as compensation expense. See Note 6 regarding shares issued to related parties.
5. Investments.
In 2018, the Company purchased 10,000,000 shares of common stock of Medical Cannabis Payment Solutions (ticker: REFG) in exchange for 1,000,000 units of Weed coins (valued at $200,000). At December 31, 2019, the fair value of the investment in REFG was adjusted to $48,000 based on the closing price of the stock on that date, which resulted in an unrealized loss on investment of $152,000. There was no change in the fair value of the investment in REFG during the year ended December 31, 2018.
FS - 15
CANNABIS SATIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
6. Stockholders’ Equity
Share Capital
The authorized capital of the Company consists of 45,000,000 shares of Common Stock with a par value of $0.001 and 5,000,000 shares of preferred stock issuable in series with such rights, preferences and conditions as the Board of Directors may establish. The Company has designated and established the rights of Series A preferred stock (“Series A”) with a par value of $0.001. The Company is authorized to issue up to 5,000,000 shares of Series A. The holders of Series A are entitled to dividends if the Company declares a dividend on common shares, have no liquidation preference, have voting rights equal to 1 vote per share, and can be converted into one share of common at any time.
2017 Stock Plan
On July 28, 2017, the Company adopted the Cannabis Sativa 2017 Stock Plan which authorized the Company to utilize common stock to compensate employees, officers, directors, and independent contractors for services provided to the Company. The Company authorized up to 3,000,000 shares of common stock to be issued pursuant to the 2017 Stock Plan. Of the total common shares issued for services of 725,397 and 557,837 in the years ended December 31, 2019 and 2018, respectively, the Company issued 618,289 and 326,901 shares of common stock pursuant to the 2017 Stock Plan, respectively. The balance of the common shares issued in each year were restricted securities. At December 31, 2019, the Company was authorized to issue up to 2,010,884 additional shares under the 2017 Stock Plan.
During 2019, shares of common stock and preferred stock were issued to related and non-related parties for cash and services, certain shares were cancelled, and shares were sold for cash. The following table breaks out the issuances by type of transaction and by related and non-related parties.
|
Year ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
Services
|
|
Total
|
|
Related Parties
|
Common
|
Value
|
|
Common
|
Preferred
|
Value
|
|
Common
|
Preferred
|
Value
|
|
Stephen Downing, Director
|
-
|
$ -
|
|
34,016
|
-
|
$ 53,962
|
|
34,016
|
-
|
$ 53,962
|
|
Deborah Goldsberry, Director
|
-
|
-
|
|
16,101
|
-
|
32,724
|
|
16,101
|
-
|
$ 32,724
|
|
Don Lundbom, Officer
|
-
|
-
|
|
210,215
|
-
|
333,478
|
|
210,215
|
-
|
$ 333,478
|
|
Trevor Reed, Director
|
-
|
-
|
|
27,212
|
-
|
43,168
|
|
27,212
|
-
|
$ 43,168
|
|
Michael Gravel, Director
|
-
|
-
|
|
53,764
|
-
|
115,655
|
|
53,764
|
-
|
$ 115,655
|
|
Cathy Carroll, Director
|
-
|
-
|
|
68,031
|
-
|
107,921
|
|
68,031
|
-
|
$ 107,921
|
|
David Tobias, Officer, Director
|
-
|
-
|
|
-
|
262,405
|
416,269
|
|
-
|
262,405
|
$ 416,269
|
|
Total for related parties
|
-
|
$ -
|
|
409,339
|
262,405
|
$ 1,103,177
|
|
409,339
|
262,405
|
$ 1,103,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related parties cancelled(1)
|
-
|
$ -
|
|
(70,000)
|
-
|
$ -
|
|
(70,000)
|
-
|
$ -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrelated parties issued(2)
|
125,000
|
$ 50,000
|
|
443,659
|
-
|
$ 710,462
|
|
568,659
|
-
|
$ 760,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Totals
|
125,000
|
$ 50,000
|
|
782,998
|
262,405
|
$ 1,813,639
|
|
907,998
|
262,405
|
$ 1,863,639
|
1) During the year ended December 31, 2019, the Company received 70,000 shares of common stock that were returned by iBudtender and cancelled in relation to the amended purchase contract that was effective July 2018.
2) During the year ended December 31, 2019, $50,000 cash was received form sale of 125,000 units where each unit consisted of one share of stock and one warrants in a Private Placement at $0.40 each.
FS - 16
CANNABIS SATIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
During 2018, shares of common stock and preferred stock were issued to related and non-related parties for cash and services, certain shares were cancelled, and shares were issued upon exercise of warrants. The following table breaks out the issuances by type of transaction and by related and non-related parties.
|
Year ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
Services
|
|
Total
|
|
Related Parties
|
Common
|
Value
|
|
Common
|
Preferred
|
Value
|
|
Common
|
Preferred
|
Value
|
|
Stephen Downing, Director
|
-
|
$ -
|
|
14,628
|
-
|
$ 64,674
|
|
14,628
|
-
|
$ 64,674
|
|
Deborah Goldsberry, Director
|
-
|
-
|
|
21,999
|
-
|
110,688
|
|
21,999
|
-
|
110,688
|
|
Don Lundbom, Officer
|
-
|
-
|
|
91,128
|
-
|
403,444
|
|
91,128
|
-
|
403,444
|
|
Michael Gravel, Director
|
-
|
-
|
|
56,252
|
-
|
223,809
|
|
56,252
|
-
|
223,809
|
|
Catherine Carroll, Director
|
-
|
-
|
|
25,501
|
-
|
105,404
|
|
25,501
|
-
|
105,404
|
|
David Tobias, Officer, Director
|
-
|
-
|
|
50,140
|
-
|
187,514
|
|
50,140
|
-
|
187,514
|
|
David Tobias, Officer, Director
|
-
|
-
|
|
-
|
27,426
|
160,000
|
|
-
|
27,426
|
160,000
|
|
Trevor Reed, Director
|
|
|
|
20,187
|
-
|
45,990
|
|
20,187
|
-
|
45,990
|
|
Total for related parties
|
-
|
$ -
|
|
279,835
|
27,426
|
$ 1,301,523
|
|
279,835
|
27,426
|
$ 1,301,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrelated Parties Issued(1)
|
180,875
|
$ 361,750
|
|
434,722
|
-
|
$ 1,517,140
|
|
615,597
|
-
|
$ 1,878,890
|
|
Related Paries Cancelled(2)
|
-
|
$ -
|
|
(50,000)
|
-
|
$ (50)
|
|
(50,000)
|
-
|
$ (50)
|
|
Unrelated Parties Cancelled(3)
|
-
|
-
|
|
(332,447)
|
-
|
(990,692)
|
|
(332,447)
|
-
|
(990,692)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Totals
|
180,875
|
$ 361,750
|
|
382,110
|
27,426
|
$ 1,827,921
|
|
512,985
|
27,426
|
$ 2,189,671
|
1) During the year ended December 31, 2018, $361,750 cash was received for 180,875 outstanding warrants exercised at $2.00 each. A total of 180,875 shares of common stock were issued.
2) During the year ended December 31, 2018, the Company amended its purchase contract with iBudtender (its 50.1% subsidiary). In that agreement, 50,000 shares of common stock due to iBudtender were cancelled.
3) During the year ended December 31, 2018, 332,447 shares were returned due to cancellation of a service contract that was originated in 2017.
At December 31, 2019 and 2018, the Company had outstanding warrants to purchase 174,900 shares and 49,900 shares of the Company’s common stock, respectively. The exercise price on 125,000 warrants was $0.80 per share and these warrants expire in November 2022. The exercise price on 49,900 warrants was $2.00 per share and these warrants expire February 1, 2020.
7. Going Concern Considerations
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying consolidated financial statements, the Company has negative working capital, has incurred operating losses since inception, and has not yet produced sufficient continuing revenues from operations to reach breakeven cash flow. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event that the Company cannot continue as a going concern. Management anticipates that it will be able to raise additional working capital through the issuance of stock and through additional loans from investors.
FS - 17
CANNABIS SATIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
The ability of the Company to continue as a going concern is dependent on its ability to raise adequate capital to fund operating losses until it is able to engage in profitable business operations. To the extent financing is not available, the Company may not be able to, or may be delayed in, developing its services and meeting its obligations. The Company will continue to evaluate its projected expenditures relative to its available cash and to evaluate additional means of financing in order to satisfy its working capital and other cash requirements. The accompanying consolidated financial statements do not reflect any adjustments that might result from the outcome of these uncertainties.
Our operations have been financed primarily through proceeds from sales of common stock, warrants exercised for common stock and revenue generated from sales of our products. We have also issued equity instruments in certain circumstances to pay for services from vendors and consultants. These actions have provided us with the resources to operate our business, sell and support our products, attract and retain key personnel and add new products to our portfolio. We have experienced net losses and negative cash flows from operations each year since our inception. As of December 31, 2019, we had an accumulated deficit of approximately $74.9 million and negative working capital.
During the year ended December 31, 2019, $50,000 in gross proceeds was raised from the issuance of common stock and warrants pursuant to a Private Placement Memorandum. During the year ended December 31, 2018, $361,750 was raised in gross proceeds from the issuance of common stock from the exercise of warrants.
8. Commitments and Contingencies
Leases. In 2018 and 2019, the Company leased an office and warehouse facility in Mesquite, Nevada that served as the principal executive offices and provided manufacturing and warehouse space. The leased space consists of approximately 900 square feet. On September 1, 2018, a new lease agreement was signed at a monthly rate of $600. The lease term is for 12 (twelve) months, which expired in September 2019. The Company renewed their lease in Mesquite, Nevada in November 2019 on a month to month basis at a cost of $600 per month. The Company terminated the lease at the end of February 2020, and now operates out of a virtual office maintained by our Chief Executive Officer. Rent expense for the years ended December 31, 2019 and 2018 was $7,200 and $13,536, respectively.
PrestoCorp leases office space through WeWork in New York for $2,444 per month on a month to month arrangement. Until February 2019, PrestoCorp also leased space in San Francisco for $2,800 per month. PrestoCorp terminated its lease and closed its office in San Francisco as of the end of February 2019. Primary operations for PrestoCorp are now based in New York City. Rent expense for PrestoCorp for the years ended December 31, 2019 and 2018 was $29,950 and $45,111, respectively. The Company currently has no lease obligations extending beyond thirty days.
Litigation. In the ordinary course of business, we may face various claims brought by third parties and we may, from time to time, make claims or take legal actions to assert our rights, including intellectual property disputes, contractual disputes and other commercial disputes. Any of these claims could subject us to litigation. As of December 31, 2019, there were two claims that were pending or threatened relating to general business disputes and accounts payable for services. Management believes the outcomes of currently pending claims are not likely to have a material effect on our consolidated financial position and results of operations.
Stock Payable. At December 31, 2019 and 2018, the Company recorded $640,685 and $532,146, respectively, of stock payable related to common stock to be issued for services. The following summarizes the activity of stock payable during the years ended December 31, 2019 and 2018:
|
|
2019
|
2018
|
|
Beginning Balance – January 1
|
$ 532,146
|
$ 767,603
|
|
Additions, net
|
562,835
|
500,120
|
|
Issuances, net
|
(454,296)
|
(735,577)
|
|
Ending Balance–December 31
|
$ 640,685
|
$ 532,146
|
FS - 18
CANNABIS SATIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
Shares in Escrow. At December 31, 2019, the Company has 419,475 shares of common stock in escrow as part of the acquisition of PrestoCorp. These shares are issuable in certain circumstances to the principals of PrestoCorp based on performance of the PrestoCorp business in 2020 and 2021. The escrow account originally contained 629,213 shares of common stock but 209,738 shares were cancelled in 2018 when the performance requirements were not met. The escrowed shares are not counted in the outstanding stock of the Company and will be considered compensation to the principals if and when issued. The escrow account also includes an additional 500 shares of PrestoCorp common stock which is distributable either back to the principals of PrestoCorp or to the Company, also depending on certain minimum performance requirements which extend into 2021. If all of the PrestoCorp shares are ultimately distributed
to the Company, the shares would have the effect of increasing the Company’s ownership of PrestoCorp to 61% from the current level of 51%.
9. Income Taxes
The Company did not recognize a tax provision or benefit for the years ended December 31, 2019 and 2018 due to ongoing net losses and a valuation allowance. At December 31, 2019 and 2018, the Company had net deferred tax assets which will not be realized and are fully reserved by valuation allowances.
At December 31, 2019 and 2018, the Company had net deferred tax assets principally arising from net operating loss carryforward for income tax purposes and differences in the carrying values of goodwill and intangibles between the Company’s financial statements and its income tax returns. The net deferred tax asset is multiplied by an expected federal tax rate of 21%. As management of the Company cannot determine that it is more likely than not that the Company will realize the benefit of the deferred tax assets, a valuation allowance equal to 100% of the net deferred tax asset exists at December 31, 2019 and 2018.
The components of the Company’s net deferred tax assets at December 31 are as follows:
|
|
|
2019
|
|
Deferred tax asset:
|
|
|
|
|
Net operating loss carryforwards
|
$
|
2,990,322
|
|
|
Non-deductible impairment expenses
|
|
955,315
|
|
|
Unrealized (gain) loss on investments and other
|
|
580
|
|
|
Total deferred tax assets
|
|
3,946,217
|
|
|
Valuation allowance
|
|
(3,946,217)
|
|
|
Net deferred tax assets
|
$
|
-
|
At December 31, 2019 the Company had net operating loss carry forwards of approximately $14,200,000 for federal and state purposes, $10,000,000 of which expire between 2021 through 2037. The remaining balance of $4,200,000 will never expire but its utilization is limited to 80% of taxable income in any future year.
The reconciliation of the federal income tax rate and the Company’s tax provision (benefit) is as follows:
|
|
2019
|
|
Provision (benefit) computed using the statutory rate:
|
$
|
(826,641)
|
|
Permanent differences
|
|
91,812
|
|
Change in valuation allowance
|
|
734,829
|
|
Total income tax provision (benefit)
|
$
|
`
|
FS - 19
CANNABIS SATIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
At December 31, 2018, the effective income tax rate of 0% differed from the statutory rate, due primarily to net operating losses incurred by the Company in the respective period. For the year ended December 31, 2018 a tax benefit of approximately $1,130,000 would have been generated. However, all benefits have been fully offset through a valuation allowance account due to the uncertainty of the utilization of the net operating losses. At December 31, 2018, the Company had accumulated net operating losses of approximately $10,028,000 that would result in a deferred tax asset of approximately $3.200,000. However. the Company has established a valuation allowance in the full amount of the deferred tax asset due to the uncertainty of the utilization of operating losses in future periods.
The Company has analyzed its filing positions in all jurisdictions where it is required to file income tax returns and found no positions that would require a liability for uncertain income tax benefits to be recognized. The Company is subject to possible tax examinations for the fiscal years 2016 through 2019. Prior year tax attributes could be adjusted by taxing authorities. If applicable, the Company will deduct interest and penalties as interest expense on the financial statements.
10. Subsequent Events
Subsequent to December 31, 2019, the Company issued 963,238 shares of common stock and 232,214 shares of preferred stock, with an aggregate value of $640,685 (based on the respective measurement dates), to consultants and officers for services rendered in the 4th quarter of 2019. The value these shares were included in stock payable at December 31, 2019 for services rendered prior to that date.
In October 2019, the Company signed an agreement to acquire certain assets of GK Marketing & Media for 100,000 shares of the Company’s common stock to be paid to sellers plus a commitment to fund the operations of a newly formed subsidiary, GK Manufacturing and Packaging, Inc.(“GKMP”) in the amount of $500,000. After signing the agreement and prior to year-end, the Company advanced $50,000 to GKMP to allow GKMP to begin setting up its production line. Preconditions to finalizing the transaction included creation of the new company and transfer of intellectual property to the newly formed business. These steps were completed in February and the agreement was finalized at a closing on February 20, 2020. At closing, GKMP is owned 51% by the Company and 49% by Keith Hyatt and Jason Washington, the former owners of GK Marketing and Media. The Company agreed to fund operations in the amount of an additional $100,000 at closing and fund the balance of $350,000 over the following 180 days. Additional shares of common stock payments of up to fair value of $1.5 million will be payable based on achievement of revenue targets in 2020. The transaction closed on February 7, 2020. As of April 20, 2020, the Company has provided aggregate funding of $225,000 to GK Manufacturing pursuant to the acquisition agreement.
In October 2019, the board of directors approved a grant of 10,000 shares of the Company’s restricted common stock to an employee of PrestoCorp, payable 5,000 shares in December of 2019, and an additional 5,000 shares payable in June of 2020. The first 5,000 shares were issued in the first calendar quarter of 2020.
On March 25, 2020, the Company borrowed $50,000 from a Director pursuant to a promissory note bearing interest at 8% per annum and payable April 1, 2021. The proceeds from the note were used to fund a portion of the working capital commitment to GK Manufacturing and Packaging, Inc.
In the first calendar quarter of 2020, the Company entered into independent contracting agreements with twelve contractors, including five officers and directors, for services to be rendered by the contractors for the Company in 2020. The agreements provide for payment of compensation in common or preferred stock of the Company, a portion of which may be paid in registered shares pursuant to the Company’s 2017 Stock Plan. The agreements provide for payment of compensation on the first day of each calendar quarter for that quarter. If paid in common or preferred stock, the shares are considered fully vested and non-cancellable on the date of issuance and if registered, may be resold immediately by the contractors. In some instances, the contractors are paid in restricted common stock or preferred stock and must be held at least six months before such shares can be sold. Aggregate commitments for payment of contractors in 2020 total approximately $1,050,000.
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CANNABIS SATIVA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
The outbreak of COVID-19, the coronavirus, has grown both in the United States and globally, and related government and private sector responsive actions have adversely affected the Company’s business operations. The World Health Organization has declared Covid-19 to be a global pandemic, resulting in an economic downturn and changes in global economic policy that will reduce demand for the Company’s products and may have an adverse impact on the Company’s business, operating results and financial condition.
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