On February 4, 2023, MJ entered into the Amended and Restated Merger Agreement and Plan of Reorganization with CS. The board of directors of MJ believes that the proposed Merger will benefit MJ by providing an increased scale of operations and clear synergies in production, distribution and logistics with significant cross selling opportunities between customers of MJ and the telehealth customer base of CS. MJ and CS have complementary products, similar corporate visions, and the desire to succeed in the fast-growing cannabis market. In addition, CS's access to capital markets is expected to enable MJ to aggressively develop and grow its brand. Moreover, since MJ stockholders will receive stock in CS they will participate in the continued growth of both companies.
Merger Agreement and the Merger is not approved, MJ will not be able to effect the Merger under the terms set forth in the Merger Agreement.
A holder who is a U.S. person (as defined in the section titled "Material U.S. Federal Income Tax Consequences") generally will recognize capital gain or loss on a sale, exchange, certain redemptions, or other taxable disposition of CS shares in an amount equal to the difference, if any, between (i) the amount realized upon the disposition of such CS shares and (ii) the holder's adjusted tax basis in such CS shares.
For a more complete discussion of the material U.S. federal income tax consequences of the Merger, see "Material U.S. Federal Income Tax Consequences" beginning on page 81.
450 Hillside Dr. #A224
Cannabis Sativa, Inc. ("CS") is engaged in telehealth, and the licensing of cannabis-related intellectual property, marketing and branding for cannabis-based products and services, operation of cannabis-related technology services, and ancillary business activities. CS holds a U.S. patent on the Ecuadorian Sativa strain of Cannabis, a U.S. Patent for a marijuana lozenge; a Cannabis-based pharmaceutical composition for the treatment of hypertensive disorders by submucosal delivery and trade secret formulas and processes and operates subsidiary PrestoDoctor®. Cannabis Sativa IP includes the "hi" and "White Rabbit" brands.
MJ cultivates, harvests, manufactures, and sells cannabis products through its company owned facilities and through its growing relationship with PPK Investment Group, Inc. (“PPK”), an Oklahoma corporation, sells and markets cannabis flower and edibles throughout Oklahoma and through a joint venture relationship with the Flandreau Santee Sioux Tribe in Flandreau, South Dakota. MJ currently owns 25% of PPK with options to acquire up to 100% of PPK at any time prior to March 31, 2023.
A holder who is a U.S. person (as defined in the section titled "Material U.S. Federal Income Tax Consequences") generally will recognize capital gain or loss on a sale, exchange, certain redemptions, or other taxable disposition of CS shares in an amount equal to the difference, if any, between (i) the amount realized upon the disposition of such CS shares and (ii) the holder's adjusted tax basis in such CS shares.
On February 4, 2023, MJ entered into the Amended and Restated Merger Agreement and Plan of Reorganization with CS. The board of directors of MJ believes that the proposed Merger will benefit MJ by providing the increased scale of operations and clear synergies in production, distribution and logistics with significant cross selling opportunities between customers of MJ and the telehealth customer base of CS. MJ and CS have complementary products, similar corporate visions, and the desire to succeed in the fast-growing cannabis market. In addition, CS's access to capital markets is expected to enable MJ to aggressively develop and grow its brand. Moreover, since MJ stockholders will receive stock in CS they will participate in the continued growth of the both companies. CS’s large shareholder base and larger average trading volume provides MJ stockholders increased liquidity for their shares.
You should read the information in the following table in conjunction with the summary historical financial information and the historical financial statements of CS and MJ and the related notes that are included elsewhere in this proxy statement/prospectus. The unaudited CS and MJ proforma condensed, combined per share information is derived from and should be read in conjunction with, the unaudited proforma condensed combined financial statements and related notes included elsewhere in this proxy statement/prospectus. See “CS and MJ Unaudited Proforma Condensed Combined Financial Information”.
The unaudited pro forma condensed combined loss per share information below is presented for illustrative purposes only and does not purport to represent the earnings per share which would have occurred had the Merger occurred during the period presented. Nor earnings per share for any future date or period.
MJ’s common stock is currently traded on the OTCQB Market under the symbol "MJHI."
The following table sets forth the closing prices per share of CS common stock and MJ common stock on the OTCQB Market on May 9, 2022, the last full trading day prior to the announcement of the Letter of Intent to Merge and on February 3, 2023 – the last full trading day prior to signing the first Amended and Restated Merger Agreement. Such price may fluctuate prior to the special meetings and the consummation of the Merger, and stockholders are urged to obtain a current market quotation prior to making any decision with respect to the Merger.
On February 4, 2023, Cannabis Sativa, Inc. (the “Company” or “CBDS”) entered into an Amended and Restated Agreement of Merger and Plan of Reorganization to acquire all of the issued and outstanding shares of MJ Harvest, Inc, a Nevada corporation (“MJ”) by means of a reverse triangular merger (the “Merger”) to be completed pursuant to the terms of the Merger Agreement among the Company, the Company’s wholly owned subsidiary formed for the purposes of completing the Merger, CBDS Acquisition Corp (“Merger Sub”), and MJ (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, Merger Sub will merge with, and into, MJ, with MJ continuing as the surviving entity as a wholly owned subsidiary of the Company. In consideration for all of the outstanding shares in the common stock of MJ (the “MJ Shares”), the Company will issue 2.66 shares of the Company’s common stock for each MJ Share to each stockholder of MJ.
Although the Company was the legal acquirer of MJ, under generally accepted accounting principles, the Merger will be accounted for as a reverse acquisition, with MJ being treated as the acquiring entity for accounting and financial reporting purposes. As such, moving forward the financial statements of the Company will be presented as a continuation of the operations of MJ and not the Company.
The following unaudited proforma condensed consolidated financial statements of the consolidated company include the unaudited proforma condensed balance sheet as of November 30, 2022 (the “Proforma Balance Sheet”), the unaudited proforma condensed statement of operations for the six months ended November 30, 2022, and the twelve months ended May 31, 2022 (the “Proforma Income Statements”), as adjusted to give effect to the Company’s acquisition of MJ and the related financing transactions (collectively, the “Proforma Financial Statements”).
The Proforma Financial Statements are for informational purposes only and are not intended to represent or to be indicative of the actual results of operations or financial position that the consolidated company would have reported had the acquisition been completed as of the dates set forth in the Proforma Financial Statements, and should not be taken as being indicative of the consolidated company’s future consolidated results of operations or financial position.
The assumptions and estimates underlying the unaudited adjustments to the Proforma Financial Statements are described in the accompanying notes, which should be read together with the Proforma Financial Statements.
The Proforma Financial Statements should be read together with the Company’s historical financial statements, which are included in the Company’s latest annual report on Form 10-K and quarterly report on Form 10-Q, and MJ’s latest annual report on Form 10-K and quarterly report on Form 10-Q.
These Proforma Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP) and are expressed in US dollars. These Proforma Financial Statements do not contain all of the information required for annual financial statements. Accordingly, they should be read in conjunction with the most recent annual financial statements of the Company and MJ.
The historical consolidated financial statements have been adjusted in the Proforma Financial Statements to give effect to proforma events that are (1) directly attributable to the business combination, (2) factually supportable and (3) with respect to the proforma condensed consolidated statements of operations, expected to have a continuing impact on the consolidated results following the business combination. The actual proforma adjustments will depend on a number of factors, and could result in a change to the Proforma Financial Statements.
This preliminary purchase price allocation has been used to prepare proforma adjustments in the proforma balance sheet and income statement. The final purchase price allocation will be determined when the Company has completed the detailed valuations and necessary calculations. The final allocation could differ materially from the preliminary allocation used in the proforma adjustments. The final allocation may include changes in fair values of assets and liabilities and changes in allocations to intangible assets and goodwill.
CANNABIS SATIVA, INC. AND MJ HARVEST, INC.
UNAUDITED PROFORMA CONSOLIDATED CONDENSED BALANCE SHEET
as of November 30, 2022
| Cannabis Sativa, Inc.
|
| MJ Harvest, Inc.
|
| Proforma Adjustments
|
|
|
| Proforma
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
Cash
| $214,530
|
| $50,221
|
| $(75,000)
|
| (1)
|
| $189,751
|
Inventory
| -
|
| 960,202
|
| -
|
|
|
| 960,202
|
Prepaids and other current assets
| -
|
| 48,371
|
| -
|
|
|
| 48,371
|
Investment in equity securities, at fair value
| 613,477
|
| -
|
| -
|
|
|
| 613,477
|
Total Current Assets
| 828,007
|
| 1,058,794
|
| (75,000)
|
|
|
| 1,811,801
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
|
Right of use asset
| 43,485
|
| 3,588,672
|
| -
|
|
|
| 3,632,157
|
Property and equipment, net
| 2,777
|
| 324,160
|
| -
|
|
|
| 326,937
|
Intangible assets, net
| 196,864
|
| 109,334
|
| -
|
|
|
| 306,198
|
Goodwill
| 1,837,202
|
| -
|
| 182,142
|
| (4)
|
| 2,019,344
|
Licenses
| -
|
| 632,066
|
| -
|
|
|
| 632,066
|
Investments in equity securities, at cost
| -
|
| 3,101,666
|
| -
|
|
|
| 3,101,666
|
Total Assets
| $2,908,335
|
| $8,814,692
|
| $107,142
|
|
|
| $11,830,169
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable
| $142,052
|
| $295,106
|
| $-
|
|
|
| $437,158
|
Operating lease liability, current portion
| 28,263
|
| 626,559
|
| -
|
|
|
| 654,822
|
Put option liability
| -
|
| 78,294
|
|
|
|
|
| 78,294
|
Notes payable, net of discounts
| 104,250
|
| 2,970,495
|
| -
|
|
|
| 3,074,745
|
Accrued interest - related parties
| 16,324
|
| -
|
| -
|
|
|
| 16,324
|
Payables to related parties
| 87,540
|
| 1,067,759
|
| -
|
|
|
| 1,155,299
|
Total Current Liabilities
| 378,429
|
| 5,038,213
|
|
|
|
|
| 5,416,642
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
|
Operating lease liability, long-term
| 15,222
|
| 2,971,952
|
| -
|
|
|
| 2,987,174
|
Common stock payable
| 206,946
|
| -
|
| (206,946)
|
| (2)
|
| -
|
Payables to related parties – long term
| -
|
| 66,300
|
| -
|
|
|
| 66,300
|
Notes payable, net of discounts
| -
|
| 321,173
|
| -
|
|
|
| 321,173
|
Total Liabilities
| 600,597
|
| 8,397,638
|
| (206,946)
|
|
|
| 8,791,289
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity:
|
|
|
|
|
|
|
|
|
|
Preferred Stock
| 696
|
| -
|
| 535
|
| (2)
|
|
|
| -
|
| -
|
| (1,231)
|
| (3)
|
|
|
Common Stock
| 44,871
|
| 4,485
|
| 476
|
| (2)
|
| 167,685
|
| -
|
| -
|
| (45,347)
|
| (3)
|
|
|
| -
|
| -
|
| 163,200
|
| (4)
|
|
|
Additional paid-in capital
| 80,905,557
|
| 14,824,082
|
| 205,935
|
| (2)
|
| 17,357,708
|
| -
|
| -
|
| (81,111,492)
|
| (3)
|
|
|
| -
|
| -
|
| 2,533,626
|
| (4)
|
|
|
Accumulated deficit
| (79,984,982)
|
| (14,411,513)
|
| 79,984,982
|
| (3)
|
| (14,486,513)
|
| -
|
| -
|
| (75,000)
|
| (1)
|
|
|
Net Income
| (67,558)
|
| (2,437,472)
|
| (19,017)
|
|
|
| (2,524,047)
|
Accumulated deficit
| (79,917,424)
|
| (11,974,041)
|
| 79,917,424
|
|
|
| (11,974,041)
|
Stockholders' Equity
| 966,142
|
| 417,054
|
| 1,655,684
|
|
|
| 3,038,880
|
|
|
|
|
|
|
|
|
|
|
Non-Controlling Interest
| 1,341,596
|
| -
|
| (1,341,596)
|
| (3)
|
| -
|
Total Stockholders' Equity
| 2,307,738
|
| 417,054
|
| 314,088
|
|
|
| 3,038,880
|
Total Liabilities and Stockholders' Equity
| $2,908,335
|
| $8,814,692
|
| $107,142
|
|
|
| $11,830,169
|
The accompanying notes are an integral part of these unaudited proforma condensed financial statements.
16
CANNABIS SATIVA, INC. AND MJ HARVEST, INC.
UNAUDITED PROFORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
| Six Months Ended 9/30/22
Cannabis Sativa, Inc.
|
| Six Months Ended 11/30/22
MJ Harvest, Inc.
|
| Proforma Adjustments
|
|
|
| Proforma
|
Revenues
| $839,167
|
| $169,166
|
| $-
|
|
|
| $1,008,333
|
Cost of Revenues
| 320,484
|
| 118,351
|
| -
|
|
|
| 438,835
|
Gross Profit (Loss)
| 518,683
|
| 50,815
|
| -
|
|
|
| 569,498
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
Professional fees
| 298,017
|
| 158,530
|
| -
|
|
|
| 456,547
|
Depreciation and amortization
| 81,794
|
| 15,576
|
| -
|
|
|
| 97,370
|
Wages and salaries
| 372,772
|
| 170,000
|
| -
|
|
|
| 542,772
|
Advertising
| 16,907
|
| (6,009)
|
| -
|
|
|
| 10,898
|
General and administrative
| 306,420
|
| 584,990
|
| -
|
|
|
| 891,410
|
Total Operating Expenses
| 1,075,910
|
| 923,087
|
|
|
|
|
| 1,998,997
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Operations
| (557,227)
|
| (872,272)
|
| -
|
|
|
| (1,429,499)
|
|
|
|
|
|
|
|
|
|
|
Other Expenses (Income)
|
|
|
|
|
|
|
|
|
|
Equity investment loss (income)
| -
|
| -
|
| 36,780
|
| (6)
|
| 36,780
|
Fair value of put option
| -
|
| 78,294
|
|
|
|
|
| 78,294
|
Unrealized loss (gain) on equity securities
| (158,283)
|
| -
|
| -
|
|
|
| (158,283)
|
Interest expense
| 6,223
|
| 1,486,906
|
| -
|
|
|
| 1,493,129
|
Total Other (Income) Expenses
| (152,060)
|
| 1,565,200
|
| 36,780
|
|
|
| 1,371,626
|
|
|
|
|
|
|
|
|
|
|
Net Loss
| (405,167)
|
| (2,437,472)
|
| (36,780)
|
|
|
| (2,801,125)
|
Non Controlling Interest income (loss)
| 12,956
|
| -
|
| -
|
|
|
| 12,956
|
Net loss attributable to Company
| $(418,123)
|
| $(2,437,472)
|
| $(36,780)
|
|
|
| $(2,892,375)
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) for the Period per Common Share: Basic & Diluted
|
|
|
|
|
|
|
| $(0.02)
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding: Basic & Diluted
|
|
|
|
|
|
|
| 152,494,123
|
The accompanying notes are an integral part of these unaudited proforma condensed financial statements.
17
CANNABIS SATIVA, INC. AND MJ HARVEST, INC.
UNAUDITED PROFORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
For the twelve month period ending May 31, 2022
| Cannabis Sativa, Inc.
|
| MJ Harvest, Inc.
|
| Proforma Adjustments
|
|
|
| Proforma
|
Revenues
| $1,732,108
|
| $172,825
|
| $-
|
|
|
| $1,904,933
|
Cost of Revenues
| 650,186
|
| 185,852
|
| -
|
|
|
| 836,038
|
Gross Profit (Loss)
| 1,081,922
|
| (13,027)
|
| -
|
|
|
| 1,068,895
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
Professional fees
| 472,147
|
| 515,792
|
| -
|
|
|
| 987,939
|
Depreciation and amortization
| 170,107
|
| 20,041
|
| -
|
|
|
| 190,148
|
Wages and salaries
| 745,385
|
| 663,800
|
| -
|
|
|
| 1,409,185
|
Advertising
| 143,002
|
| -
|
| -
|
|
|
| 143,002
|
General and administrative
| 1,008,755
|
| 657,636
|
| 75,000
|
| (1)
|
| 1,741,391
|
Total Operating Expenses
| 2,539,396
|
| 1,857,269
|
| 75,000
|
|
|
| 4,471,665
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Operations
| (1,457,474)
|
| (1,870,296)
|
| (75,000)
|
|
|
| (3,402,770)
|
|
|
|
|
|
|
|
|
|
|
Other Expenses (Income)
|
|
|
|
|
|
|
|
|
|
Loan financing fees
| -
|
| 227,756
|
| -
|
|
|
| 227,756
|
Equity investment loss (income)
| -
|
| -
|
| (373,710)
|
| (6)
|
| (373,710)
|
Unrealized loss (gain) on equity securities
| 663,285
|
| -
|
| -
|
|
|
| 663,285
|
Gain on forgiveness of CAREs Act Loan
| (5,000)
|
| -
|
| -
|
|
|
| (5,000)
|
Gain on sale of investment securities
| 9,030
|
| -
|
| -
|
|
|
| 9,030
|
Interest expense
| 54,013
|
| 777,732
|
| -
|
|
|
| 831,745
|
Total Other (Income) Expenses
| 721,328
|
| 1,005,488
|
| (373,710)
|
|
|
| 1,353,106
|
|
|
|
|
|
|
|
|
|
|
Net Loss
| (2,178,802)
|
| (2,875,784)
|
| 298,710
|
|
|
| (4,755,876)
|
Non Controlling Interest income (loss)
| 158
|
| -
|
| -
|
|
|
| 158
|
Income (Loss) from Discontinued Operations
| 266
|
| -
|
| -
|
|
|
| 266
|
Net loss attributable to Company
| $(2,178,378)
|
| $(2,875,784)
|
| $298,710
|
|
|
| $(4,755,452)
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) for the Period per Common Share: Basic & Diluted
|
|
|
|
|
|
|
| $(0.04)
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding: Basic & Diluted
|
|
|
|
|
|
|
| 114,331,969
|
The accompanying notes are an integral part of these unaudited proforma condensed financial statements.
18
Notes to the Unaudited Pro Forma Condensed Combined Financial Information
1. Description of Transaction
Upon the Merger effective date, all shares of MJ common stock outstanding immediately prior to the Merger, will be converted into approximately 121,107,790 shares of CS’s common stock in the aggregate, based on an exchange ratio of 2.66 shares of CS for 1 share of MJ as set forth in the Merger Agreement. The estimated number of shares of common stock that CS expects to issue to MJ’s common and preferred stockholders as of November 30, 2022 (ignoring rounding of fractional shares) is determined as follows:
Shares of MJ common stock outstanding at August 31, 2022 and December 13, 2022
| 44,854,737
|
Exchange ratio stipulated in Merger Agreement
| 2.66
|
Estimated number of shares of CS common stock to be issued to MJ shareholders upon closing of merger
| 121,107,790
|
Consummation of the merger is subject to certain closing conditions, including, among other things, approval by the CS stockholders and the MJ stockholders.
2. Basis of Pro Forma Presentation
The unaudited pro forma condensed combined financial information has been prepared in accordance with SEC Regulation S-X Article 11. The unaudited pro forma condensed combined statements of operations for the year ended May 31, 2022 and the six months ended November 30, 2022, give effect to the Merger as if it had been consummated on June 1, 2021. The unaudited pro forma condensed combined balance sheet as of November 30, 2022 gives effect to the Merger as it had been consummated on November 30, 2022.
For accounting purposes, MJ is considered to be the acquiring company and the merger is expected to be accounted for as a reverse acquisition of CS by MJ. This determination was primarily based on voting interests, executive officers, and board representation in the combined company. The historical financial statements of MJ will become the historical financial statements of the combined company.
The accompanying unaudited proforma condensed combined financial information is derived from the historical financial statements of CS and MJ. These proforma financial statements have been compiled from and include:
| (a)
| an unaudited proforma balance sheet combining the unaudited balance sheet of the Company as at September 30, 2022, with the unaudited balance sheet of MJ as at November 30, 2022, giving effect to the transaction as if it occurred on June 1, 2021.
|
| (b)
| an unaudited proforma statement of operations combining the unaudited twelve months of operations of the Company for the twelve months ended June 30, 2022, with the audited statement of operations of MJ for the year ended May 31, 2022, giving effect to the transaction as if it occurred on June 1, 2021.
|
| (c)
| an unaudited proforma statement of operations combining the unaudited interim statement of operations of the Company for the six months ended September 30, 2022, with the unaudited statement of operations of MJ for the six months ended November 30, 2022, giving effect to the transaction as if it occurred on June 1, 2021.
|
The Proforma Financial Statements have been compiled using the significant accounting policies as set out in the consolidated financial statements of the Company for the year ended May 31, 2022. For the year ended May 31, 2022, based on the review of the accounting policies of MJ, it is the Company’s management’s opinion that there are no material accounting differences between the accounting policies of the Company and MJ. The Proforma Financial Statements should be read in conjunction with the historical financial statements and notes thereto of the Company and of MJ.
19
It is management’s opinion that these proforma financial statements include all adjustments necessary for the fair presentation, in all material respects, of the proposed transaction described above in accordance with US GAAP applied on a basis consistent with the Company’s accounting policies. The unaudited pro forma condensed combined financial information does not reflect the costs of any integration activities or benefits that may result from realization of future cost savings from operating efficiencies which may result from the merger.
3. Preliminary Purchase Price
The Company estimates that the aggregate value of the consideration to be paid in the merger will be approximately $2.7 million. The fair value of consideration transferred is based on the number of common shares CS stockholders will own of the combined company upon consummation of the merger, multiplied by the closing price of fair value of CS common stock on February 6, 2023, the most recent practicable date prior to the filing of this registration statement. The number and value of the shares of CS common stock to be issued pursuant to the Merger Agreement will not be determined until the completion of the merger and therefore, the final aggregate value of the consideration paid in the merger, may be more or less than $2.7 million. The fair value of consideration transferred is not indicative of the combined entities enterprise value upon consummation of the merger.
For purposes of these pro forma financial statements, the total estimated purchase price is summarized as follows (in thousands, except share and per share amounts):
Shares of CS common stock outstanding at September 30, 2022
| 44,870,655
|
Shares of CS preferred stock outstanding at September 30, 2022 to be converted into shares of CS common stock on a 1:1 basis
| 695,708
|
Equivalent shares of CS common stock included in Stock Payable at September 30, 2022 to be issued prior to the Merger
| 1,010,942
|
Estimated number of shares of the combined company to be owned by CS stockholders
| 46,577,305
|
Multiplied by the assumed price per share of CS common stock, which is the closing trading price of CS on February 6, 2023
| $0.0579
|
Total estimated purchase price
| $2,696,826
|
The actual purchase consideration for the net assets of CS will vary based on CS share price at closing. The estimated purchase consideration reflected in these unaudited pro forma condensed combined financial information does not purport to represent what the actual purchase consideration will be when the merger is completed. The actual purchase price will fluctuate until the merger.
3.Pro Forma Adjustments
Adjustments included in the column under the heading “Pro Forma Adjustments” are primarily based on information contained within the Merger Agreement. Further analysis will be performed after the completion of the merger to confirm the necessity of these estimates.
Both MJ and CS have a history of generating net operating losses and maintain a full valuation allowance against their net deferred tax asset. As a result, both entities have not previously reflected an income tax benefit or expense within the financial statement periods presented. Management has not identified any changes to the income tax positions due to the merger that would result in an incremental tax expense or benefit. Accordingly, no tax-related adjustments have been reflected for the pro forma adjustments.
The pro forma adjustments, based on preliminary estimates that could change materially as additional information is obtained, are as follows:
1)To reflect estimated transaction costs of $75,000. Transaction costs of $75,000 are reflected as general and administrative expense in the unaudited pro forma condensed combined statement of operations for the year ended May 31, 2022.
2)To reflects the issuance of common and preferred shares associated with CS’ stock payable balance at September 30, 2022.
3)To eliminate CS’s historical equity carrying values. All preferred shares of CS will be converted to common shares of CS prior to the Merger.
20
4)To reflect the fair value of the common stock assumed in the Merger and the adjustment of common stock to CS’ par value.
5)To reflect the adjustment of CS’ goodwill acquired to its estimated fair value. The preliminary purchase price was below the preliminary estimated fair value of net assets acquired. Management has initially determined that acquired goodwill should be increased by the difference.
6)To adjust for the change in accounting for MJ’s investment in PPK Investment Group, Inc. (“PPK”) which has been historically accounted for using the cost, less impairment basis prior to the Merger. Post-merger, management has determined that the investment is required to be accounted for using the equity method because the president of PPK will become an officer and director of the combined company. The amounts per this adjustment on the proforma statement of operations represents MJ’s share of PPK’s net income (loss) for the periods presented.
7)Net loss per share calculated using the historical weighted average shares outstanding, and the issuance of additional shares in connection with the Merger assuming the shares were outstanding since June 1, 2021. As the Merger is being reflected as if it had occurred at the beginning of the periods presented, the calculation of weighted average shares outstanding for basic and diluted net loss per share assumes that the shares issuable relating to the Merger have been outstanding for the entire period presented.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements convey CS's or MJ's current expectations or forecasts of future events. CS and MJ intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are generally identifiable by use of the words "may," "could," "should," "would," "estimate," "project," "believe," "intend," "plan," "anticipate," "expect," "targets" and similar expressions. These forward-looking statements include statements relating to management's expectations regarding CS's and MJ's ability to consummate the Merger and integrate the two companies, the expected benefits of the Merger, the value of the CS common stock to be issued in connection with the Merger, CS's and MJ's ability to remain solvent, the relative competency of management, the likely response of the OTCQB Market to certain actions of CS, certain decisions of the U.S. Internal Revenue Service (the "IRS"), capital requirements, business strategies and other plans and objectives of CS's and MJ's management for future operations and activities and other such matters. Actual results could differ materially from those in forward-looking statements because of, among other reasons, the factors described below. The forward-looking statements are not guarantees of future performance. They are based on numerous assumptions that CS and MJ believe are reasonable, but they are open to a wide range of uncertainties and business risks.
Key factors that could cause actual events or results to be different than expected or anticipated include, but are not limited to:
·failure to complete the Merger;
·failure to integrate CS and MJ's operations following the Merger;
·the future regulation of marijuana;
·operating conditions at CS and MJ;
·availability of capital;
·the risks set forth in this joint proxy statement/prospectus under the caption "Risk Factors."
In light of these risks, uncertainties and assumptions, you are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this joint proxy statement/prospectus. When considering forward-looking statements, you should keep in mind the cautionary statements in this joint proxy statement/prospectus. CS and MJ are not under any obligation, and each expressly disclaims any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this joint proxy statement/prospectus might not occur.
21
RISK FACTORS
In determining whether to vote for approval of the Merger Agreement and the Merger, you should consider carefully the matters described below and the other information included in this proxy statement/prospectus. Additional risks and uncertainties that CS and MJ do not presently know or that CS and MJ currently deem immaterial may also have a material adverse effect on CS's and MJ's business.
Risks Relating to the Merger
The benefits of integrating the companies may not be realized.
To be successful after the Merger, CS will need to integrate the operations of MJ into CS as its wholly owned subsidiary. Integration will require substantial management attention and could detract attention from the day-to-day business of CS. CS could encounter difficulties in the integration process, such as the need to revisit assumptions about reserves, future operations, revenues, capital expenditures and operating costs, including synergies, the loss of key employees or commercial relationships or the need to address unanticipated liabilities. If CS cannot integrate the CS and MJ businesses successfully, it may fail to realize the expected benefits of the Merger.
Failure to complete the Merger or delays in completing the Merger could negatively affect CS's stock price and CS's and MJ's future businesses and operations.
If the Merger is not completed for any reason, CS and MJ may be subject to a number of risks, including the following:
·the separate companies will not realize the benefits expected from the Merger, including a potentially enhanced financial and competitive position;
·due to its current liquidity position, MJ may not be able to continue operations as a going concern and, as a result, its creditors may foreclose on certain or all of its assets or seek protection under the U.S. Bankruptcy Code. In both scenarios, MJ stockholders would most likely lose all or substantially all of their investment in MJ;
·the current market price of CS common stock may reflect a market assumption that the Merger will occur and a failure to complete the Merger could result in a negative perception by the stock market of CS and a resulting decline in the market price of its common stock;
·certain costs relating to the Merger, including certain investment banking, financing, legal and accounting fees and expenses, must be paid even if the Merger is not completed; and
·there may be substantial disruption to each of CS's and MJ's business and distraction of each company's management and employees from day-to-day operations because matters related to the Merger (including integration planning) may require substantial commitments of time and resources, which could otherwise have been devoted to other opportunities that could have been beneficial to CS or MJ, as applicable.
Delays in completing the Merger could exacerbate uncertainties concerning the effect of the Merger, which may have an adverse effect on the business following the Merger and could defer or detract from the realization of the benefits expected to result from the Merger.
Ownership by CS stockholders will be diluted by the Merger.
The Merger will dilute the ownership position of the current stockholders of CS. Following the Merger, the current shareholders of MJ will own approximately 72% of the issued and outstanding common shares of CS.
The price of CS common stock might decrease before or after the Merger, which would affect the value of the consideration to be received by MJ stockholders in connection with the Merger.
Upon the closing of the Merger, each share of MJ common stock will be converted into the right to receive the Merger Consideration. This exchange ratio is fixed in the Merger Agreement and will not be adjusted for changes in the market price of CS's common stock. If the price of CS common stock decreases before or after the Merger is consummated, MJ stockholders who receive CS common stock will receive shares of CS common stock that have a lesser market value at such time. Therefore, MJ stockholders cannot be sure of the value of the CS common stock they will receive upon completion of the Merger. Stock price changes may result from a variety of factors (many of which
22
are beyond the control of CS or MJ). The trading price of the shares of CS common stock may vary because of factors such as:
·changes in the business, operating results or prospects of CS, MJ or both companies;
·actual or anticipated variations in quarterly results of operations of both companies;
·sales of CS common stock;
·additions or departures of key personnel;
·announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by CS, MJ or both companies;
·or trends in the marijuana industry; changes in market valuations of companies similar to CS or MJ;
·the prospects of post-Merger operations;
·regulatory considerations;
·general market and economic conditions; and
·the other risks set forth in this joint proxy statement/prospectus.
The date that MJ stockholders will receive the Merger Consideration is uncertain.
The date that MJ stockholders will receive the Merger Consideration depends on the completion date of the Merger, which is uncertain. While CS and MJ expect to complete the Merger in the first quarter of 2023, the completion date of the Merger might be later than expected because of unforeseen events.
MJ's directors and executive officers have interests in the Merger that are different from, and in addition to, the interests of other MJ stockholders.
MJ's directors and executive officers are parties to agreements or participants in other arrangements that give them interests in the Merger that are different from, and in addition to, the interests of other stockholders of MJ, which could create conflicts of interest in their determinations to recommend the Merger. You should consider these interests in voting on the Merger. These different interests are described under "The Merger—Interests of MJ's Directors and Executive Officers in the Merger."
If CS fails to implement an effective system of internal controls with respect to MJ after the Merger, it may not be able to accurately report its financial results or prevent fraud and, as a result, its business could be harmed and current and potential stockholders could lose confidence in CS, which could cause CS's value to fall.
If CS is not able to establish and maintain effective internal controls with respect to MJ in a timely manner following the Merger or with adequate compliance, it may not be able to accurately report the financial results of the CS and MJ or prevent fraud and might be subject to sanctions or investigation by, among others, the OTCQB Market. Any such action could harm its business or investors' confidence in CS, and could cause its stock price to fall.
Risks Relating to the Businesses of CS, MJ
MJ has a limited operating history and MJ's business and prospects should be considered in light of the risks and difficulties typically encountered by a company with a limited operating history.
MJ has had no revenue-generating operations since its incorporation and MJ's operating cash flow needs have been financed solely through offerings of MJ's common stock or other securities and debt. As a result, MJ has limited historical financial and operating information relating to its ability to generate revenue in the future available to help you evaluate MJ's performance or independent value.
MJ's estimates of capital, personnel, equipment, and facilities required for its proposed operations are based on certain other existing businesses operating under similar business conditions and plans. MJ believes that its estimates are reasonable, but, until MJ's operations have been established, it is not possible to determine the accuracy of such estimates. MJ has not had any direct operating experience and therefore has no basis for its projections, other than the experience of other similar businesses from which limited financial histories are available. As a result, there is no assurance that MJ will be able to generate profits from operations.
23
MJ has a history of losses, deficits and negative operating cash flows and will likely continue to incur losses in the future. Such losses may impair MJ's ability to pursue MJ's business plan.
MJ has incurred losses and negative operating cash flows since MJ's inception and expects to continue to incur operating losses and negative cash flows from operations for the foreseeable future. MJ has made, and will continue to make, substantial capital and other expenditures before it will have sufficient operating income and cash flow to recover its investments. MJ is not able to accurately estimate when, if ever, MJ's operating income will be sufficient to cover these investments. Further, MJ may not achieve or maintain profitability or generate cash from operations in future periods. MJ has been dependent on sales of its equity securities and debt financing to meet its cash requirements and such financing may not continue to be available. MJ does not expect positive cash flow from operations in the near term. There is no assurance that actual cash requirements will not exceed MJ's estimates. MJ's existing working capital is not expected to be adequate to fund MJ's business operations over the next twelve months.
CS's business could be harmed if CS loses the services of its key personnel.
CS's business and cannabis related programs depend upon CS's ability to employ the services of employees with experience in branding, marketing, developing and manufacturing cannabis based products and other experts in this field. In operating CS's business and in order to continue CS's programs, CS competes for the services of employees and professionals with other cannabis companies and businesses. In addition, several entities have expressed an interest in hiring certain of CS's employees. CS's ability to maintain and expand CS's business and continue CS's cannabis programs may be impaired if CS is unable to continue to employ or engage those parties currently providing services and expertise to CS or identify and engage other qualified personnel to do so in their place. To retain key employees, CS may face increased compensation costs, including potential new stock incentive grants and there can be no assurance that the incentive measures CS implements will be successful in helping CS retain its key personnel.
Approximately 37% of CS's common stock is controlled by two significant stockholders and management.
The availability for sale of a large amount of shares may depress the market price of CS's common stock.
Terms of subsequent financings may adversely impact CS's stockholders.
In order to finance CS's future production plans and working capital needs, CS may have to raise funds through the issuance of equity or debt securities. Depending on the type and the terms of any financing CS pursues, stockholders' rights and the value of their investment in CS's stock could be reduced. For example, if CS has to issue secured debt securities, the holders of the debt would have a claim to CS's assets that would be prior to the rights of stockholders until the debt is paid. Interest on these debt securities would increase costs and negatively impact operating results. If the issuance of new securities results in diminished rights to holders of CS's common stock, the market price of CS's common stock could be negatively impacted.
CS stockholders could be diluted if CS was to use its common stock to raise capital.
As previously noted, CS may need to seek additional capital in the future to satisfy CS's working capital requirements. This financing could involve one or more types of securities including common stock, convertible debt, preferred stock or warrants to acquire common or preferred stock. These securities could be issued at or below the then prevailing market price for CS's common stock. Any issuance of additional shares of CS's common stock could be dilutive to existing stockholders and could adversely affect the market price of CS's common stock.
24
THE STOCKHOLDER MEETING
MJ. MJ's board of directors is furnishing this proxy statement/prospectus to solicit proxies from MJ stockholders for use at MJ's virtual special meeting of stockholders. This proxy statement/prospectus provides you with the information you need to be able to vote or instruct your vote to be cast at the MJ virtual special meeting. In addition, this document constitutes a prospectus covering the issuance of CS common stock to MJ stockholders pursuant to the Merger Agreement.
Time and Place
The stockholder meeting will be held as follows:
You will be able to attend the special meeting online by logging in at https://www.colonialstock.com/MJHarvest2023 and then clicking on the document entitled “Virtual Meeting Instructions” which includes additional instructions necessary to access the meeting room. To access the special meeting, you will need your unique 12-digit control number included in the instructions that accompany your proxy materials. The meeting will be held on April 10, 2023, at 10:00 a.m. Pacific Daylight Time.
Purposes of the Stockholder Meeting
MJ. At the MJ special meeting, stockholders of MJ will be asked to:
1.consider and vote upon a proposal to approve the Merger Agreement and the Merger;
2.consider and vote upon any adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies in favor of the foregoing proposal; and
3.transact any other business that may properly come before the special meeting or any adjournment or postponement of the special meeting.
The MJ board of directors has unanimously approved the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement and determined that the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement are advisable to and in the best interests of the stockholders of MJ. The MJ board of directors unanimously recommends that the stockholders of MJ vote "FOR" the proposal to approve the Merger Agreement and the Merger and to approve any adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies.
Record Date and Outstanding Shares
MJ. Only holders of record of MJ common stock at the close of business on March 20, 2023, the record date for the MJ special meeting, are entitled to notice of, and to vote at, the MJ special meeting. Each share of MJ common stock entitles the holder of that share to one vote on each matter submitted for stockholder approval.
Security Ownership and Voting by Directors and Executive Officers
MJ. As of the record date for the MJ special meeting, MJ's directors and executive officers, and their affiliates beneficially owned or had the right to vote 33,262,569 outstanding shares of MJ common stock, representing approximately 74.2% of the shares issued and outstanding and entitled to vote at the MJ special meeting. For more information regarding the security ownership of MJ common stock by directors, executive officers and certain beneficial owners of MJ, see "Information Related to MJ—Security Ownership of Management and Certain Beneficial Owners". While there are no voting agreements or arrangements with any directors, officers or other stockholders of MJ relating to the Merger of which MJ is aware, to MJ's knowledge, all the directors and executive officers of MJ and their affiliates intend to vote their common stock in favor of the Merger Agreement and the Merger.
25
Quorum and Vote Necessary to Approve Proposals
Abstentions and Broker Non-Votes
For any item of business proposed at the special meeting of stockholders of MJ, as applicable, may vote "FOR," "AGAINST" or "ABSTAIN." If you elect to "ABSTAIN," which is referred to as an "abstention," your shares will be treated as shares present at the meeting entitled to vote but your vote will not be counted as a vote cast. However, abstentions are considered present for purposes of determining a quorum, even though they are not considered votes cast on that proposal since an abstention is not a vote cast.
If you hold shares beneficially in "street name" and do not provide your broker with voting instructions, your shares may constitute "broker non-votes." Generally, broker non-votes occur on a matter when a broker is not permitted to vote on that matter without instructions from the beneficial owner and instructions are not given by the beneficial owner. In tabulating the voting result for any particular proposal, shares that constitute broker non-votes are considered present for purpose of determining a quorum but are not considered entitled to vote or votes cast on that proposal. Thus, a broker non-vote will make a quorum more readily attainable, but broker non-votes will not affect the outcome of any matter being voted on at the meetings except for the approval of the Merger Agreement and Merger by MJ stockholders, which requires the affirmative vote of a majority of the voting power of MJ's stockholders.
MJ. The presence, in person or by proxy, of the holders of one-half of the shares of MJ common stock outstanding is necessary to constitute a quorum at the MJ special meeting. Abstentions and broker non-votes will be counted as present for purposes of establishing a quorum. Approval of the Merger Agreement and the Merger requires the affirmative vote of a majority of the voting power of MJ's stockholders. Because this proposal requires the affirmative vote of a majority of the voting power of MJ's stockholders, abstentions and broker non-votes will have the same effect as a vote "AGAINST" the approval of the Merger Agreement and the Merger.
Any adjournment of the MJ special meeting to solicit additional proxies requires the affirmative vote of the holders of MJ common stock representing a majority of the votes present in person or by proxy at the special meeting entitled to vote, whether or not a quorum exists, without further notice other than by announcement made at the stockholders meeting. Abstentions will be treated as shares present in person or by proxy and entitled to vote and thus will have the same effect as a vote "AGAINST" this proposal. Broker non-votes will not be treated as shares present in person or by proxy and entitled to vote and will have no effect on the outcome of this proposal.
Tabulation of the Votes
MJ. MJ has appointed Pacific Stock Transfer to serve as the Inspector of Election for the MJ special meeting. Pacific Stock Transfer will independently tabulate affirmative and negative votes and abstentions.
Proxies
The applicable proxy card will be sent to each MJ stockholder on or promptly after their respective record dates. If you receive a proxy card, you may grant a proxy to vote on the proposals by marking, dating and signing your proxy card and returning it to MJ or by following the procedures to submit a proxy by telephone or through the Internet. If you hold your stock through a bank, broker or other nominee, you should follow the instructions of the bank, broker or nominee when voting your shares. All shares of stock represented by properly executed proxies (including those given by telephone or through the Internet) received prior to or at the MJ special meeting, will be voted in accordance with the instructions indicated on such proxies. Proxies that have been revoked properly and on time will not be counted. If no instructions are indicated on a properly executed returned proxy (including those given by telephone or through the Internet), that proxy will be voted "FOR" each of the proposals presented at the applicable special meeting.
Other Business
The MJ board of directors is not currently aware of any business to be acted upon at the stockholders meeting other than the matters described in this proxy statement/prospectus. If, however, other matters are properly brought before the meeting, the persons appointed as proxies for the meeting will have discretion to vote or act on those matters according to their judgment.
26
Revocation of Proxies
You may revoke your proxy before it is voted by:
·submitting a new, valid, and later-dated proxy by mail, telephone or through the Internet that is received prior to the applicable special meeting;
·notifying the corporate secretary of MJ, in writing, before the special meeting that you have revoked your proxy; or
·voting in person or notifying the corporate secretary of MJ, in writing, at the special meeting of your wish to revoke your proxy.
Voting in Person at the Virtual Special Meeting
All stockholders of record of MJ may vote their shares in person by attending the virtual special meeting and submitting the ballot that will be provided there.
If your shares are held in "street name," you may vote in person at the special meeting if you have a legal proxy from the holder of record. You will need to ask the broker or bank or other institution holding your shares for a legal proxy and bring the legal proxy with you to the special meeting. You will not be able to vote your shares at the meeting without a legal proxy. If you request a legal proxy, any previously executed proxy will be revoked, and your vote will not be counted unless you appear at the special meeting and vote in person or legally appoint another proxy to vote on your behalf.
Solicitation of Proxies
In addition to solicitation by mail, MJ may make arrangements with brokerage houses and other custodians, nominees and fiduciaries to send proxy materials to beneficial owners. The directors, officers and employees of MJ may solicit proxies by telephone, Internet or in person. These directors, officers and employees will receive no additional compensation for doing so.
To ensure sufficient representation at the special meetings, MJ may request the return of proxy cards by telephone, the Internet or in person. The extent to which this will be necessary depends entirely upon how promptly proxy cards are returned, MJ urges you to send in your proxy without delay.
MJ will pay its cost of soliciting proxies, including the cost of preparing and mailing this document and the expenses incurred by brokerage houses, nominees and fiduciaries in forwarding proxy materials to beneficial owners.
Assistance
If you need assistance in completing your proxy card or have questions regarding the various voting options with respect to the special meeting, MJ stockholders should call MJ's corporate secretary at 954-519-3115.
THE MERGER
The discussion in this joint proxy statement/prospectus of the Merger and the principal terms of the Merger Agreement are subject to, and are qualified in their entirety by reference to, the Merger Agreement, a copy of which is attached to this joint proxy statement/prospectus as Annex A and is incorporated by reference into this joint proxy statement/prospectus.
General Description of the Merger
Under the terms of the Merger, MJ will become a wholly owned subsidiary of CS through a reverse triangular merger with CS and a merger subsidiary. CS will continue as the parent corporation. Shares of CS common stock will continue to be listed on the OTCQB Market of the OTC Markets System under the symbol "CBDS". Shares of MJ will cease trading and MJ will become a private company.
The Merger Agreement is attached as Annex A to this joint proxy statement/prospectus. Please read the Merger Agreement carefully and fully as it is the legal document that governs the Merger.
27
Background of the Merger
The Boards of Directors of CS and MJ have been discussing a possible merger since September 2021, and after consideration of market opportunities, the respective businesses of each company and their respective prospects for expansion, capital formation, and to take advantage of cost savings afforded by the combination of two public companies, the respective Boards reached agreement on the Merger transaction described in this Prospectus. In structuring the transaction, the Boards took into account, the current levels of business and the anticipated new opportunities available to each and determined that the consideration offered was fair to the shareholders of both companies.
Recommendation of CS's Board of Directors and CS's Reasons for the Merger
The CS board of directors has unanimously approved the Merger Agreement and the Merger and the other transactions contemplated by the Merger Agreement and determined that the Merger Agreement and the Merger and the other transactions contemplated by the Merger Agreement are advisable to and in the best interests of the stockholders of CS.
Recommendation of MJ's Board of Directors and MJ's Reasons for the Merger
The MJ board of directors has unanimously approved the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement and determined that the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement are advisable to and in the best interests of the stockholders of MJ. The MJ board of directors unanimously recommends that the stockholders of MJ vote "FOR" the proposal to approve the Merger Agreement and the Merger.
Interests of MJ's Directors and Executive Officers in the Merger
In considering the recommendation of the MJ board of directors with respect to the Merger Agreement, MJ's stockholders should be aware that some of MJ's executive officers and directors have interests in the Merger and have arrangements that are different from, or in addition to, those of MJ's stockholders generally. The MJ board of directors was aware of these interests and considered them, among other matters, in reaching its decisions to approve the Merger Agreement and to recommend that MJ's stockholders vote in favor of approving the Merger Agreement and the Merger.
Security Ownership
As of the record date for the MJ Special Meeting, MJ's directors and executive officers, including options to acquire shares of MJ common stock that are exercisable within 60 days, representing approximately 74.2% of the common stock of MJ. MJ's directors and officers will receive the same consideration for each share of common stock of MJ as the other holders of MJ common stock.
Board of Directors and Management of CS Following the Merger
Upon completion of the Merger, the CS board of directors will consist of Patrick Bilton, David Tobias, Ralph Clinton Pyatt III, and Randy Lanier. Upon completion of the Merger, the CS principal officers will consist of Patrick Bilton, CEO and Ralph Clinton Pyatt III, COO.
Accounting Treatment
The Merger will be accounted for as an acquisition of MJ by CS using the "acquisition" method of accounting under accounting principles generally accepted in the United States of America ("GAAP") with CS treated as the acquirer. Under the acquisition method of accounting, assets acquired and liabilities assumed will be recorded, as of completion of the Merger, at their respective fair values and added to those of CS. The reported financial condition and results of operations of CS issued after completion of the Merger will reflect MJ's balances and results after completion of the Merger, but will not be restated retroactively to reflect the historical financial position or results of operations of MJ.
28
Material United States Federal Income Tax Consequences of the Merger
The following are the material U.S. federal income tax consequences of the Merger to holders of MJ common stock that exchange their shares of MJ common stock for shares of CS common stock in the Merger.
This discussion addresses only holders of MJ common stock who hold that stock, and the CS common stock received in the Merger in exchange for MJ common stock, as a "capital asset" as defined for U.S. federal income tax purposes.
This discussion does not address all aspects of U.S. federal income taxation that may be relevant to a holder of MJ common stock in light of that holder's particular circumstances or to a holder subject to special rules (such as, for example, dealers or brokers in securities, commodities or foreign currencies, traders in securities that elect to apply a mark-to-market method of accounting, banks and certain other financial institutions, insurance companies, mutual funds, tax-exempt organizations, holders subject to the alternative minimum tax provisions of the Code, partnerships, S corporations or other pass-through entities or investors in partnerships, regulated investment companies, real estate investment trusts, holders who are not U.S. persons (as defined below), holders who hold shares of MJ common stock through certain foreign financial institutions (including investment funds or other investment vehicles), controlled foreign corporations, passive foreign investment companies, former citizens or residents of the United States, U.S. expatriates, holders whose functional currency is not the U.S. dollar, holders who hold shares of capital stock as part of a hedge, straddle, constructive sale or conversion transaction or other integrated investment, holders who acquired capital stock pursuant to the exercise of employee stock options, through a tax qualified retirement plan or otherwise as compensation or holders who actually or constructively own more than 5% of MJ common stock).
For purposes of this discussion a "U.S. person" for purposes hereof is:
·an individual citizen or resident of the United States;
·a corporation (or any other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia;
·an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
·a trust that (i) is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to control all substantial decisions of the trust or (ii) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
This discussion is based on the Code, applicable U.S. Treasury regulations, administrative interpretations and court decisions, each as in effect as of the date of this joint proxy statement/prospectus and all of which are subject to change, possibly with retroactive effect.
If a partnership (or an entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds MJ common stock, the tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partners of partnerships holding MJ common stock should consult their own tax advisors.
This discussion of material U.S. federal income tax consequences is for general information purposes only and is not intended to be, and should not be construed as, tax advice. Holders of MJ common stock are urged to consult their independent tax advisors with respect to the application of U.S. federal income tax laws to their particular situations as well as any tax consequences arising under the U.S. federal estate or gift tax rules, or under the laws of any state, local, foreign or other taxing jurisdiction or under any applicable tax treaty.
Neither MJ nor CS have sought, nor will either of them seek, any ruling from the Internal Revenue Service (the "IRS") regarding any matters relating to the Merger, and as a result, there can be no assurance that the IRS will not assert, or that a court would not sustain, a position contrary to any of the conclusions set forth below.
Tax consequences of the Merger to CS and MJ. MJ and CS intend for the Merger to qualify as a "reorganization" for U.S. federal income tax purposes within the meaning of Section 368(a) of the Code. Accordingly, neither CS nor MJ will recognize any gain or loss for U.S. federal income tax purposes as a result of the Merger.
29
Tax consequences of the Merger to MJ stockholders. Each holder of MJ common stock who exchanges such holder's MJ common stock for CS common stock generally will not recognize gain or loss. The aggregate tax basis of the CS common stock each holder receives in the Merger will equal the aggregate adjusted tax basis in the shares of MJ common stock such holder surrenders in the Merger. The holding period for the shares of CS common stock received in the Merger will include the holding period of the shares of MJ common stock surrendered in the Merger. If a holder acquired different blocks of MJ common stock at different times or at different prices, the CS common stock such holder receives will be allocated pro rata to each block of MJ common stock, and the basis and holding period of each block of CS common stock received will be determined on a block-for-block basis depending on the basis and holding period of the blocks of MJ common stock exchanged for such block of CS common stock.
Merger reporting requirements. A holder of MJ common stock, as a result of having received CS common stock in the Merger, will be required to retain records and file certain statements with their tax returns pertaining to the Merger as provided pursuant to U.S. Treasury regulation Section 1.368-3. Holders of MJ common stock should consult with their tax advisers regarding the compliance with these requirements.
Sale or other disposition. A sale, exchange, or other disposition of the CS common stock received in the Merger will generally result in gain or loss equal to the difference between the amount realized upon the disposition and a holder's adjusted tax basis in the CS common stock, as the case may be. Such gain or loss will be capital gain or loss and will be long-term capital gain or loss if the holder's holding period for the CS common stock, as applicable, exceeds one year. If a holder is an individual or other non-corporate holder, net long-term capital gain realized by such holder is subject to a preferential maximum tax rate of 20%, whereas short term capital gains are taxable at ordinary effective income tax rates. The deduction of capital losses is subject to limitations.
A Medicare contribution tax is imposed on the "net investment income" of certain individuals, estates and trusts with income exceeding certain threshold amounts. An individual is subject to a 3.8% tax on the lesser of: (1) his or her net investment income for the relevant taxable year, or (2) the excess of his or her modified adjusted gross income for the taxable year over a certain threshold ($125,000, $200,000 or $250,000 depending on the individual's U.S. federal income tax filing status). Estates and trusts are subject to similar rules applied to undistributed net investment income. Net investment income generally would include any capital gain recognized in connection with a disposition of CS common stock, as well as, among other items, other interest, dividends, capital gains and rental or royalty income received by such individual. Holders of MJ common stock should consult their tax advisors as to the application of this additional tax to their circumstances.
Information reporting and backup withholding. In general, information reporting will apply to dividends in respect of the CS common stock and the proceeds from the sale, exchange or other disposition of the CS common stock that are paid to a holder within the United States (and in certain cases, outside the United States), unless a holder is an exempt recipient and appropriately establishes that exemption. Backup withholding may apply to such payments if a holder fails to provide a taxpayer identification number or certification of other exempt status or fails to report in full dividend and interest income.
Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against a holder's U.S. federal income tax liability provided the required information is timely furnished to the IRS.
Dissenters' or Appraisal Rights
Dissenters' or appraisal rights are statutory rights that, if applicable under law, enable stockholders to dissent from an extraordinary transaction, such as a merger, and to demand that the corporation pay the "fair value" for their shares instead of receiving the consideration offered to stockholders in connection with the extraordinary transaction. Dissenters' or appraisal rights are not available in all circumstances.
Any holder of MJ common stock is entitled to dissent to the Merger and receive the "fair value" of its shares of MJ common stock in cash, together with the interest accrued from the effective date of the Merger until the date of payment, provided that the stockholder fully complies with the provisions of NRS 92A.300 to 92A.500. If, however, holders of more than 15% of MJ's outstanding common stock exercise their dissenters' rights, CS or MJ has the right to abandon the Merger.
Ensuring the perfection of your dissenter's rights can be complicated. The procedural rules are specific and must be followed precisely. Failure to comply with the procedural rules may cause a termination or waiver of your dissenter's rights. The following is only a brief summary of the material provisions of the statutory procedures MJ stockholders must follow to perfect their dissenters' rights. This summary, however, is not a complete statement of all
30
applicable requirements and is qualified in its entirety by reference to NRS 92A.300 to 92A.500, inclusive, the full text of which is attached to this joint proxy statement/prospectus as Annex B. Please review NRS 92A.300 to 92A.500 for the complete procedure. MJ will not give you any notice other than as described in this joint proxy statement/prospectus and as required by the Nevada Revised Statutes. If you are considering dissenting, you should consult with your own legal advisor.
To exercise dissenter's rights, a stockholder must:
·deliver written notice to MJ before the Merger Agreement and the Merger are voted upon, stating that the stockholder intends to demand payment for his, her or its shares of common stock if the Merger is effectuated; and
·not vote, or cause or permitted to be voted, any of his, her or its shares of common stock in favor of the Merger Agreement or the Merger. A VOTE IN FAVOR OF THE MERGER AGREEMENT OR THE MERGER BY A STOCKHOLDER WILL RESULT IN A WAIVER OF THAT STOCKHOLDER'S DISSENTER'S RIGHTS.
Notices transmitted before the special meeting should be addressed to MJ Harvest, Inc., 9205 W. Russell Road, Suite 240, Las Vegas, Nevada 89139, Attention: Corporate Secretary. At the MJ special meeting, notices may be handed to the chairman of the meeting.
A stockholder whose shares common stock are held in "street name" or in the name of anyone other than the stockholder must obtain written consent to the dissent from the person or firm in whose name the shares are registered and must deliver the consent to the applicable corporate secretary no later than the time such beneficial stockholder asserts dissenter's rights. Also, any dissenter's rights that are asserted must be asserted as to all shares of common stock that such stockholder beneficially owns or has power to direct the vote.
FAILURE BY A STOCKHOLDER TO DULY DELIVER WRITTEN NOTICE OF ITS INTENT TO DEMAND PAYMENT WITH ANY REQUIRED CONSENTS WILL RESULT IN THE LOSS OF SUCH STOCKHOLDER'S DISSENTER'S RIGHTS.
Any stockholder who exercises dissenter's rights will not be entitled to vote his or her shares of common stock for any purpose or to receive payment of dividends or any other distributions on such shares after the effective date of the Merger.
Within 10 days after the effective date of the Merger, MJ will deliver a written dissenter's notice to all stockholders who properly perfected their rights to dissent, which will, among other things:
·specify where the demand for payment must be sent and where and when stock certificates, if any, must be deposited;
·state the extent to which the transfer of uncertificated shares will be restricted after the demand for payment is received;
·include a form for demanding payment that includes the date the Merger was first publicly announced and requires that the stockholder certify whether or not he, she or it acquired beneficial ownership of the shares before that date;
·set the date by which MJ must receive the demand for payment; and
·include a copy of NRS 92.A.300 to 92.A.500, inclusive.
Any stockholder who fails to deliver a duly completed form for demanding payment by the date required in the dissenter's notice will be deemed to have waived the right to demand payment.
Stockholders who receive a dissenter's notice and who wish to exercise dissenter's rights must:
·demand payment;
·certify whether he, she or it acquired beneficial ownership of the shares before the date set forth in the dissenter's notice; and
·deposit his, her or its certificates, if any, in accordance with the terms of the dissenter's notice.
31
FAILURE BY A STOCKHOLDER TO DEMAND PAYMENT IN THE PROPER FORM OR DEPOSIT HIS, HER OR ITS CERTIFICATES AS DESCRIBED IN THE DISSENTER'S NOTICE WILL TERMINATE SUCH STOCKHOLDER'S RIGHT TO RECEIVE PAYMENT FOR HIS, HER OR ITS SHARES PURSUANT TO NEVADA'S DISSENTERS' RIGHTS STATUTE.
Within 30 days after receiving a stockholder's properly executed demand for payment, MJ will pay in cash to such stockholder the amount MJ estimates to be the fair value of such stockholder's shares, plus accrued interest. The payment will be accompanied by:
·MJ's balance sheet as of the end of a fiscal year ending not more than 16 months before the date of payment, a statement of income for that year, a statement of changes in the stockholders' equity for that year, and the latest available quarterly financial statements, if any;
·a statement of MJ's estimate of the fair value of the shares; and
·information regarding such stockholder's right to challenge the estimated fair value.
MJ may elect to withhold payment from any stockholder that became the beneficial owner of the shares on or after the date the Merger was first publicly announced as set forth in the dissenter's notice. If MJ withholds payment, after the consummation of the Merger, it will estimate the fair value of the shares, plus accrued interest, and offer to pay this amount to such stockholder in full satisfaction of his, her or its demand. The offer will contain a statement of MJ's estimate of the fair value, an explanation of how the interest was calculated, and a statement of dissenters' rights to demand payment under NRS Section 92A.480.
A dissenting stockholder who is dissatisfied with the amount of the payment offered or paid by MJ may notify MJ in writing of such stockholder's own estimate of the fair value of his, her or its shares and the amount of interest due, and demand payment of such estimate, less any payment previously paid by MJ. Such demand must be made within 30 days after MJ made or offered payment; otherwise, such stockholder shall be deemed to have waived his, her or its right to challenge the amount paid or offered by MJ.
If there is still a disagreement about the fair market value, MJ will, within 60 days after receiving a stockholder's demand, petition the court to determine the fair value of the shares and accrued interest. If MJ does not commence such legal action within the 60-day period, it will have to pay the amount demanded for all unsettled demands, plus interest.
All dissenters whose demands remain unsettled will be made parties to the proceeding, and are entitled to a judgment for either:
·the amount by which the fair value of the shares, plus interest, exceeds the amount paid by MJ; or
·the fair value, plus accrued interest, of the after-acquired shares for which or MJ withheld payment.
MJ will pay the costs and expenses of the court proceeding, unless the court finds the dissenters acted arbitrarily, vexatiously or in bad faith, in which case the costs will be equitably distributed. Attorney fees will be divided as the court considers equitable.
FAILURE TO COMPLY STRICTLY WITH THE PROCEDURES OF NRS 92A.400 THROUGH 92A.480 FOR PERFECTING DISSENTERS' RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS. IF DISSENTERS' RIGHTS ARE NOT PERFECTED, YOU WILL BE ENTITLED TO RECEIVE THE CONSIDERATION RECEIVABLE WITH RESPECT TO SUCH SHARES IN ACCORDANCE WITH THE MERGER AGREEMENT. IN VIEW OF THE COMPLEXITY OF THE PROVISIONS OF NEVADA'S DISSENTERS' RIGHTS STATUTE, IF YOU ARE CONSIDERING DISSENTING TO THE MERGER, CS AND MJ STRONGLY URGE YOU TO CONSULT YOUR OWN LEGAL ADVISOR.
Resale of CS Common Stock
CS common stock issued to MJ stockholders in the Merger will not be subject to any restrictions on transfer arising under the Securities Act, except for shares issued to any stockholder who may be deemed an "affiliate" of CS under the Securities Act.
32
THE MERGER AGREEMENT
The following summary describes the material provisions of the Merger Agreement. The provisions of the Merger Agreement are complicated and not easily summarized. This summary may not contain all of the information about the Merger Agreement that is important to you. The Merger Agreement is attached to this joint proxy statement/prospectus as Annex A and is incorporated by reference into this joint proxy statement/prospectus. You are encouraged to read it carefully in its entirety for a more complete understanding of the Merger Agreement and the Merger.
The Merger Agreement and the following summary have been included to provide you with information regarding the terms of the Merger Agreement and the transactions described in this joint proxy statement/prospectus. Neither CS nor MJ intends that the Merger Agreement or any of its terms will constitute a source of business or operational information related to CS or MJ. The representations and warranties in the Merger Agreement are made as of a specified date, are tools used to allocate risk between the parties, are subject to contractual standards of knowledge and materiality, are modified or qualified by information contained in the disclosure schedules exchanged by the parties, and should not be relied on by any person or entity other than CS or MJ for any purpose. Business and operational information regarding CS and MJ can be found elsewhere in this joint proxy statement/prospectus and, in the case of CS, in the other public documents that CS files with the SEC. See "Where You Can Find More Information."
SUMMARY OF MERGER AGREEMENT
Surviving Corporation. At the Effective date of the Merger, Merger Sub shall be merged with and into MJHI, and MJHI shall be the surviving corporation of the Merger (the “Surviving Corporation”). The Articles of Incorporation of MJHI shall be the Articles of Incorporation for the Surviving Corporation until amended, altered or repealed as authorized by law. The bylaws of MJHI shall be the bylaws of the Surviving Corporation until amended, altered, or repealed as authorized by law. The name of the Surviving Corporation shall continue to be MJ Harvest, Inc. ("MJHI" in this Summary of Merger Agreement) and the Articles of Incorporation shall be amended accordingly as authorized by law. Upon Completion of the Merger, the existence of Merger Sub shall cease at the Effective date of the Merger as a consequence of the Merger.
Terms, Conditions and Effect.
The terms and conditions of the Merger and the mode of carrying it into effect are as follows:
a.The Merger shall become effective, and the term "Effective date of the Merger" shall mean, the time:
i.when all conditions precedent hereinafter enumerated have been complied with, and
ii.this Agreement or certificate of merger shall have been signed, acknowledged, filed, and recorded pursuant to the laws of the State of Nevada.
b.The corporate identity, existence, purposes, powers, franchises, rights, and immunities of MJHI shall continue as MJHI unaffected and unimpaired by the Merger.
c.Upon the Effective date of the Merger, all rights, privileges, powers, franchises and interests of MJHI, both of a public and private nature; all of its property, real, personal and mixed; all debts due on whatever account; and every other interest of MJHI shall be retained by MJHI, and all claims, demands, property and every other interest shall remain the property of MJHI. The title to any real estate vested in MJHI shall not revert or be in any way impaired by reason of the Merger; all rights of creditors and all liens upon the property of MJHI shall be preserved unimpaired, and all debts, liabilities, restrictions and duties of MJHI shall remain with MJHI and may be enforced against it to the same extent as if they had been incurred or contracted by it.
d.The officers and directors of MJHI shall remain unaffected by the Merger.
33
e.Merger Sub consents to be sued and served with process in the State of Nevada or in such other jurisdiction as may be applicable in any proceeding for the enforcement of any obligation of Merger Sub, and Merger Sub irrevocably appoints the Secretary of State of Nevada, or such other state as may be applicable insofar as the same may be required by such jurisdiction, as its agent to accept service of process in any such proceeding.
f.CBDS and MJHI will each furnish to the other such data and information relating to it as the other may reasonably request for the purpose of including such data and information in any proxy statement or registration statement which the other may use in connection with its meeting of shareholders to be held to consider and take action with respect to the approval and adoption of this Agreement.
g.CBDS and MJHI each agree to give the other and the authorized representatives of the other full access to all the premises and books and records of it and any subsidiaries, and to furnish such financial information and operating data with respect to the respective businesses, as the other shall from time to time reasonably request.
h.Dissenters’ Rights. Pursuant to the NRS Sections 92A.300 et seq., MJHI shareholders will have the opportunity to dissent from the action contemplated by this Agreement of Merger. Any shareholder electing to exercise such right of dissent must file with the corporation, prior to or at the meeting of the shareholders at which such proposed corporate action is submitted to vote, a written objection to the action. If the action is approved by the required vote, CBDS in accordance with NRS Sections 92A.430 and 440 will provide the shareholder written dissenter’s notice within 10 days. The shareholder may, within 60 days after the date shareholder received the dissenters notice, make a written demand on the corporation or the surviving corporation, in the case of a merger, for payment of a fair value of such shareholder’s shares. Any shareholder failing to make demand within the applicable 60-day period shall be bound by the terms of this Agreement for Merger. Any shareholder making demand for payment of the fair value shall thereafter be entitled only to payment and shall not be entitled to vote or to exercise any other rights of a shareholder. Fair value of the dissenter’s shares shall be determined: (i) Immediately before the effectuation of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion would be inequitable, (ii) using customary and current valuation concepts and techniques generally employed for similar businesses in the context of the transaction requiring appraisal; and (iii) without discounting for lack of marketability or minority status in accordance with NRS Section 92A.320.
Closing.
a.The closing shall take place at the offices of at such location and at such time as the parties shall agree on the first business day following the adoption of this Agreement by the shareholders of MJHI and Merger Sub as contemplated by a Proxy and Shareholder Information Package to be provided to the Shareholders of MJHI in accordance with all applicable laws and regulations.
b.At the closing MJHI will deliver to CBDS: (i) such evidences as counsel for MJHI may reasonably require as to MJHI’s compliance with provisions of NRS relating to the Merger as set forth herein; and (ii) such other documents as may be required to be produced pursuant to this Agreement.
c.At closing CBDS will cause to be delivered to MJHI: (i) certificates representing the number of shares of CBDS Common Stock into which the outstanding shares of MJHI Common Stock are to be converted Pursuant to Section 1.04 hereof; (ii) documents referred to in Article VII hereof; and (iii) such other documents as may be required to be produced pursuant to this Agreement.
Conversion of Stock
a.At the Effective date of the Merger, CBDS will have authorized capital stock consisting of 500,000,000 shares of common stock having a par value of $.001 per share, of which 46,262,073 shares will be issued and outstanding, and 5,000,000 shares of preferred stock having a par value of $0.001 per share, of which no shares will be issued and outstanding.
34
b.At the Effective date of the Merger, Merger Sub will have authorized capital stock consisting of ten shares of common stock having a par value of $0.001 per share, of which one share will be issued and outstanding.
b.At the Effective date of the Merger, MJHI will have authorized capital stock consisting of 100,000,000 shares of common stock having a par value of $.0001 per share, of which 45,534,860 shares will be issued and outstanding, and 5,000,000 shares of preferred stock having a par value of $0.001 per share, of which no shares will be issued and outstanding.
c.At the Effective date of the Merger:
i.Each share of MJHI Common Stock issued and outstanding immediately prior to the Effective date of the Merger shall, by virtue of the Merger and without any action on the part of the holder thereof, automatically be converted into two and sixty-six one hundredths (2.66) fully paid and nonassessable shares of CBDS Common Stock. Prior to the Effective date of the Merger, MJHI shall not declare any stock dividend or split, combine, reclassify, or make any change in the outstanding shares of MJHI Common Stock, except as provided in this Agreement.
ii.Each share of Merger Sub common stock, par value $0.001 per share, issued and outstanding immediately prior to the Effective date of the Merger shall be converted into and be exchanged for one newly and validly issued, fully paid and nonassessable share of common stock, par value $0.001 per share, of MJHI.
ii.Each holder of an outstanding certificate or certificates theretofore representing shares of MJHI Common Stock immediately before the Effective date of the Merger shall, at or after the Effective date of the Merger, receive a book entry certificate or certificates representing the number of full shares of CBDS Common Stock into which the shares represented by such certificate or certificates so surrendered shall have been converted as aforesaid.
iii.Neither certificates nor script for fractional shares will be issued. Where application of the exchange ratio set forth in Paragraph 1.04 (c)(i), above, would result in issuance of a fractional share, the number of shares shall be rounded up to the next whole number.
Directors and Officers. The directors of CBDS after the Effective date of the Merger, shall hold office until the next annual meeting of shareholders of CBDS and until their successors are chosen and qualified will be as follows:
Names of Directors
Patrick Bilton
David Tobias
Ralph Clinton Pyatt III
Randy Lanier
35
The principal officers of CBDS, after the Effective date of the Merger, who shall hold office until their successors are chosen and qualified will be as follows:
Officers:
Name
| Title
|
Patrick Bilton
| Chief Executive Officer
|
Ralph Clinton Pyatt III
| Chief Operating Officer
|
CBDS may also have such other officers as the Board of Directors shall from time to time determine. The Chief Executive Officer and the Chief Operating Officer of CBDS are authorized, from time-to-time to promote existing personnel or hire new personnel in such capacities as they deem appropriate and to designate titles for such personnel up to and including designations as vice-president without further input from the Board of Directors of CBDS.
COVENANTS AND AGREEMENTS OF MJ
MJ covenants and agrees that between the date of the merger agreement and the Effective date of the Merger, except with the consent in writing of CS (which shall not be unreasonably withhold), and except as may be required to affect the transactions contemplated hereby:
Articles of Incorporation and Bylaws. MJ will not change its Articles of Incorporation or bylaws.
Capitalization. MJ will not make any change in its authorized, issued or outstanding capital stock; grant any stock option or security or right to purchase shares of its capital stock; issue any security convertible to shares of its capital stock; purchase, redeem, retire or otherwise acquire any shares of its capital stock, or agree to do any of the foregoing; or declare, set aside, or pay any dividend or other distribution in respect of its capital stock.
Shareholder’s Meeting. MJ will submit the merger agreement to a special meeting of its shareholders with a recommendation of its board of directors, with respect to each item submitted, for favorable action by the shareholders and will use its best efforts to obtain the requisite shareholder approval.
Business in the Ordinary Course. MJ will conduct its business in the ordinary course and will (a) use its best efforts to preserve its business organization intact, to keep available to MJ the services of its present officers and employees and to preserve the goodwill of its suppliers, customers and others having business relations with it; (b) maintain its properties in customary repair, working order and condition, reasonable wear and tear by casualty excepted; (c) enter into no sale, lease, contract, commitment or other transaction except in the course of ordinary business; provided, however, that nothing in this section shall prohibit compliance by MJ with, or MJ’s borrowing or repayment of funds pursuant to any agreements or other commitments disclosed by MJ to CS.
Banking Arrangements: Powers of Attorney. MJ will not make any change in its banking and safe deposit arrangements and will not grant any powers of attorney, other than as required for the effectuation of the merger agreement, or to reflect changes in personnel or the establishment of new locations.
Accounting Practices. Except as required by generally accepted accounting principles, MJ will not make any change in its accounting methods or practices.
Employment Compensation. MJ will not institute, agree to, or amend any employment contract in excess of $100,000 per year, or any bonus, profit-sharing, pension, retirement, incentive or similar arrangement, except to grant normal individual increases in compensation in accordance with established agreements or procedures.
Merger, etc. MJ will not sell or lease all or substantially all, of its assets and business; acquire all or substantially of the stock or the business or the assets of any other person, corporation or business organization; or agree to do any of the foregoing.
36
CONDITIONS PRECEDENT TO CS’S OBLIGATIONS
The obligations of CS under this merger agreement are subject to the fulfillment, before or on the effective date of the Merger, of each of the following conditions, unless waived in writing by CS:
MJ’s Representations and Warranties. The representations and warranties of MJ set forth in merger agreement hereof shall be true and correct as of the date hereof and shall be made again at and as of the Effective date of the Merger and shall then (except as affected by transactions contemplated hereby) be true and correct; and CS shall have received a certificate dated the Effective date of the Merger signed on behalf of MJ by its president certifying to the fulfillment of this condition.
MJ’s Covenants. MJ shall have performed all covenants required by this Agreement to be performed by it on or before the Effective date of the Merger; and CS shall have received a certificate dated the Effective date of the Merger signed on behalf of MJ by its president certifying to the fulfillment of these conditions.
Opinion of MJ’s Counsel. MJ shall have delivered to CS the opinion of its counsel, dated on the Effective date of the Merger, in form and substance satisfactory to counsel for CS, to the effect that:
a.MJ’s Corporate Standing. MJ is a Nevada corporation organized and validly existing, with power to conduct its business as conducted on the Effective date of the Merger.
b.MJ’s Corporate Authority. (i) The execution, delivery and performance of the merger agreement and the consummation of the transactions contemplated herein have been duly authorized and approved by all requisite action of MJ’s board of directors and shareholders, and the merger agreement has been duly executed and delivered and constitutes the valid and binding obligation of MJ in accordance with its terms; and (ii) the execution of the merger agreement has not violated, and performance hereof will not violate, the provisions of MJ’s articles of incorporation, bylaws, any note known to counsel of which MJ is the maker, or any indenture, agreement or other instrument known to counsel to which MJ is a party, except as permitted by consents specified in the opinion that are to the best of counsel’s knowledge in full force and effect.
c.Registration Statement. The registration statement of CS prepared and filed by CS in connection with the registration of the shares to be issued in the transactions contemplated by the merger agreement appears on its face to be appropriately responsive to the Securities Act of 1933, and the applicable rules and regulations of the Securities and Exchange Commission as regards such information about or related to MJ or supplied by MJ. Counsel shall state the extent to which they have participated in the preparation of the registration statement and that they are not aware of any facts which would lead them to believe that MJ has failed to comply with said rules and regulations by reason of the inclusion in the registration statement of any untrue statement or material fact or the omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading (except counsel for MJ need express no opinion with respect to (i) the financial statements included in the prospectus or (ii) information with respect to CS supplied or approved in writing by CS or any representative thereof for use in the registration statement).
Registration Statement Information. None of the information with respect to MJ which shall have been furnished by or on behalf of MJ for inclusion in the registration statement to be sent to the shareholders of MJ and CS shall be false or misleading in any material respect or shall fail to state any fact necessary to make the statements therein not false or misleading in any material respect.
Effectiveness of Registration Statement. The registration statement filed by CS shall have become effective and the shares of CS’s Common Stock to be issued and delivered to the shareholders of MJ, respectively, shall be registered under the Act and under applicable state blue sky and securities laws.
37
COVENANTS AND AGREEMENTS OF CS
CS covenants and agrees that between the date hereof and the Effective date of the Merger:
Articles of Incorporation and Bylaws. CS will not change its articles of incorporation or bylaws, except as otherwise provided herein.
Capitalization. CS will not make any change in its authorized, issued or outstanding capital stock; grant any stock option or right to purchase shares of its capital stock; issue any security convertible into shares of its capital stock; purchase, redeem, retire or otherwise acquire any shares of its capital stock; or agree to do any of the foregoing; or declare, set aside, or pay any dividend or other distribution in respect of its capital stock, except as otherwise provided herein.
Business in the Ordinary Course. CS will conduct its business in the ordinary course and will (a) use its best efforts to preserve its business organization intact, to keep available to CS the services of its present officers and employees, and to preserve the goodwill of suppliers, customers and others having business relations with it; (b) maintain its properties in customary repair, working order and condition, reasonable wear and tear by casualty excepted; and (c) enter into no sale, lease, contract or commitment or other transaction except in the course of ordinary business.
Employment Compensation. CS will not institute, agree to or amend any employment contract in excess of $100,000 per year, or any bonus, stock option, profit-sharing, pension, retirement, incentive or similar arrangement, except to grant normal individual increases in compensation in accordance with established agreements or procedures.
Banking Arrangements and Powers of Attorney. CS will not make any change in its banking and safe deposit arrangements and will not grant any powers of attorney, other than as required for the effectuation of the merger agreement, or to reflect changes in personnel.
Accounting Practices. Except as required by generally accepted accounting principles, CS will not make any changes in its accounting methods or practices.
Merger, etc. CS will not merge or consolidate with any other corporation; sell or lease all or substantially all of its assets and business; acquire all or substantially all the stock, business or assets of any other person, corporation or business organization; or agree to do any of the foregoing, except as provided herein.
Preparation and Filing of Registration Statement. CS shall cause a registration statement on Form S-4 to be prepared and filed with the Securities and Exchange Commission and with the securities or "blue sky" commissions of each state in which filing is necessary for the purpose of registering the shares of common stock to be issued pursuant to merger agreement hereof, and will use its best efforts to cause the registration statement to become effective.
Listing of Common Stock. CS common stock will be traded in the OTCQB Market after the Effective date of the Merger.
38
CONDITIONS PRECEDENT TO MJ’S OBLIGATIONS
The obligations of MJ under the merger agreement are subject to the fulfillment before or on the Effective date of the Merger of each of the following conditions, unless waived in writing by MJ:
CS’s Representations and Warranties. The representations and warranties of CS set forth in the merger agreement shall be true and correct as of the date thereof and shall be deemed to be made again at and as of the effective date of the merger and shall then (except as affected by transactions contemplated hereby) be true and correct; and MJ shall have received a certificate dated the effective date of the merger signed on behalf of CS by its president certifying to the fulfillment of this condition.
CS’s Covenants. CS shall have performed all covenants required by this Agreement to be performed by it on or before the Effective date of the Merger; and MJ shall have received a certificate dated the Effective date of the Merger signed on behalf of CS and Merger Sub by their respective president certifying to the fulfillment of these conditions.
Opinion of Counsel for CS. CS shall have delivered to MJ the opinion of CS’s counsel, dated on the Effective date of the Merger, addressed and satisfactory to MJ, to the effect that:
a.CS’s Corporate Standing. CS is a Nevada corporation organized and validly existing, with power to conduct its business as conducted on the Effective date of the Merger.
b.CS’s Corporate Authority. (i) The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated therein have been duly authorized and approved by all requisite action of CS’s board of directors and shareholders, and the merger agreement has been duly executed and delivered and constitutes the valid and binding obligation of CS in accordance with its terms; and (ii) the execution of the merger agreement has not violated, and performance hereof will not violate, the provisions of CS’s articles of incorporation, bylaws, any note known to counsel of which CS is the maker, or any indenture, agreement or other instrument known to counsel to which CS is a party, except as permitted by consents specified in the opinion that are to the best of counsel’s knowledge in full force and effect.
c.Registration Statement. The registration statement of CS prepared and filed by CS in connection with the registration of the shares to be issued in the transactions contemplated by the merger agreement appears on its face to be appropriately responsive to the Securities Act of 1933, and the applicable rules and regulations of the Securities and Exchange Commission as regards such information about or related to CS or supplied by CS. Counsel shall state the extent to which they have participated in the preparation of the registration statement and that they are not aware of any facts which would lead them to believe that CS has failed to comply with said rules and regulations by reason of the inclusion in the registration statement of any untrue statement or material fact or the omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading (except counsel for CS need express no opinion with respect to (i) the financial statements included in the prospectus or (ii) information with respect to MJ supplied or approved in writing by MJ or any representative thereof for use in the registration statement).
Registration Statement Information. None of the information with respect to CS which shall have been furnished by or on behalf of CS for inclusion in the registration statement to be sent to the shareholders of MJ and CS shall be false or misleading in any material respect or shall fail to state any fact necessary to make the statements therein not false or misleading in any material respect.
Effectiveness of Registration Statement. The registration statement filed by CS shall have become effective and the shares of CS’s common stock to be issued and delivered to the MJ’s and CS’s shareholders, respectively, shall be registered under the Securities Act of 1933, and under applicable state blue sky and securities laws.
39
TERMINATION
Termination. The merger agreement may be terminated and abandoned in accordance with the following provisions:
a.by mutual written consent of CS and MJ;
b.upon prompt written notice by (a) MJ to CS or (b) CS to MJ, if such notifying party has decided, prior to the expiration of the term of the merger agreement, not to pursue the transaction contemplated hereby on substantially the same terms as those set forth in the merger agreement;
c.in the event of termination by either party pursuant to paragraph (b) immediately above, the party terminating the merger agreement shall pay the non-terminating party $50,000 for walking away from the transaction.
d.by MJ, without any penalty to CS, in the event that MJ’s due diligence (a) uncovers facts concerning CS’s business or financial condition that are different than those represented to MJ by CS prior to the execution of the merger agreement or (b) discloses any material concerns to CS regarding MJ; and
e.by MJ, without any penalty to CS, in the event that MJ’s board of directors does not approve the execution of the merger agreement, and/or the transactions contemplated thereby.
[END OF SUMMARY OF MERGER AGREEMENT]
INFORMATION RELATED TO CANNABIS SATIVA
Description of Business
Company Background. Cannabis Sativa, Inc., formerly named Ultra Sun Corporation, was incorporated under the laws of Nevada in November 2005. In 2020, we conducted operations through our subsidiaries PrestoCorp, Inc. (“PrestoCorp”), a 51% owned Delaware corporation engaged in the telemedicine business. We also began the year with interests in GK Manufacturing and Packaging, Inc. (“GKMP”), a California corporation that serves as a contract manufacturer of products containing hemp-based CBD and i-Budtender (IBUD”), a Nevada corporation in the development stage for on-line referral business in the cannabis industry.
In April 2021, we discontinued operations of GKMP and IBUD and sold our controlling interests in these subsidiaries. We reported their operations for the years ended December 31, 2021, and 2020 separately as discontinued operations.
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, but fit into our business strategy as 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 homes. Our mailing address is 450 Hillside Drive, #A224, Mesquite, Nevada 89027. Our telephone number is (702) 763-3123.
Business Strategy. In 2022, focused on growing our telemedicine business while seeking opportunities in brand development and marketing of products and services to the cannabidiol (“CBD”) and marijuana industries.
40
Telemedicine. PrestoCorp (“PrestoDoctor”) offers an online telemedicine platform providing customer access to knowledgeable physicians to obtain a medical marijuana recommendation (https://prestodoctor.com). PrestoDoctor uses secure video conferencing technology 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. In 2022, PrestoDoctor expanded service to Pennsylvania, Illinois, Iowa, and Texas, while continuing to offer services in California, Nevada, New York, Missouri, and Oklahoma. We continue to actively target expansion into additional states.
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. Growth of the platform to take advantage of these opportunities will require capital for development of new features and capabilities necessary to provide new services, 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.
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 plan to engage in marketing and branding within the cannabis and CBD spaces utilizing our existing brands, including our trademark pending "hi" brand, while also seeking out new opportunities for brand aggregation and marketing. In 2021, 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.
Descriptions of the products/brands include:
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, bioavailability, 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 work to build out our product portfolio.
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.
Other Opportunities. In addition to licensing, branding and technology, we have the ability to offer mainstream medical prescription discount cards, for which the Company will receive a small percentage on each product purchased. This concept has not yet been implemented but is being evaluated by our Telemedicine division for feasibility and return on investment.
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.
41
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 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 covering telemedicine and consumer education. In order to achieve this vision, we plan to develop brands and branded products which will distinguish our online presence as a source for innovative and effective medicinal cannabis products and cost-effective alternatives for customers seeking quality, affordable natural health products to aid in wellness and appearance.
Through a long-term commitment to this vision, we hope to become known as a company that is committed to its customers, associates, and communities.
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 pre-merger revenues.
Consumer Products. Through December 31, 2021, the products discussed below in this section are conceptual and have produced no significant revenues. We had intended to pursue the strategy described below in 2021, but lack of capital largely shifted our strategic implementation plans to 2023. In the remainder of 2022, we expect to work on building THC infused products in MJHI’s California facility and testing the market through direct sales of products, including:
·hi Lozenges, utilizing our proprietary formula, offer rapid relief of throat irritation. Based upon preliminary results, our lozenges generally take effect within a period of five to 15 minutes.
·Wild Earth Naturals Recover Deep Penetrating Healing Balm is a fast-acting organic anti-inflammatory pain reliever for sore muscles, joints, arthritic and back pain.
·Wild Earth Naturals Trauma Cream was developed with a blended infusion of cannabinoids and THC, including Arnica for its numbing effect.
·Branded Clothing and Merchandise.
Marketing & Distribution
Market Conditions in the Cannabis Industry. Our target markets are located in states that have legalized the production and use of cannabis. Eighteen states plus the District of Columbia have approved measures to legalize cannabis for adult recreational use. Thirty-seven states, the District of Columbia and five US territories 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.
Infused Products and Merchandise. In 2023, we intend to use social media to drive traffic to our websites, and, pending the Merger, leverage MJHI’s California manufacturing, sales and distribution to reintroduce hi and Wild Earth natural products.
42
During 2023, we plan to utilize direct business to business sales, internet advertising, social media marketing, and trade show participation to generate sales leads and orders, with entry into California, and other existing markets where MJHI bands have a position and are being manufactured, sold and distributed to leading retailers and wholesalers throughout OK, CO, SD, CA, and AZ. No assurances can be given that we will be successful in such efforts.
Infused Products. For cannabis infused products, we intend to develop our customer base through markets where MJHI brands have a position and are being manufactured, sold and distributed to leading retailers and wholesalers throughout OK, CO, SD, CA, and AZ.
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 markets where MJHI brands have a position and are being manufactured, sold and distributed to leading retailers and wholesalers throughout OK, CO, SD, CA, and AZ.
Intellectual Property
CS holds certain intellectual property (the "IP") consisting of recipes and process/methods to maximize the cannabinoid concentrations used for manufacture of medical marijuana edibles, including our proprietary 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 hold the patent for the Ecuadorian Sativa (aka CTA) strain of cannabis. We are continuing to pursue commercialization of the CTA strain, but no assurances can be given that the patented strain will result in development of any commercial products. The Company intends to use or license the "hi" brand for skin care products, edibles (infused and non-infused), apparel and branded merchandise. No assurance can be given that these marks will have any commercial value, or that they will offer any protection against potential competitors should they be commercialized.
Effect of Existing or Probable Governmental Regulations on the Business
Currently, our products consist of telemedicine services and we are developing and implementing a business strategy to sell products derived from cannabis plants or products containing THC. 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.
The United States federal government regulates drugs in large part through the Controlled Substances Act, or CSA. Marijuana, which is a form of cannabis, is classified as a Schedule I controlled substance. As a Schedule I controlled substance, the federal Drug Enforcement Agency, or DEA, considers marijuana to have a high potential for abuse with no currently accepted medical use in treatment in the United States (except as disclosed below for epilepsy and related syndromes) and a lack of accepted safety for use of the drug under medical supervision. According to the U.S. federal government, cannabis having a concentration of tetrahydrocannabinol, or THC, greater than 0.3% is marijuana. Cannabis with a THC content below 0.3% is classified as hemp. The scheduling of marijuana as a Schedule I controlled substance is inconsistent with what we believe to be widely accepted medical uses for marijuana by physicians, researchers, patients, and others. Moreover, as of November 30, 2022 and despite the clear conflict with U.S. federal law, 37 states, plus the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands, have legalized marijuana for medical use, while 21 of those states and the District of Columbia have legalized the adult-use of cannabis for recreational purposes. As further evidence of the growing conflict between the U.S. federal treatment of cannabis and the societal acceptance of cannabis, the FDA on June 25, 2018 approved Epidiolex. Epidiolex is an oral solution with an active ingredient derived from the cannabis plant for the treatment of seizures associated with two rare and severe forms of epilepsy, Lennox-Gastaut syndrome and Dravet syndrome, in patients two years of age and older. This is the first FDA-approved drug that contains a purified substance derived from the cannabis plant. In this case, the substance is cannabidiol, or CBD, a chemical component of marijuana that does not contain the psychoactive properties of THC.
43
Marijuana is largely regulated at the state level in the United States. State laws regulating marijuana are in conflict with the CSA, which makes marijuana use and possession federally illegal. Although certain states and territories of the United States authorize medical or adult-use marijuana production and distribution by licensed or registered entities, under United States federal law, the possession, use, cultivation, and transfer of marijuana and any related drug paraphernalia is illegal. Although our activities currently do not involve any products that contain THC and we are compliant with the applicable state and local laws in states where we do business, should we enter into a new area that involves THC products, strict compliance with state and local laws with respect to cannabis may neither absolve us of liability under United States federal law nor provide a defense to any federal criminal action that may be brought against us.
In 2013, as more and more states began to legalize medical and/or adult-use marijuana, the federal government attempted to provide clarity on the incongruity between federal law and these state-legal regulatory frameworks. Until 2018, the federal government provided guidance to federal agencies and banking institutions through a series of DOJ memoranda. The most notable of this guidance came in the form of a memorandum issued by former U.S. Deputy Attorney General James Cole on August 29, 2013, which we refer to as the Cole Memorandum.
The Cole Memorandum offered guidance to federal agencies on how to prioritize civil enforcement, criminal investigations and prosecutions regarding marijuana in all states and quickly set a standard for marijuana-related businesses to comply with. The Cole Memorandum put forth eight prosecution priorities:
1.Preventing the distribution of marijuana to minors;
2.Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs and cartels:
3.Preventing diversion of marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
4.Preventing the state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
5.Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
6.Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
7.Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
8.Preventing marijuana possession or use on federal property.
On January 4, 2018, former United States Attorney General Sessions rescinded the Cole Memorandum by issuing a new memorandum to all United States Attorneys, which we refer to as the Sessions Memo. Rather than establishing national enforcement priorities particular to marijuana-related crimes in jurisdictions where certain marijuana activity was legal under state law, the Sessions Memo simply rescinded the Cole Memorandum and instructed that “[i]n deciding which marijuana activities to prosecute... with the [DOJ’s] finite resources, prosecutors should follow the well-established principles that govern all federal prosecutions.” Namely, these include the seriousness of the offense, history of criminal activity, deterrent effect of prosecution, the interests of victims, and other principles.
Under President Biden, Merrick Garland serves as Attorney General in his administration. It is not yet known whether the Department of Justice under President Biden and Attorney General Garland will re-adopt the Cole Memorandum or announce a substantive marijuana enforcement policy.
Nonetheless, there is no guarantee that state laws legalizing and regulating the sale and use of marijuana will not be repealed or overturned, or that local governmental authorities will not limit the applicability of state laws within their respective jurisdictions. Unless and until the United States Congress amends the CSA with respect to marijuana (and as to the timing or scope of any such potential amendments there can be no assurance), there is a risk that federal authorities may enforce current U.S. federal law. Currently, in the absence of uniform federal guidance, as had been established by the Cole memorandum, enforcement priorities are determined by respective United States Attorneys.
44
We are not aware of other specific governmental regulations that impact our business. We do, however, utilize Chinese vendors for manufacturing a significant portion of the products we sell. To the extent that tariffs are imposed on imported goods manufactured in China, our pricing structure and acceptance in the marketplace may be affected. We currently stock our products through distributors in foreign countries when appropriate and ship direct from our manufacturer to the foreign distributor when such can be done at a cost savings. We intend to continue to explore ways that we can hold our costs down on the products we sell in order to minimize price sensitivity concerns with our customers.
COVID-19
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 disrupted economic activity in the United States and Worldwide. In retrospect, the pandemic did have a negative impact on the contract manufacturing business start-up (primarily delay) and had a positive impact on our telehealth business through loosening of regulations allowing telehealth services and an increase in persons seeking telehealth services to avoid in person visits to doctors offices. The COVID-19 disruption did not materially impact the Company’s financial statements and may have had a positive impact on the telehealth market. It now appears that the impacts from COVID are lessening, and we anticipate that any positive impact on the telehealth sector may soften in the coming periods.
Environmental Laws
We are not aware of any environmental laws that would limit our ability to conduct our current sales and distribution activities in their present form or as we envision them in the near future. As we expand our operations to participate more directly in the cannabis and hemp industries as a distributor of cannabis and hemp products, we may become subject to environmental laws relating to water usage, recycling, waste disposal, and similar regulations that will vary depending on the location of our operations. We intend to address the impact of such environmental regulations when we have a specific use case to evaluate.
Number of Total Employees and Number of Full Time Employees
As of September 30, 2022, we have two employees in Cannabis Sativa, Inc. During the year ended December 31, 2022, the Company had independent contractor arrangements with four people, including officers and directors, and eight outside service providers. PrestoCorp has six employees, including two officers of PrestoCorp. 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 2021 and 2022, and currently, CS operated out of virtual offices maintained by our officers, directors and contractors.
Our subsidiary PrestoDoctor leases an office in New York on a month-to-month basis for $2,444 per month.
Legal Proceedings
CS is not a party to any material legal proceedings, and, to the best of our knowledge, no such legal proceedings have been threatened against CS.
Market for CS's Common Stock and Related Stockholder Matters
Market Information. Our shares of common stock are quoted on the OTCQB Market operated by the OTC Markets Group Inc. of the Financial Industry Regulatory Authority, Inc. (“FINRA”) under the symbol “CBDS”.
Holders of Record
On February 1, 2023, there were 69 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.
45
No Dividends
No dividends have ever been paid on our securities, and we have no current plans to pay dividends in the foreseeable future.
Equity Compensation Plan
On September 25, 2020, the Company adopted the Cannabis Sativa 2020 Stock Plan which authorized the Company to utilize common stock to compensate employees, officers, directors, and independent contractors for services provided to the Company. By resolution dated September 25, 2020, the Company authorized up to 1,000,000 shares of common stock to be issued pursuant to the 2020 Stock Plan. This amount was subsequently increased to 2,000,000 shares on January 27, 2021, and all shares under the 2020 Stock Plan were registered with the Securities & Exchange Commission on Form S-8 on January 29, 2021. Registration of the shares in the 2020 Stock Plan allows immediate sale of the shares by the recipient of such shares. As of September 30, 2022, the Company has issued 649,333 shares under the 2020 Plan and has 1,350,667 shares available for future issuance under the 2020 Plan.
Transfer Agent
Colonial Stock Transfer Co., Inc., 7840 South 700 East, Sandy, UT 84070, telephone (801) 355-5740, serves as the transfer agent and registrar for our common stock.
Management's Discussion and Analysis of Financial Condition and Results of Operation
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.
Cannabis Sativa Results of Operations
For the fiscal year ended December 31, 2021 compared with fiscal year ended December 31, 2020.
The narrative comparison of the results of continuing operations for the periods ended December 31, 2021 and 2020 are based on the following table.
| Years Ended
|
|
|
|
| A
|
| B
|
| A-B
|
| December 31, 2021
|
| December 31, 2020
|
| Change
| Change %
|
REVENUE
| $1,841,558
|
| $1,940,731
|
| $(99,173)
| -5%
|
Cost of revenues
| 699,378
|
| 740,645
|
| (41,267)
| -6%
|
Cost of sales % of total sales
| 38%
|
| 38%
|
| 0%
|
|
Gross profit
| 1,142,180
|
| 1,200,086
|
| (57,906)
| -5%
|
Gross profit % of sales
| 62%
|
| 62%
|
| 0%
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
Professional fees
| 581,660
|
| 750,030
|
| (168,370)
| -22%
|
Depreciation and amortization
| 171,163
|
| 207,866
|
| (36,703)
| -18%
|
Wages and salaries
| 711,872
|
| 596,262
|
| 115,610
| 19%
|
Advertising
| 344,904
|
| 467,918
|
| (123,014)
| -26%
|
General and administrative
| 1,078,204
|
| 971,598
|
| 106,606
| 11%
|
Total operating expenses
| 2,887,803
|
| 2,993,674
|
| (105,871)
| -4%
|
NET LOSS FROM CONTINUING OPERATIONS
| (1,745,623)
|
| (1,793,588)
|
| 47,965
| -3%
|
46
Revenue for the fiscal year ended December 31, 2021 decreased 5% compared to the period ended December 31, 2020. Cost of revenues as a percentage of sales was constant at 38% between the periods. The decrease in revenues in 2021 is primarily a result of the lessening impact COVID-19 as we progressed into 2021. In 2020, COVID-19 and the associated concerns with in-person visits to doctors’ offices caused a surge in the use of telemedicine in general and the Company benefitted from this with an increase in customers seeking medical marijuana cards through telemedicine. In 2021, as the public grew more accustomed to the pandemic, and as vaccinations and booster shots became widely available, the demand for remote visits with physicians for medical marijuana cards decreased. We expect that this softening in the demand for our service will continue in 2022. The softening of demand in 2021 was partially offset by expansion into new territories, focused advertising and marketing efforts, and a continuing focus on customer service and word of mouth referrals of our services.
Total operating expenses decreased 4% in 2021 compared with 2020 which was in line with the decrease in revenue in the current period. Decreases in professional fees, depreciation and amortization, and advertising were offset by increases in wages and salaries and general and administrative expenses. Professional fees decreased with continuing efforts at cost reduction. Depreciation and amortization decreased in part due to the discontinuation of GKMP and IBUD, as reflected below. Advertising costs were reduced by taking a more focused approach to our target markets. Wages and salaries increased with the addition of personnel in our telemedicine business relating to increased selling efforts as we expand to new markets. General and administrative expenses increased primarily due to the addition of a brand ambassador and costs associated with our continuing business development efforts.
Discontinued Operations.
In April 2021, the Company entered into discussions with THC Farmaceuticals, Inc. (“CBDG”) regarding sale of CS’s controlling interest positions in GKMP and iBudtender Inc. (iBud”). The discussions were triggered by an interest on the part of CS management to refocus business efforts on growing PrestoCorp while streamlining financial reporting and management processes by eliminating assets that are no longer considered essential to the Company’s core focus. The sale was completed on April 22, 2021. Management believes that the sale of GKMP and iBud will free up management time and resources to seek other acquisitions that are more closely aligned with the PrestoCorp business model. Consideration for the sale of the controlling interests consisted of 1,500,000 shares of CBDG common stock and 1,500,000 shares of CBDG preferred stock valued at $600,000 on the date of the acquisition. iBud had no revenues in the periods presented. Summaries of the discontinued operations of GKMP and the operations of iBud through April 22, 2021 are provided below.
|
| Year
|
| Year
|
|
| Ended
|
| Ended
|
DISCONTINUED OPERATIONS OF GKMP
|
| December 31, 2021
|
| December 31, 2020
|
REVENUE
|
| $75,866
|
| $94,552
|
Cost of revenues
|
| 91,316
|
| 152,837
|
Cost of sales % of total sales
|
| 120%
|
| 162%
|
Gross profit
|
| (15,450)
|
| (58,285)
|
Gross profit % of sales
|
| -20%
|
| -62%
|
OPERATING EXPENSES
|
|
|
|
|
Depreciation and amortization
|
| 5,526
|
| 8,898
|
Wages and salaries
|
| 106,224
|
| 213,765
|
Advertising
|
| 1,693
|
| 36,056
|
General and administrative
|
| 104,177
|
| 433,592
|
Total operating expenses
|
| 217,620
|
| 692,311
|
NET LOSS FROM OPERATIONS
|
| (233,070)
|
| (750,596)
|
|
|
|
|
|
DISCONTINUED OPERATIONS OF IBUD
|
|
|
|
|
REVENUE
|
| $-
|
| $-
|
OPERATING EXPENSES
|
|
|
|
|
Depreciation and amortization
|
| 1,135
|
| 1,004
|
Total operating expenses
|
| 1,135
|
| 1,004
|
NET LOSS FROM OPERATIONS
|
| (1,135)
|
| (1,004)
|
Aggregate net loss from discontinued operations
|
| (234,205)
|
| (751,600)
|
Gain on sale of discontinued operations
|
| 164,736
|
| -
|
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS
|
| (69,469)
|
| (751,600)
|
GKMP and iBud generated losses from operations during the periods they were operated by the Company. The sale of our interests in GKMP and iBud will now allow management to devote more resources to PrestoCorp.
47
Liquidity and Capital Resources
Cash used by operating activities was $245,986 in 2021 compared $191,756 in 2020. In 2021, financing activities provided $95,243, consisting of proceeds from sales of restricted stock in the amount of $5,000 and from proceeds from related party advances and notes payable in the amount of $90,243. We ended 2021 with $194,060 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 $2,419,406 and $2,458,544, respectively, for the years ended December 31, 2021 and 2020 and had an accumulated deficit of $79,475,968 as of December 31, 2021. 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 8, 2022, the Company had cash on hand of approximately $200,000. This amount does not provide sufficient liquidity to meet all of 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.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Quantitative and Qualitative Disclosures About Market Risk
Not Applicable. The Company is a “smaller reporting company.”
Supplementary Financial Data
Not Applicable
Security Ownership of Management and Certain Beneficial Owners
The following table sets forth as of February 1, 2023, 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 45,566,365 shares of our common stock issued and outstanding. 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
|
|
Principal Stockholders
| Common
| Preferred
| Common
| Preferred
| Ownership
| Percentage
|
Sadia Barrameda (1)
| 1,561,986
| -
| 4,753,967
| -
| 6,315,953
| 13.9%
|
New Compendium Corp. (2)
| 4,753,967
| -
| 1,561,986
| -
| 6,315,953
| 13.9%
|
David Tobias
| 8,980,008
| -
| 35,000
| -
| 9,015,008
| 19,8%
|
|
|
|
|
|
|
|
Officers and Directors
|
|
|
|
|
|
|
David Tobias (3)
| 8,980,008
| -
| 35,000
| -
| 9,015,008
| 19.8%
|
Catherine Carroll (4)
| 1,115,639
| -
| 136,068
| -
| 1,251,707
| 2.7%
|
Trevor Reed
| 215,530
| -
| -
| -
| 215,530
| 0.5%
|
Robert Tankson
| 77,951
| -
| -
| -
| 77,951
| 0.2%
|
All Officers and Directors as a Group
| 10,389,128
| -
| 171,068
| -
| 10,560,196
| 23.2%
|
(1) Ms. Barrameda is deemed to be the beneficial owner of the 4,753,967 Common 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 1,561,986 Common Shares owned by Sadia Barrameda. Ms. Barrameda is an affiliate of New Compendium Corp. New Compendium’s address is P.O. Box 1363, Discovery Bay, CA 94505.
48
(3) Mr. Tobias is the beneficial owner of 35,000 common shares owned by his wife. Mr. Tobias’ address is 450 Hillside Drive, #A224, Mesquite, NV 89027.
(4) Ms. Carroll is deemed to be the beneficial owner of 136,068 Common Shares owned by Carroll’s Consulting LLC, a company wholly owned by Ms. Carroll. Ms. Carroll’s address is 450 Hillside Drive, #A224, Mesquite, NV 89027.
INFORMATION RELATED TO MJ Harvest
Company Background
MJ Harvest, Inc. was incorporated in Nevada in 2002. Our business model is focused on building a vertically integrated cannabis company specializing in manufacturing operations, brand aggregation, and distribution of products utilizing ingredients derived from cannabis. Our current operations are centered in Colorado and California, and through a minority investment in PPK Investment Group, Inc. (“PPK”), an Oklahoma corporation, we have extended our market reach to Oklahoma, South Dakota and Arizona. We are currently working with our Oklahoma affiliate to further expand our business into Florida, Missouri, New Jersey, and New York. Our business model is constantly evolving to take into account the scope of our market presence, the brands included in our brand portfolio, and the relationships we have with our brands and our minority owned affiliates.
On May 19, 2021, PPK entered into a joint venture agreement with the Flandreau Santee Sioux Tribe of South Dakota (“FSST”). Under the agreement, PPK opened extraction and manufacturing facilities in a building located on the FSST Reservation and manufactures products for FSST utilizing biomass grown in FSST’s existing and expanding grow operations. FSST markets their products under the Native Nations Brand. PPK currently markets its products under the Country Cannabis Brand. The joint venture agreement provides that PPK and FSST will cross market the other’s brands in their respective states, providing an opportunity for FSST to expand its Native Nations Brand to Oklahoma and for PPK to expand its Country Cannabis Brand into South Dakota. The joint venture also provides both PPK and FSST with additional capabilities, work force, and other synergies that management believes will benefit both entities. MJ currently participates as a minority investor in PPK and expects its involvement to increase as its PPK investment commitment grows and more MJ provides more capital to PPK and the joint venture.
Given MJ’s investments in Colorado and California, and MJ’ investment in PPK, MJ’s long-term focus shifted, to expand operations, to including vertically integrated cannabis growing operations in Colorado, California, Oklahoma and South Dakota. MJ is actively looking at markets in Arizona, Florida New Jersey and New York as potential areas for expansion. The timing for development of these expanded operations will depend on availability of growth capital. The PPK tribal business with FSST has grown to now include other tribes and we view this as a significant opportunity given the sovereign status of reservations lands and the flexibility of opening new locations on tribal grounds outside of the traditional regulatory frameworks dictated by the various states that allow medical and/or adult use of cannabis products.
In addition to the tribal opportunities, MJ has focused much of its growth efforts at acquiring interests in, and licensing agreements with, multiple other brands of cannabis products. Currently, MJ offers Country Cannabis (the PPK Brand), Weedsy, BLVK, and Chronic brands (MJ’s “Brand Portfolio”) and is in active negotiations to acquire interests in, and licenses with, several other brands. This focus on brand aggregation is a cornerstone of our expansion plans. We believe that MJ’s wholesale customers, consisting primarily of dispensaries, will be more receptive to our product offerings if we offer a wide range of products and price points while building MJ’s reputation as a quality manufacturer and distributor.
Prior to 2020, MJ was focused on building a portfolio of best-in-class agricultural and horticultural products to benefit farmers and hobbyists in their hemp and cannabis growing operations. MJ’s first product line consisted of the DeBudder Lid and EDGE products. The Debudder is used to strip buds off stems for a variety of plants, including hemp and cannabis. The patented Debudder line is wholly owned and marketed by MJ through MJ’s e-commerce sites: www.procannagro.com (U.S. sales) and www.procannagro.ca (Canada sales). In 2020, MJ expanded its online product offerings to include the Kalix and NPK product lines, which offer customers access to plant nutrient products.
49
While MJ’s focus shifted toward cannabis products, MJ continues to offer the Debudder and the plant nutrient products through its online marketing platforms.
We are actively seeking to acquire and/or license additional brands, acquire and/or establish additional manufacturing and distribution operations, and acquire growing operations in the coming periods. We also continue to seek out additional agricultural and horticultural implements to add to our product offerings through distribution agreements, licensing, and acquisition. In this aspect of our business, we look for agricultural implements, durable goods, and services that will benefit smaller growers of hemp and cannabis by making their growing operations more efficient. As we increase the depth of our vertical integration, we will utilize the products from our agricultural and horticultural implements division in our operations. This will allow us to perform first-hand verification of the efficacy of the products and testimonials on our experiences with the products we offer. We also believe the customer contact and feedback from small and mid-sized growers will provide a source of prospective acquisition targets and the cannabis industry matures and consolidates in our states of operation.
Strategy and Objectives
With our investment into PPK, PPK’s cannabis joint venture relationship with FSST, and our focus on brand aggregation, MJ is poised to take advantage of significant business development opportunities. The following business divisions are either in process, under development, or are being evaluated in an effort to assemble a dynamic enterprise covering all aspects of seed to sale operations in the cannabis and hemp-based CBD sectors. We believe we have selected excellent partners to assist in achieving the strategic vision outlined below.
Vertically Integrated Cannabis Operations.
Through our investment in PPK and our intention to increase the investment over time to make PPK a wholly owned subsidiary, we will operate as a vertically integrated cannabis company encompassing grow operations, harvesting, processing, extraction, manufacturing, distribution, and wholesale sales of a full line of products containing THC and CBD. In addition to the FSST joint venture, the Company also signed agreements with International Business Group to produce and distribute the Chronic Brand of products, WDSY LLC to produce and distribute the Weedsy Brand of products, and with BLIP Holdings, LLC to produce and distribute the BLVK Brand of products. The agreements include a right of first refusal to offer the Chronic Brand in other markets as MJHI and PPK expand their market reach. The ability to add brands to the MJHI and PPK distribution system will serve to further increase the market reach of MJHI and PPK.
As a result of our brand development efforts, MJ became aware of an opportunity to acquire a commercial kitchen operation in Tulsa, Oklahoma with an additional distribution facility in Oklahoma City, Oklahoma. Working with PPK, we entered into an asset acquisition agreement with AOK Ventures, Inc. to acquire the commercial kitchen operations, including a sublease on the Oklahoma City distribution facility. The acquisition was structured with PPK acquiring the assets of AOK and with the Company providing a portion of the funding for the acquisition in exchange for a 15% increase in ownership of PPK, bringing the Company’s total ownership of PPK to 25% from the original investment of 10%. The assets acquired include exclusive distribution rights to distribute the Sublime brand of products in Oklahoma with additional opportunities to expand in other states on similar terms.
Joint Venture for Manufacturing and Distribution with Tribal Partner
FSST is one of 574 Native American Indian tribes recognized by the United States Government. The Flandreau Santee Sioux Reservation is situated on over 5,000 acres of land located along and near the Big Sioux River in Moody County, South Dakota. The reservation facilities include the Royal River Entertainment Complex, which is the only legal casino in South Dakota with 430 gaming devices, a 300-seat entertainment and conference center, a 120-room hotel, an adjacent RV park, plus a full-service restaurant, buffet, snack bar and lounge.
The Tribe has been active in tribal cannabis since 2015 and has a state-of-the-art cultivation facility through which it has resumed cannabis cultivation after the legalization of cannabis in South Dakota in November 2020. The cultivation facility currently houses about 65 strains of cannabis and the Tribe has renovated an existing building to
50
include a lab, kitchen, packaging, and a dispensary with drive-up service. FSST also has developed a full-line of 2018 Farm Bill Compliant hemp products which it sells under its trade name “Native Nations Cannabis.”
Federal recognition of the sovereign status of Native American Indian tribes under the Indian Reorganization Act of 1934 (the “Act”) allows tribes such as the Flandreau Santee Sioux Tribe to manage their own affairs, including their assets, land, and mineral rights. The Act and the ensuing legislation were intended to create a sound economic foundation for the inhabitants of the reservations. Two of the main benefits of federal recognition are exemption from payment of federal taxes and exemption from many federal and state licensing requirements applicable to non-tribal companies. As a result of these advantages, many tribes have pursued business opportunities in the gaming and tobacco industries. Now, with the growing legalization of marijuana for medicinal and adult use, we believe marijuana provides a new growth area for tribes. FSST is the first tribe to expand into the marijuana industry in South Dakota. PPK and FSST have created a unique business model that is now being offered to other tribal entities in a coordinated program to grow the Native Nations brand throughout sovereign lands.
PPK and its Chief Executive Officer, Clinton Pyatt, have now entered into an agreement with FSST to offer the tribal program to other tribes. In each instance where a tribe agrees to follow the FSST/PPK model, PPK will serve as the manufacturer on the tribal lands in exchange for a revenue sharing arrangement on retail sales revenues generated out of the tribal relationship. This also facilitates expansion of brand sales to new areas as ne tribal relationships are forged. MJHI is working closely with PPK to include the MJHI Brand Portfolio in the new tribal arrangements.
Indoor Grow Operations
The Company is evaluating several indoor grow operations for acquisition and/or joint venture operations but has not entered into any binding agreements or arrangements. Management believes that securing indoor grow operations will allow the Company’s operating divisions to access a consistent supply of biomass in the quality demanded by the Company’s customers. Management also believes that the acquisition of an existing indoor grow facility would allow the Company to rapidly generate operating cash flows as the biomass is processed by the Company’s own extraction and manufacturing concerns. As indicated above, PPK and FSST both have their own grow facilities in Oklahoma and South Dakota, respectively, which we believe positions us to apply best practices learned from our and their own operations to newly acquired locations. The Company, PPK, and FSST intend to continue to evaluate indoor grow facilities in locations where they are licensed to grow or manufacture products and in new markets where licenses to cultivate and process marijuana can be obtained at reasonable cost.
The Company is cognizant of the critical processes that must be addressed to effectively monitor and produce a quality product. Steps considered critical include cultivation monitoring, maintenance and monitoring of plant nutrients, irrigation, and lighting systems during the growing cycles, monitoring of production processes, and knowledge of the market demand for products that customers want and for which they will pay a reasonable price. Management believes all of these aspects of the business could be very efficiently driven by software applications. The Company is currently evaluating several competent software alternatives to address these critical processes and the Company expects to develop procedures and practices to obtain a competitive advantage over less sophisticated producers.
Disrupting Cannabis Distributor
Once the products are produced, the next critical phase of our strategic vision is in distribution of the products to customers where and when demanded. This is another area where management believes inventory control, data analysis to determine product demand, and delivery systems focused on getting products into the hands of the customers at the lowest delivery cost possible could be driven by software applications. The Company is currently evaluating inventory control systems, consumer data collection systems, and delivery methods to allow efficient distribution of the products to the consumer.
51
Traditionally, retail distribution is done through brick-and-mortar dispensaries. With the growing reach of Lyft and Uber, and similar business models, last mile delivery is a growth industry. We believe that software applications may also be applied to this aspect of the marijuana industry, and we are evaluating solutions that could disrupt the traditional brick-and-mortar dispensary distribution model at lower cost.
Farm Implements and Nutrient Products
Our goal is to become a preferred provider of agricultural and horticultural products to hemp and marijuana growers and processors. We are targeting small and medium sized commercial growers as well as the hobby farmers prevalent in many areas with recently legalized hemp and marijuana industries. We intend to continue our expansion by building distribution relationships with manufacturers of products that fit in our catalog, and by acquiring rights to manufacture and sell compatible products when those opportunities occur. In the longer term, we intend to open physical warehouse and retail locations on the east and west coasts of the United States and eventually in a central U.S. location in order to optimize logistics for our product sales and distribution efforts. As we build our product lines, we intend to become a one-stop shop for the hemp and marijuana growers looking for ways to improve yield and reduce costs of harvest and processing.
Business Concentration.
In the period ended May 31, 2022, our business in the Debudder product line was concentrated with 96% of our Debudder sales going to four customers. We expect significant changes in our sources of our revenues in the coming periods and the business concentrations for the period ended May 31, 2022, may not reflect future results.
Competition
With our expansion into the vertically integrated cannabis space through our investment in PPK, we will be subject to competition for a wide range of industry participants, and we expect competition to intensify in the coming periods. We are currently evaluating our sources of direct competition in the California, Colorado, Oklahoma, and South Dakota markets where MJHI and PPK are currently operating and will report on competition experienced as we develop our history of selling products in these regions.
In our sector of farm implements and nutrient products, the direct competition for distribution of the “picks and shovels” needed by the small growers is significantly less congested. There are some retail offshoots from brick-and-mortar businesses like hydroponics shops that offer a range of tools and implements similar to the Company’s product offerings, and these businesses are likely to compete directly with the Company’s offerings. To date we are not aware of any large nationally recognized distributors of like products, and we are attempting to position ourselves as a player at the national level through online sales. There are significant hurdles to accomplishing this objective, most significantly, availability of capital to build and maintain the online information needed for a comprehensive “one-stop-shop” offering. If we are unable to find the necessary capital to build our product lines and our online presence, we are likely to face increasing competition as other players enter the market. This could have a negative impact on our ability to grow our revenues and compete effectively in the future.
Competitive Advantages
We believe our competitive advantages are derived from our ability to pursue opportunities when and where we find them without getting bogged down in the bureaucracy that a larger and more diverse business might face. As a small publicly traded company, we are able to move quickly, rapidly negotiate and document licensing and distribution agreements, and when appropriate, acquisitions.
With the acquisition of our interest in PPK and the Country Cannabis Brand, and our desire to increase our ownership of PPK to a majority position (up to 100%), we are also now seeking competitive advantages in our market areas by expanding the brand pool available to MJHI and PPK for distribution through our growing sales force. By adding brands, including Chronic, Sublime, Weedsy and BLVK, MJHI and PPK are providing additional products to offer dispensaries as a one stop shop. We expect that this will generate increased order size per sales visit and a reduction of selling cost per product across our entire distribution network.
52
Marketing and Distribution
Our business model now includes marketing of products to wholesale customers and actively seeking new business opportunities for expansion.
A significant part of our current business model involves manufacture and distribution of products to wholesale customers, consisting primarily of dispensaries. In order to effectively sell to these wholesale customers, MJHI and PPK have and are growing our sales force for each location/area, broken down primarily by each state in which we operate. This allows our sales teams to become familiar with the laws and regulations governing cannabis sales in their state of operation and allows each team to get to know the markets, customers and demographics of the users. Our Brand Portfolio give each particular dispensary the ability to tailor its orders to meet the demands of its retail customers in terms of product type, price point, and brand recognition. We believe there is value in calling on our customers and face-to-face visits, but we also maintain an online store and information site to provide customers with that avenue or shopping if desired.
In order to keep a steady stream of acquisition prospects and brands, we are actively searching for business opportunities in the cannabis industry. Our searches are done through word of mouth, attendance at trade shows and industry events, and by monitoring the activities in our states of operations. When we identify an interesting prospect, our CEO reaches out personally to the management team of the prospect to see if there is a basis for furthering discussions. Our management team has a long history in the industry and large networks of contacts which provide leads on business prospects. Collectively, we believe we will be able to capitalize on these various connections to build a broad-based business selling products to our customers in the cannabis space.
Historically, our product offerings have been limited to the debudder product line and additional soil enhancement products that we distribute for other manufacturers. We will continue to develop these capabilities as resources allow. Our primary marketing method for the existing products is through our online shopping site, www.procannagro.com, and through a small number of distributors that offer the debudder products to their customers. We do not expect the debudder will be a significant contributor to revenues or profits in the foreseeable future, but we intend to continue our efforts to grow the business.
Manufacturing
Vertically Integrated Cannabis Operations. With our recent acquisitions in Colorado and California, we are now actively engaged in manufacturing, packaging and distribution of cannabis products in Denver Colorado and Cathedral City California. Our close relationship with PPK has allowed us to supplement our manufacturing knowledge and experience with the expertise gained by PPK through many years of hands-on manufacturing, product development, quality control and packaging of similar products. Both the Colorado and California locations were start-ups requiring equipment set-up, training, process creation, and adjustments of manufacturing systems. Both locations are now producing high quality products for sale and our manufacturing process continue to improve as our workforce becomes more seasoned and as our familiarity with the manufacturing equipment increases. We expect to continue building our integrated systems in conjunction with PPK and are focused on adopting best manufacturing practices where feasible.
Farm Implements and Nutrient Products. We are not currently manufacturing any products in our own facilities. We rely on third party manufacturers for our production runs, and currently have relationships with third party companies for the manufacturing our products, primarily with Chinese companies. We are monitoring the China tariff situation closely and will take appropriate steps to find new contract manufacturing capabilities in other countries should the China tariffs cause a significant impact on our business. Management believes that alternative manufacturers are available, both in the United States and in other industrialized nations, but it is likely that such other sources of manufacturing would only be available at increased cost. Given current gross margins on the debudder line, an increase in costs may impact the long-term viability of the debudder product line. The molds used to manufacture our products were built by Eco Molding Co., Limited in Guandong, China. We own the molds, but it is our understanding that the molds may not be transferred out of China. Consequently, if an alternate manufacturer outside of China becomes necessary, we may be forced to incur the cost of a new mold, which could further affect the viability of the debudder product line. We do not currently have any outstanding contracts with Eco Molding for production of our product and have historically operated on the basis of purchase orders. Our last order for product was for 10,000
53
units of the Debudder Edge product. We received our final shipment of these units during the year and they are currently held in inventory for sale to customers. At current inventory and sales levels, we expect that another product order will be necessary within 6 months.
Intellectual Property
Our intellectual property consists of business trade secrets regarding methods of operation, product formulations, and business practices. This category is applicable across all sectors of our business, is not protected by patent or other intellectual property laws and is held in confidence by our employees by agreement.
In the farm implements sector, we have two design patents, and several foreign patents covering our debudder products. The United States Patent and Trademark Office (“USPTO”) issued our patents on October 8, 2019. Design Patent D862180 covers the original Debudder Bucket Lid, and Design Patent D862281 covers the Debudder Edge.
Our business strategy will continue to focus on intellectual property protections when appropriate. As we research additional products to include in our product catalogue, we include an analysis of the level of protection that is available for such product as an element of our decision to pursue licensing or distribution of that product. Our preference is to license or distribute products that have intellectual property protections, either because of patent pending or patented status, or as a result of trade secrets.
We also own the domains for mjhi.com, mjharvestinc.com, and procannagro.com. We utilize mjhi.com as our primary domain, website address and e-mail server address. Procannagro.com is our online shopping site and web-based sales tool. Mjharvestinc.com is being phased out in favor of mjhi.com but will likely be retained to protect against confusion caused by third party use if we were to abandon the domain and it became available for others.
Government Regulation
The United States federal government regulates drugs in large part through the Controlled Substances Act, or CSA. Marijuana, which is a form of cannabis, is classified as a Schedule I controlled substance. As a Schedule I controlled substance, the federal Drug Enforcement Agency, or DEA, considers marijuana to have a high potential for abuse with no currently accepted medical use in treatment in the United States (except as disclosed below for epilepsy and related syndromes) and a lack of accepted safety for use of the drug under medical supervision. According to the U.S. federal government, cannabis having a concentration of tetrahydrocannabinol, or THC, greater than 0.3% is marijuana. Cannabis with a THC content below 0.3% is classified as hemp.
The scheduling of marijuana as a Schedule I controlled substance is inconsistent with what we believe to be widely accepted medical uses for marijuana by physicians, researchers, patients, and others. Moreover, as of July 29, 2022, and despite the clear conflict with U.S. federal law, 37 states and the District of Columbia have legalized marijuana for medical use, while 19 of those states and the District of Columbia have legalized the adult-use of cannabis for recreational purposes.
As further evidence of the growing conflict between the U.S. federal treatment of cannabis and the societal acceptance of cannabis, the FDA on June 25, 2018, approved Epidiolex. Epidiolex is an oral solution with an active ingredient derived from the cannabis plant for the treatment of seizures associated with two rare and severe forms of epilepsy, Lennox-Gastaut syndrome and Dravet syndrome, in patients two years of age and older. This is the first FDA-approved drug that contains a purified substance derived from the cannabis plant. In this case, the substance is cannabidiol, or CBD, a chemical component of marijuana that does not contain the psychoactive properties of THC.
Marijuana is largely regulated at the state level in the United States. State laws regulating marijuana are in conflict with the CSA, which makes marijuana use and possession federally illegal. Although certain states and territories of the United States authorize medical or adult-use marijuana production and distribution by licensed or registered entities, under United States federal law, the possession, use, cultivation, and transfer of marijuana and any related drug paraphernalia is illegal. We are compliant with the applicable state and local laws in states where we do business, but strict compliance with state and local laws with respect to cannabis may neither absolve us of liability under United States federal law nor provide a defense to any federal criminal action that may be brought against us.
54
In 2013, as more and more states began to legalize medical and/or adult-use marijuana, the federal government attempted to provide clarity on the incongruity between federal law and these state-legal regulatory frameworks. Until 2018, the federal government provided guidance to federal agencies and banking institutions through a series of DOJ memoranda. The most notable of this guidance came in the form of a memorandum issued by former U.S. Deputy Attorney General James Cole on August 29, 2013, which we refer to as the Cole Memorandum.
The Cole Memorandum offered guidance to federal agencies on how to prioritize civil enforcement, criminal investigations and prosecutions regarding marijuana in all states and quickly set a standard for marijuana-related businesses to comply with. The Cole Memorandum put forth eight prosecution priorities:
1.Preventing the distribution of marijuana to minors;
2.Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs and cartels:
3.Preventing diversion of marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
4.Preventing the state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
5.Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
6.Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
7.Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
8.Preventing marijuana possession or use on federal property.
On January 4, 2018, former United States Attorney General Sessions rescinded the Cole Memorandum by issuing a new memorandum to all United States Attorneys, which we refer to as the Sessions Memo. Rather than establishing national enforcement priorities particular to marijuana-related crimes in jurisdictions where certain marijuana activity was legal under state law, the Sessions Memo simply rescinded the Cole Memorandum and instructed that “[i]n deciding which marijuana activities to prosecute... with the [DOJ’s] finite resources, prosecutors should follow the well-established principles that govern all federal prosecutions.” Namely, these include the seriousness of the offense, history of criminal activity, deterrent effect of prosecution, the interests of victims, and other principles.
Merrick Garland was confirmed to serve as Attorney General in the Biden administration. US Attorney General Merrick Garland currently has no plans to reinstate the Cole Memo or pass new legislation.
Garland stated in April 2022 that cannabis prosecutions are “not an efficient use of resources given the opioid and methamphetamine epidemic that we have,” indicating that the Biden Administration has no intention of repealing Sessions’ memo. While he has made it increasingly clear that he and his administration have no plans of federally prosecuting cannabis users, decriminalization has come to a stagnant point in federal policy, although efforts at federal legalization continue.
While the Cole Memorandum will be informally adhered to and treated as precedence, there are no confirmed efforts to recodify the DoJ’s official legal stance on cannabis law. Both Republicans and Democrats are currently pushing for comprehensive federal reform. Bipartisan congressional groups have even put forth a bill aiming to amend current legislation and model cannabis regulation after existing alcohol regulations.
Nonetheless, there is no guarantee that state laws legalizing and regulating the sale and use of marijuana will not be repealed or overturned, or that local governmental authorities will not limit the applicability of state laws within their respective jurisdictions. Unless and until the United States Congress amends the CSA with respect to marijuana (and as to the timing or scope of any such potential amendments there can be no assurance), there is a risk that federal authorities may enforce current U.S. federal law. Currently, in the absence of uniform federal guidance, as had been established by the Cole memorandum, enforcement priorities are determined by respective United States Attorneys.
55
We are not aware of other specific governmental regulations that impact our business. We do, however, utilize Chinese vendors for manufacturing a significant portion of the products we sell. To the extent that tariffs are imposed on imported goods manufactured in China, our pricing structure and acceptance in the marketplace may be affected. We currently stock our products through distributors in foreign countries when appropriate and ship direct from our manufacturer to the foreign distributor when such can be done at a cost savings. We intend to continue to explore ways that we can hold our costs down on the products we sell in order to minimize price sensitivity concerns with our customers.
Environmental Laws
We are not aware of any environmental laws that would limit our ability to conduct our current sales and distribution activities in their present form. As we expand our operations to participate more directly in the cannabis and hemp industries, and become a vertically integrated grower, harvester, processor, manufacturer, and distributor of cannabis and hemp products, we will likely be subject to environmental laws, including water usage, recycling, waste disposal, and similar regulations that will vary depending on the location of our facilities. We intend to address the impact of such environmental regulations when we have a specific use case to evaluate.
Organization Within Last Five Years
In late 2017, the Board undertook a business evaluation and elected to focus on distribution of agricultural and horticultural implements used by farmers and hobbyists around the world. The Company acquired the rights to the DeBudder product line, including the DeBudder Bucket Lid and the DeBudder Edge, and continues to seek other products for distribution through its distributor relationship and its distribution web site located at www.procannagro.com. In 2018, the Company changed its name to MJ Harvest, Inc. and amended and restated its articles of incorporation to reflect the reorganized business direction. The Company also changed its stock symbol to MJHI (formerly RZPK).
These changes were affected in order to make our corporate name and ticker symbol better align with our short-term and long-term business focus. Our current, short-term goals will focus on building our product portfolio while we expand our product sales and build our distribution platform and brands.
Our long-term plan is to increase our ownership position in PPK, grow our cannabis manufacturing and distribution businesses in Colorado and California,, and acquire additional cannabis extraction, manufacturing and distribution facilities and grow operations where we can develop additional products, build or brands, research the effectiveness of such products in real world settings, and provide concrete examples of the effectiveness of the products to our customers. This step will also allow us to expand operations into biomass production, processing, and sale of products containing THC and CBD.
We also intend to focus on expansion of our cannabis operations into new states and regions through our relationship with PPK and PPK’s ability to expand through tribal relationships under the auspices of FSST.
We can offer no assurances that we will be able to accomplish any portion of our long-range vision.
Employees
Prior to the Colorado and California acquisitions, all of our day-to-day tasks were outsourced to consultants and independent contractors who provided services to us as needed and as directed by our Chief Executive Officer. With the Colorado and California acquisitions, as of September 30, 2022, we have fifteen employees working in our California facility. We have outsourced operations of our Colorado location to PPK. We also have five contractors regularly providing services to the company.
Day to day operations are managed by our officers, and their activities are monitored by our Board of Directors. As business activities require and capital resources permit, we intend to hire employees to fulfill our company’s needs.
56
Facilities
The Company has physical facilities located at 4093 Jackson Street, Denver, CO 80216 and 68350 Commercial Road, Cathedral City, CA 92234. Both locations are leased and are considered adequate for the commercial manufacturing operations conducted there.
In addition, each of our officers and directors and regularly retained contractors operate out of home or virtual offices. We are able to meet remotely as needed. In our farm implement and plant nutrients business segment, our physical products are placed at third-party fulfillment centers and are shipped direct to our customers by the fulfillment centers or drop shipped directly from the manufactures of the products we distribute.
COVID-19
The effects of the continued outbreak of COVID-19 and related government responses have and could 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. As of August 15, 2022, there were no material adverse impacts to the Registrants’ operations due to COVID-19.
The economic disruptions caused by COVID-19 could also adversely impact the impairment risks for certain long-lived assets. Management evaluated these impairment considerations and determined that no such impairments occurred as of May 31, 2022.
Legal Proceedings
The Company and PPK are plaintiffs in lawsuit against Country Cannabis, LLC of Yale, Oklahoma for trademark infringement for the use of the name “Country Cannabis”. The lawsuit was filed with the Payne County, Oklahoma Courts on February 7, 2022. The Company has motioned the Court for summary judgment in this matter and for legal fees. The motion for summary judgement is currently pending before the Court.
Market for MJ’s Common Stock and Related Stockholder Matters
Market Information
MJ’s common stock began trades on the OTCQB market under the symbol “MJHI.”
Holders of Record
On September 30, 2022, there were 258 holders of record of MJ’s common stock, as reported by the MJ’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 MJ’s securities.
Equity Compensation Plan
MJ did not have an equity compensation plan as of September 30, 2022 or as of the Merger Date.
Transfer Agent
Pacific Stock Transfer Co., Inc., 6725 Via Austi Parkway, Las Vegas, NV 89119, telephone (702)-361-3033, serves as the transfer agent and registrar for MJ’s common stock.
57
Management’s Discussion and Analysis of Financial Condition and Results of Operation
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.
Year Ended May 31, 2022 compared with the Year Ended May 31, 2021
The narrative comparison of results of operations for the fiscal years ended May 31, 2022 and 2021 is based on the following table. The table includes information on continuing operations, non-operating expenses and discontinued operations, which are discussed below.
| Year Ended
|
| A
|
| B
|
| A-B
|
| May 31, 2022
|
| May 31, 2021
|
| Change
| Change %
|
REVENUE
| $172,825
|
| $89,186
|
| $83,639
| 94%
|
Cost of revenues
| 185,852
|
| 40,454
|
| 145,398
| 359%
|
Cost of sales % of total sales
| 108%
|
| 45%
|
| 62%
|
|
Gross profit
| (13,027)
|
| 48,732
|
| (61,759)
| -127%
|
Gross profit % of sales
| -8%
|
| 55%
|
| -62%
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
Officer and director compensation
| 663,800
|
| 535,000
|
| 128,800
| 24%
|
General and administrative
| 677,677
|
| 107,546
|
| 570,131
| 530%
|
Professional fees and contract services
| 515,792
|
| 430,656
|
| 85,136
| 20%
|
Total operating expenses
| 1,857,269
|
| 1,073,202
|
| 784,067
| 73%
|
NET LOSS FROM CONTINUING OPERATIONS
| (1,870,296)
|
| (1,024,470)
|
| (845,826)
| 83%
|
NON-OPERATING EXPENSES
|
|
|
|
|
|
|
Interest expense
| 777,732
|
| 378,442
|
| 399,290
| 106%
|
Financing fees
| 227,756
|
| 2,906,000
|
| (2,678,244)
| -92%
|
Impairment of investment
| -
|
| 592,800
|
| (592,800)
| -100%
|
Total non-operating expenses
| 1,005,488
|
| 3,877,242
|
| (2,871,754)
| -74%
|
LOSS FROM DISCONTINUED OPERATIONS
| -
|
| 14,151
|
| (14,151)
| -100%
|
NET LOSS
| (2,875,784)
|
| (4,915,863)
|
| (2,040,079)
| 41%
|
Revenues in the year ended May 31, 2022 increased when compared to the same period in 2021. The increase is largely attributable to an intensified sales effort for MJ’s Debudder Products in conjunction with a move of MJ’s inventory to a new fulfillment center in California. In anticipation of the move, MJ’s sales force reached out to customers with incentives to avoid having to move the inventory and the incentive program was successful in generating a short-term increase in Debudder sales. MJ does not anticipate that the short-term increase in Debudder sales will be sustainable and expects to see a decrease in sales of farm implements and plant nutrients in the fiscal year ended May 31, 2023. In the current fiscal year, MJ also generated $25,352 in sales of cannabis products at its Colorado facility. The Colorado facility was newly opened in the fiscal fourth quarter and was in the very early stage of commencing sales activities. MJ expects a slow ramp up of sales of cannabis products through the remainder of calendar year 2022. Additional information on MJ’s business segments is included below.
58
Cost of revenues as a percentage of sales increased in the year ended May 31, 2022 when compared to the same period in 2021. The increase is attributable to the costs incurred in MJ’s Colorado and California operations. In MJ’s fiscal fourth quarter, MJ incurred operating costs associated with setting up and documenting its manufacturing processes and producing test batches of products to verify systems were generating expected results at the Colorado and California facilities. During this phase, MJ did not produce significant quantities of product for resale. The production expenses of the test batches were, however, recorded as manufacturing costs. We expect margins to improve on MJ’s cannabis product lines in the coming periods as manufacturing processes are standardized and needs to run test batches and adjust processes decreases.
Other operating expenses increased in the fiscal year ended May 31, 2022 compared to the same period in the prior year. The increase was primarily due to an increase in officer and director compensation resulting from expansion of MJ’s board of directors and contracting with Randy Lanier, a new director, to represent MJ as Brand Ambassador. MJ also incurred significant promotion and advertising costs during the current year, primarily for investor relations services. General and administrative expenses increased due to our decision to further develop MJ’s cannabis business through acquisition of the Colorado and California facilities and the attendant costs of setting up geographically disbursed manufacturing operations.
Net loss from operations increased in 2022 compared with 2021. The increase in the net loss is attributable to the factors identified above.
Non-operating Expenses.
Non-operating expenses decreased in 2022 compared with 2021. In 2021, we incurred $2,906,000 in financing costs associate with a debt financing for operating capital. The notes payable giving rise to the financing fees were paid off in March 2022 and financing fees were not incurred in the current fiscal year. MJ did, however, replace the 2021 notes payable with a new senior debt that resulted in an increase in interest expense in the current year compared to 2021.
In 2021, MJ also incurred a $592,800 impairment on its investment in PPK. There was no impairment of this investment in the current year.
Discontinued Operations.
In the year ended May 31, 2021, MJ incurred a $14,151 loss on discontinued operations of a business acquired from Elevated Ag Solutions, Inc. in 2020. The loss from operations in the year ended 2021 did not carry over to 2022 as operations were discontinued early in our fiscal year 2021. The Elevated operating results for the year ended May 31, 2021.
OPERATING RESULTS
|
|
| Year Ended
|
| May 31, 2021
|
Revenue
| $75,217
|
Cost of revenue
| 66,243
|
Amortization
| 13,125
|
Gross profit
| (4,151)
|
Loss on discontinued operations
| 10,000
|
| $(14,151)
|
59
Segment Reporting
In the year ended May 31, 2022, MJ expanded its operations to include segments focused on farm implements. plant nutrients and cannabis manufacturing. Summary information on each segment is provided below. In the year ended May 31, 2021, MJ operated only the farm implements and plant nutrients business.
Segment Reporting
|
| Farm Implements and Plant Nutrients
|
| Cannabis Manufacturing
| Total
|
Gross revenues
|
| $159,773
|
| $25,352
| $185,125
|
Cost of goods sold
|
| 60,868
|
| 127,833
| 188,701
|
Gross profit
|
| $98,905
|
| $(102,481)
| $(3,576)
|
|
|
|
|
|
|
Capital expenditures.
|
| $-
|
| $30,838
| $30,838
|
Liquidity and Capital Resources
Cash flow used in operating activities for the year ended May 31, 2022 was $726,932 compared with $258,024 in 2021. During the period, our total cash decreased by $82,432. Cash to fund the negative cash flow from operations was derived primarily from proceeds of notes payable of $1,271,000. The decrease in our cash position at May 31, 2022 is largely attributable to the cash requirements for starting up operations in Colorado and California.
MJ’s historic operations have not been sufficient to support the existing infrastructure, much of which is required in order to maintain public company status. On March, 29, 2022, MJ entered into a senior debt funding transaction that allowed us to pay off an earlier debt financing and provided additional operating capital primarily for start-up operations in California.
MJ is currently heavily dependent on funding through advances from related parties, but no assurances can be given that such funding will continue to be available in future periods. The debt funding matures on May 11 at which time, the note balance of $2,317,198 plus accrued interest will be due.
MJ has maintained active operations as a manufacturer and distributor of the Debudder product line since 2018.
The accompanying consolidated financial statements have been prepared assuming that MJ will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. MJ incurred net losses of $2,875,784 for the year ended May 31, 2022 and had an accumulated deficit of $11,974,041 as of May 31, 2022. These factors raise substantial doubt about MJ’s ability to continue as a going concern. 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 succeed in its efforts to raise capital in this manner to further its business plan in an aggressive manner. Raising additional capital may cause dilution to current shareholders.
Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, MJ elected not to provide the information required by this item.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Security Ownership of Management and Certain Beneficial Owners
The following table sets forth certain information furnished by current management and others, concerning the ownership of MJ’s common stock as of June 30, 2022, of (i) each person who is known to us to be the beneficial owner of more than 5% of our common stock, without regard to any limitations on conversion or exercise of convertible securities or warrants; (ii) all directors and named executive officers; and (iii) MJ’s directors, named executive officers, and executive officers as a group:
60
Name of Beneficial Owner
| Address of Beneficial Owner
| Title
| Amount of Beneficial Ownership
| Nature of Beneficial Ownership
| Percent of Class
|
Patrick Bilton
| 9205 W. Russell Rd., #240
| CEO and Director
| 9,225,950
| Direct
| 20.57%
|
| Las Vegas, NV 89148
|
|
|
|
|
Old Floresta LLC
| 9205 W. Russell Rd., #240
| Beneficially owned by Patrick Bilton
| 3,859,412
| Indirect
| 8.60%
|
| Las Vegas, NV 89148
|
|
|
|
|
David Tobias
| 9205 W. Russell Rd., #240
| Director
| 6,631,875
| Direct
| 14.79%
|
| Las Vegas, NV 89148
|
|
|
|
|
Randy Lanier
| 9205 W. Russell Rd., #240
| Director
| 53,571
| Direct
| 0.12%
|
| Las Vegas, NV 89148
|
|
|
|
|
Lanier Management LLC
| 9205 W. Russell Rd., #240
| Beneficially owned by Randy Lanier
| 556,522
| Indirect
| 1.24%
|
| Las Vegas, NV 89148
|
|
|
|
|
Jason Roth, President
| 9205 W. Russell Rd., #240
| Director
| 166,667
| Indirect
| 0.37%
|
Big Horse Holdings, Inc.
| Las Vegas, NV 89148
|
|
|
|
|
Rich Turasky, Member
| 9205 W. Russell Rd., #240
| Director
| 104,167
| Indirect
| 0.23%
|
Boulder Capital, LLC
| Las Vegas, NV 89148
|
|
|
|
|
Brad Herr, President
| 9205 W. Russell Rd., #240
| CFO
| 1,623,925
| Indirect
| 3.62%
|
Nexit Inc.
| Las Vegas, NV 89148
|
|
|
|
|
Ralph Clinton Pyatt, III, President
| 9205 W. Russell Rd., #240
| COO
| 1,520,000
| Indirect
| 3.39%
|
PPK Investment Group, Inc.
| Las Vegas, NV 89148
|
|
|
|
|
Executive Officers as a Group
|
|
| 23,742,089
|
| 52.93%
|
Jerry Cornwell
| 38574 Clear Sky Way
| 5% beneficial owner
| 1,185,331
| Direct
| 2.64%
|
| Palm Desert, CA 92211
|
|
|
|
|
XXX Enterprises, Inc.
| 38574 Clear Sky Way
| Beneficially owned by Jerry Cornwell
| 2,446,261
| Direct
| 5.45%
|
| Palm Desert, CA 92211
|
|
|
|
|
Shawn Falconbridge, Member
| 8271 E. Gelding Dr.
| 5% beneficial owner
| 5,972,222
| Direct
| 13.31%
|
Consensus Holdings, LLC
| Scottsdale, AZ 85260
|
|
|
|
|
This table is based upon information supplied by officers, directors and principal stockholders and is believed to be accurate. Unless otherwise indicated in the footnotes to this table, we believe that each of the stockholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of MJ’s common stock subject to options, warrants, or other conversion privileges currently exercisable or convertible, or exercisable or convertible within 60 days of the date of this table, are deemed outstanding for computing the percentage of the person holding such option or warrant but are not deemed outstanding for computing the percentage of any other person. Where more than one person has a beneficial ownership interest in the same shares, the sharing of beneficial ownership of these shares is designated in the footnotes to this table. As of the date of this table, MJ had 44,854,737 shares outstanding.
There are no current arrangements which will result in a change in control.
Item 13. Certain Relationships and Related Transactions, and Director Independence
During the year ended May 31, 2022, MJ received additional advances totaling $271,500 from Mr. Patrick Bilton, Chief Executive Officer and director of MJ to cover operating expenses. In addition, Mr. Bilton deferred payment of his salary and director fees in the aggregate amount of $280,000 which is recorded as payable to related party for services in the financial statements. David Tobias, director, also advanced $2,000 to MJ in the year ended May 31, 2022. As of May 31, 2022, advances from related parties totaled $1,871,482. This amount is comprised of $1,199,914 due to Mr. Bilton for advances to MJ, $560,000 due to Mr. Bilton for deferred salary, $82,553 due to Mr. Tobias, a director for advances to MJ, and $29,015 due to Mr. Cornwell, a director for advances to MJ. MJ has not recorded interest on these amounts. Subsequent to the fiscal year end, on July 8, 2022, the related parties converted an aggregate of $2,021,482 of related party debt (including $150,000 in accounts payable due to Nexit, Inc., a corporation wholly owned by Brad Herr, MJ’s Chief Financial Officer) into common stock at a price of $0.187 per share or an aggregate of 10,810,067 shares.
Approval of Related Party Transactions
Related party transactions are reviewed and approved or denied by MJ’s board of directors. 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.
61
DESCRIPTION OF CS CAPITAL STOCK
CS’s authorized capital stock consists of 495,000,000 shares of common stock, par value $0.001, and 5,000,000 shares of preferred stock, par value $0.001. As of September 30, 2022, there were 46,262,073 shares of our common stock issued and outstanding, held by approximately 85 shareholders of record. There are no shares of our preferred stock outstanding as of the date of this filing.
Common Stock. Each shareholder of our common stock is entitled to a pro rata share of cash distributions made to shareholders, including dividend payments. The holders of our common stock are entitled to one vote for each share of record on all matters to be voted on by shareholders. There is no cumulative voting with respect to the election of our directors or any other matter. Therefore, the holders of more than 50% of the shares voted for the election of those directors can elect all of the directors. The holders of our common stock are entitled to receive dividends when and if declared by our Board of Directors from funds legally available therefore. Cash dividends are at the sole discretion of our Board of Directors. In the event of our liquidation, dissolution or winding up, the holders of common stock are entitled to share ratably in all assets remaining available for distribution to them after payment of our liabilities and after provision has been made for each class of stock, if any, having any preference in relation to our common stock. Holders of shares of our common stock have no conversion, preemptive or other subscription rights, and there are no redemption provisions applicable to our common stock.
Dividend Policy. We have never issued any dividends and do not expect to pay any stock dividend or any cash dividends on our common stock in the foreseeable future. We currently intend to retain our earnings, if any, for use in our business. Any dividends declared on our common stock in the future will be at the discretion of our Board of Directors and subject to any restrictions that may be imposed by our lenders.
Preferred Stock. We are authorized to issue 5,000,000 shares of preferred stock, par value $0.0001. We have not issued, nor established any series for, any of our preferred stock. Our preferred stock is “blank check preferred” whereby our Board of Directors may create a series of preferred stock and set the rights and preferences of such preferred stock, without further shareholder approval. The availability or issuance of preferred shares in the future could delay, defer, discourage or prevent a change in control.
COMPARISON OF STOCKHOLDER RIGHTS
The rights of stockholders are governed by CS's articles of incorporation and bylaws, each as amended, and the laws of the State of Nevada, and the rights of MJ stockholders are governed by MJ's articles of incorporation and bylaws and the laws of the State of Nevada. After the Merger, MJ stockholders will become stockholders of CS and, accordingly, their rights will be governed by CS's articles of incorporation and bylaws. Since both corporations are Nevada corporations and subject to the corporate laws of the State of Nevada, the rights and privileges of MJ stockholders track, for the most part, the material rights and privileges of CS shareholders. However, MJ has 100,000,000 common shares authorized with 44,854,737 issued and outstanding. That means, at the present time, MJ may issue an additional 55,145,263. CS has 495,000,000 common shares authorized. Following the Merger, CS will have an additional 328,325,845 common shares that may be issued. Accordingly, if the Merger is consummated, there will be more potential for MJ shareholders to have their share position diluted if some or all of the available 328,325,845 CS shares are issued. An additional material difference is that for MJ shareholders to achieve a quorum to take action at a meeting of shareholders, one third of the issued and outstanding voting power must be present at the meeting. For CS shareholders to take action, a majority of the issued and outstanding voting power must be present. This lessor MJ quorum requirement does not pertain to the election of directors where a majority of the voting power must be present to form a quorum.
DIRECTORS AND OFFICERS OF CS FOLLOWING THE MERGER
The following sets forth information concerning the persons expected to be the directors and executive officers of CS following consummation of the Merger.
62
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
|
| Position
|
Patrick Bilton
|
| 61
|
| Chief Executive Officer, Principal Finance Officer, Director
|
David Tobias
|
| 71
|
| Director
|
Randy Lanier
|
| 67
|
| Brand Ambassador, Director
|
Ralph Clinton Pyatt III
|
| 51
|
| Chief Operating Officer, Director
|
Certain biographical information with respect to our executive officers and directors.
Patrick Bilton, CEO, Secretary and Director will manage our product development and product acquisition efforts, and focus on developing and implementing our strategic business direction. Patrick joined MJ Harvest in 2017 and was instrumental in establishing MJ’s operations while also seeking to expand MJ’s business. Patrick sold his landscape business in 2007 and after working with the new owners over a three-year transition period, has been since 2010 to the present, involved as a consultant in construction management, working primarily on luxury and high end residential real estate projects. Concurrently, Patrick has worked as a consultant with various public companies in their business development and merger and acquisition efforts, primarily focused on herbal and plant-based products and derivatives, including CS. Patrick brings a wealth of practical experience and a deep understanding of the requirements of growers of hemp and cannabis crops. With Patrick’s guidance, MJ has been developing a portfolio of tools and implements used in growing and harvesting crops.
Randy Lanier, Director, served as brand ambassador for MJ, and will continue this role with CS. Additionally, Randy offers guidance and assistance with strategic business direction. Randy’s career has included race car driving where he was the 1986 Rookie of the Year at the Indianapolis 500, the 1984 IMSA GTP Champion, and is currently a high-performance driving instructor. Randy has also worked as a behavioral health technician and treatment advocate, yoga instructor and is also an accomplished artist. Randy brings a wealth of practical experience and a deep understanding of the cannabis industry and has been leveraging his extensive contact list and network of cannabis professionals to promote and share our vision.
David Tobias. Director, served as CEO of CBDS prior to the Merger and 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 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. Mr. Tobias served as CEO of CS since January 1, 2019. Upon the completion of the Merger, David will resign as our CEO, while continuing to serve as a director.
Clinton Pyatt, Director, has a diverse background in cannabis, pharmaceuticals, nutraceuticals, law and the financial markets. He served three years with the first publicly traded company as Senior Vice President of Government Relations, and Chief Operating Officer for Notis Global (formerly MedBox). As a company executive, he drove company revenues and operational expansion by leveraging his esteemed list of industry relationships. As a long time, Cannabis business owner Mr. Pyatt was one of the largest extraction and manufacturing producers of Cannabis oil and concentrates in California in which he sold Dreamfields’s Companies. His expertise and understanding of the cannabis industry makes him an invaluable asset. Mr. Pyatt has developed relationships with several pharmaceutical companies for the use of proprietary technologies that are revolutionizing patent dosage effectiveness and absorption rates in the human body. Mr. Pyatt is currently engaged in working with Native Nations Cannabis to bring Good Manufacturing Practices and products to the Native American Tribes throughout the United
63
States. Mr. Pyatt strives to give back to organizations and participate with nonprofits that benefit the Veteran and children afflicted with diseases helped by Cannabis. He now runs one of the largest manufacturing businesses in Oklahoma (as reported by the Oklahoma Medical Marijuana Authority OOMA). His brand known as Country Cannabis is truly vertically integrated from seed to sale. The brand has now sold in multiple states. Mr. Pyatt is currently engaged in working with Native Nations Cannabis to bring Good Manufacturing Practices and products to the Native American Tribes throughout the United States. Mr. Pyatt strives to give back to organizations and participate with nonprofits that benefit the Veteran and children afflicted with diseases helped by Cannabis. Previously he has worked on wall street for nearly a decade buying and selling mortgage back securities to institutional investors. He holds a degree in Law. Mr. Pyatt is a United States Marine Corps Veteran honored for his active duty and service with the Department of Defense to include operations in Desert Shield, Desert Storm and Somalia. Mr. Pyatt strives to give back to organizations and participate with nonprofits that benefit the Veteran and children afflicted with diseases helped by Cannabis.
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.
Board of Directors
Our board of directors consists of five persons. None of our directors is "independent" within the meaning of Rule 5605(a)(3) of the NASDAQ Marketplace. The five 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 does not have an independent director. The board also does not have an independent "financial expert" to serve on the audit committee. As a result, the Company, after the Merger, is not able to designate an audit committee and the function of the audit committee will be 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. 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.
The Company's Board of Directors also 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
In 2021, the Company’s Board of Directors meetings were held as needed via remote conference call. As a matter of convenience, many of the actions requiring Board approval are conducted telephonically and/or online and then documented as consent minutes. All minutes approved by consent require signatures from all directors. Most Board meetings are attended by all of the Directors, and absences, if any, are noted in the minutes. In 2022, meetings will be held at least once quarterly and more often if needed. Actions may also be taken in 2022 without formal meeting by consent signed by each of the directors.
64
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, 450 Hillside Dr., #A224, Mesquite, NV 89027. 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.
Code of Ethics
We have adopted a Code of Ethics and Business Conduct Policy that applies to our executive officers, including our principal executive, financial and accounting officers.
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.
Director Independence
In considering and making decisions as to the independence of each of the directors of the Company, the Board considered transactions and relationships between the Company (and its subsidiaries) and each director (and each member of such director’s immediate family and any entity with which the director or family member has an affiliation such that the director or family member may have a material indirect interest in a transaction or relationship with such entity). The Board has determined that Mr. David Tobias and Mr. Brad Herr are independent as defined in applicable SEC and Nasdaq rules and regulations, and that each constitutes an “Independent Director” as defined in Nasdaq Listing Rule 5605. Such members constitute two of the five members of the entire Board.
Policy Regarding Transactions with Related Persons
Any transaction with a related person must be approved by the board of directors and considered upon the same terms and conditions as a transaction with an unrelated third party. Any director that has a material interest in a transaction cannot vote on the transaction when and if approved by the board of directors.
65
OFFICER AND DIRECTOR COMPENSATION
Executive Compensation
The following table sets forth certain information regarding the annual compensation paid to our principal executive officer and principal financial officer while serving in their respective positions at MJ in all capacities for MJ’s fiscal years ended May 31, 2021 and 2020. No other person served as an executive officer of the Company or received total annual compensation from the Company in excess of $100,000 other than as set forth in the table.
SUMMARY COMPENSATION TABLE
Name & Principal Position
| Year
| Annual Pay ($)
| Stock Awards ($)
| Total ($)
|
Patrick Bilton, President and CEO
| 2022
| 280,000
| -
| 280,000
|
| 2021
| 280,000
| -
| 280,000
|
|
|
|
|
|
Brad Herr, CFO (resigned Oct 2022)
| 2022
| 120,000
| 60,000
| 180,000
|
| 2021
| 120,000
| 60,000
| 180,000
|
|
|
|
|
|
Randy Lanier, Brand Ambassador
| 2022
| -
| 130,213
| 130,213
|
| 2021
| -
| 34,284
| 34,284
|
All compensation reflected in the above table was paid pursuant to independent contractor agreements between the individuals listed and MJ. All stock awards were authorized by MJ’s Board of Directors. During the fiscal year ended May 31, 2022, the salary and fees due Mr. Bilton and Mr. Herr were accrued due to cash flow constraints. The stock awards due to Mr. Herr were paid by issuance of common stock on a quarterly basis.
FOLLOWING THE MERGER
Employment Agreements
Following the Merger, employment contracts will be negotiated between the executive officers and CS.
Director Compensation
Our directors are issued shares of common stock valued at $2,500, quarterly for their service on the board of directors.
LEGAL MATTERS
Prior to the date this registration statement becomes effective, Gary R. Henrie, Esq. will provide an opinion regarding the validity of the CS common stock to be issued to MJ stockholders in the Merger.
EXPERTS
The audited consolidated financial statements of Cannabis Sativa, Inc. for the years ended December 31, 2021 and December 31, 2020, and the audited consolidated financial statements of MJ Harvest, Inc. for the years ended May 31, 2022 and May 31, 2021, included in this prospectus have been audited by Assure CPA, LLC, an independent registered public accounting firm, as stated in their reports appearing elsewhere herein, and are included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing.
66
FUTURE CS STOCKHOLDER PROPOSALS
Stockholder proposals may be included in CS's proxy statement for an annual meeting so long as they are provided to CS on a timely basis and satisfy the other conditions set forth in SEC regulations under Rule 14a-8 under the Securities Exchange Act of 1934, as amended, regarding the inclusion of stockholder proposals in company-sponsored proxy materials. For a stockholder proposal to be considered for inclusion in CS's proxy statement and form of proxy for the annual meeting to be held in 2023, CS must receive the proposal at its principal executive offices, addressed to the Secretary, no later than March 31, 2023. In addition, a stockholder proposal that is not intended for inclusion in CS's proxy statement under Rule 14a-8 may be brought before the 2023 annual meeting so long as CS receives information and notice of the proposal not later than June 30, 2023.
INDEMNIFICATION MATTERS AND DISCLOSURE OF SEC POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
CS’s officers and directors are indemnified as provided by Nevada Corporation Law and our bylaws. Under the Nevada Corporation Law, director immunity from liability to a company or its shareholders for monetary liabilities applies automatically unless it is specifically limited by a company's articles of incorporation that is not the case with our articles of incorporation. Excepted from that immunity are:
(1)a willful failure to deal fairly with the company or its shareholders in connection with a matter in which the director has a material conflict of interest;
(2)a violation of criminal law (unless the director had reasonable cause to believe that his or her conduct was lawful or no reasonable cause to believe that his or her conduct was unlawful);
(3)a transaction from which the director derived an improper personal profit; and
(4)willful misconduct.
CS’s bylaws provide that we will indemnify our directors and officers to the fullest extent not prohibited by Nevada law; provided, however, that we may modify the extent of such indemnification by individual contracts with our directors and officers; and, provided, further, that we shall not be required to indemnify any director or officer in connection with any proceeding (or part thereof) initiated by such person unless:
(1)such indemnification is expressly required to be made by law;
(2)the proceeding was authorized by our Board of Directors;
(3)such indemnification is provided by us, in our sole discretion, pursuant to the powers vested us under Nevada law; or
(4)such indemnification is required to be made pursuant to the bylaws.
CS’s bylaws provide that we will advance all expenses incurred to any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was our director or officer, or is or was serving at our request as a director or executive officer of another company, partnership, joint venture, trust or other enterprise, prior to the final disposition of the proceeding, promptly following request. This advanced of expenses is to be made upon receipt of an undertaking by or on behalf of such person to repay said amounts should it be ultimately determined that the person was not entitled to be indemnified under our bylaws or otherwise.
CS’s bylaws also provide that no advance shall be made by us to any officer in any action, suit or proceeding, whether civil, criminal, administrative or investigative, if a determination is reasonably and promptly made: (a) by the board of directors by a majority vote of a quorum consisting of directors who were not parties to the proceeding; or (b) if such quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, that the facts known to the decision-making party at the time such determination is made demonstrate clearly and convincingly that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to our best interests.
67
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, the registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is therefore unenforceable.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The SEC allows us to “incorporate by reference” information into this prospectus. This means that we can disclose important information to you by referring you to another document filed separately with the SEC. The information that we incorporate by reference is considered to be part of this prospectus. Because we are incorporating by reference our future filings with the SEC, this prospectus is continually updated and those future filings may modify or supersede some or all of the information included or incorporated in this prospectus. This means that you must look at all of the SEC filings that we incorporate by reference to determine if any of the statements in this prospectus or in any document previously incorporated by reference have been modified or superseded.
This prospectus incorporates by reference the documents listed below that have been previously filed with the SEC:
·our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on April 14, 2022;
·our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, filed with the SEC on May 23, 2022;
·our Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, filed with the SEC on August 22, 2022;
·our Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, filed with the SEC on November 14, 2022, as amended on December 13, 2022; and
·our Current Report on Form 8-K (other than information furnished rather than filed) filed with the SEC on November 23, 2022.
We also incorporate by reference all future documents (except as to any portion of any report or document that is not deemed filed under such provisions) we file with the SEC pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, subsequent to the date of this prospectus and prior to the termination of the offering.
You should rely only on the information incorporated by reference or provided in this prospectus. We have not authorized anyone else to provide you with different information. Any statement contained in a document incorporated by reference into this prospectus will be deemed to be modified or superseded for the purposes of this prospectus to the extent that a later statement contained in this prospectus or in any other document incorporated by reference into this prospectus modifies or supersedes the earlier statement. Any statement so modified or superseded will not be deemed, except as so modified or superseded, to constitute a part of this prospectus. You should not assume that the information in this prospectus is accurate as of any date other than the date of this prospectus or the date of the documents incorporated by reference in this prospectus.
We will provide without charge to each person, including any beneficial owner, to whom this prospectus is delivered, upon written or oral request, a copy of any or all documents that are incorporated by reference into this prospectus, but not delivered with the prospectus, other than exhibits to such documents unless such exhibits are specifically incorporated by reference into the documents that this prospectus incorporates. You should direct oral or written requests by one of the following methods. Attention: Investor Relations, Cannabis Sativa, Inc., 450 Hillside Dr. #A224, Mesquite, Nevada 89027. You may also access these documents, free of charge on the SEC’s website at www.sec.gov.
68
WHERE YOU CAN FIND MORE INFORMATION
CS has filed a registration statement on Form S-4 to register with the SEC the CS common stock CS will issue to MJ stockholders in the Merger. This joint proxy statement/prospectus is a part of that registration statement and constitutes a prospectus of CS, in addition to being a proxy statement of CS for a special meeting of its stockholders and a proxy statement of MJ for a special meeting of its stockholders. This joint proxy statement/prospectus does not include all of the information contained in the registration statement. You should refer to the registration statement and the exhibits thereto for additional information. You may obtain copies of the Form S-4 (and any amendments to the Form S-4), including any exhibits to the Form S-4, in the manner described below.
CS files annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy any reports, statements or other information that CS files at the SEC's public reference room at 100 F Street, N.E., Washington, District of Columbia 20549. Please call the SEC at 1-800-SEC-0330 for more information on the public reference room. CS's SEC filings are also available to the public from commercial retrieval services and at the website maintained by the SEC at www.sec.gov.
MJ files annual, quarterly reports, special reports, proxy statements and other information with the SEC. You may read and copy any reports, statements or other information that CS files at the SEC's public reference room at 100 F Street, N.E., Washington, District of Columbia 20549. Please call the SEC at 1-800-SEC-0330 for more information on the public reference room. MJ's SEC filings are also available to the public from commercial retrieval services and at the website maintained by the SEC at www.sec.gov. The reports and other information filed by MJ with the SEC are also available at MJ's website. The address of MJ's website is MJHI.com. Information contained on MJ's website or that can be accessed through its website is not incorporated by reference into this joint proxy statement/prospectus.
CS has supplied all information contained in this joint proxy statement/prospectus relating to CS, and MJ has supplied all information contained in this joint proxy statement/prospectus relating to MJ.
69
INDEX TO FINANCIAL STATEMENTS
CANNABIS SATIVA, INC.
F-1
INDEX TO FINANCIAL STATEMENTS
MJ HARVEST, INC.
F-2
CANNABIS SATIVA, INC.
|
|
Consolidated Financial Statements For The Years Ended December 31, 2021 and 2020
|
|
F-3
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, 2021 and 2020, the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the years 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, 2021 and 2020, and the results of its operations and its cash flows for each of the years 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 1 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 1. 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 audits. 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 audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits 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 audits 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 audits 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 audits 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 audits provide a reasonable basis for our opinion.
/s/Assure CPA, LLC.
Spokane, Washington
PCAOB ID: 444
April 14, 2022
We have served as the Company's independent auditor since 2019.
F-4
CANNABIS SATIVA, INC.
CONSOLIDATED BALANCE SHEETS
|
December 31,
|
| 2021
|
| 2020
|
ASSETS
|
|
|
|
|
Current Assets
|
|
|
|
|
Cash
|
| $194,060
|
| $322,107
|
Inventories
|
| —
|
| 56,485
|
Investment in equity securities, at fair value
|
| 208,540
|
| 195,000
|
Other current assets
|
| —
|
| 57,694
|
Total Current Assets
|
| 402,600
|
| 631,286
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
| 1,974
|
| 199,120
|
Intangible assets, net
|
| 320,806
|
| 489,946
|
Deposits and other assets
|
| —
|
| 9,250
|
Right to use asset
|
| —
|
| 47,312
|
Goodwill
|
| 1,837,202
|
| 1,837,202
|
|
|
|
|
|
Total Assets
|
| $2,562,582
|
| $3,214,116
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
Current Liabilities
|
|
|
|
|
Accounts payable and accrued expenses
|
| $95,031
|
| $179,200
|
Accrued interest - related parties
|
| 204,613
|
| 144,024
|
Advances from related parties
|
| —
|
| 18,800
|
Notes payable to related parties
|
| 1,218,038
|
| 1,161,020
|
Customer deposits
|
| —
|
| 25,545
|
Operating lease liability - current
|
| —
|
| 31,891
|
Total Current Liabilities
|
| 1,517,682
|
| 1,560,480
|
|
|
|
|
|
Long-Term Liabilities
|
|
|
|
|
Operating lease liability - long term
|
| —
|
| 15,421
|
|
|
|
|
|
Total Liabilities
|
| 1,517,682
|
| 1,575,901
|
|
|
|
|
|
Commitments and contingencies (Notes 6 and 8)
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity (Deficit):
|
|
|
|
|
Preferred stock $0.001 par value; 5,000,000 shares authorized; 777,654 and 1,090,128 issued and outstanding, respectively
|
| 778
|
| 1,090
|
Common stock $0.001 par value; 45,000,000 shares authorized; 30,746,865 and 27,453,178 shares issued and outstanding, respectively
|
| 30,748
|
| 27,455
|
Additional paid-in capital
|
| 79,151,240
|
| 77,660,014
|
Accumulated deficit
|
| (79,475,968)
|
| (77,028,339)
|
|
|
|
|
|
Total Cannabis Sativa, Inc. Stockholders' Equity (Deficit)
|
| (293,202)
|
| 660,220
|
|
|
|
|
|
Non-Controlling Interests
|
| 1,338,102
|
| 977,995
|
|
|
|
|
|
Total Stockholders' Equity
|
| 1,044,900
|
| 1,638,215
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
| $2,562,582
|
| $3,214,116
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
CANNABIS SATIVA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
For the years ended December 31,
|
| 2021
|
| 2020
|
|
|
|
|
|
Revenues
|
| $1,841,558
|
| $1,940,731
|
|
|
|
|
|
Cost of Revenues
|
| 699,378
|
| 740,645
|
|
|
|
|
|
Gross Profit
|
| 1,142,180
|
| 1,200,086
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
Professional fees
|
| 581,660
|
| 750,030
|
Depreciation and amortization
|
| 171,163
|
| 207,866
|
Wages and salaries
|
| 711,872
|
| 596,262
|
Advertising
|
| 344,904
|
| 467,918
|
General and administrative
|
| 1,078,204
|
| 971,598
|
|
|
|
|
|
Total Operating Expenses
|
| 2,887,803
|
| 2,993,674
|
|
|
|
|
|
Loss from Operations
|
| (1,745,623)
|
| (1,793,588)
|
|
|
|
|
|
Other Income (Expenses)
|
|
|
|
|
Gain (loss) on investment in equity securities
|
| (542,442)
|
| 147,000
|
Gain on forgiveness of CAREs Act Loan
|
| 5,000
|
| —
|
Interest expense - related parties
|
| (66,872)
|
| (60,356)
|
|
|
|
|
|
Total Other Income (Expenses), Net
|
| (604,314)
|
| 86,644
|
|
|
|
|
|
Net Loss Before Income Taxes
|
| (2,349,937)
|
| (1,706,944)
|
|
|
|
|
|
Income Taxes
|
| —
|
| —
|
|
|
|
|
|
Net Loss from Continuing Operations
|
| (2,349,937)
|
| (1,706,944)
|
|
|
|
|
|
Net Income (Loss) from Discontinued Operations
|
|
|
|
|
Operating loss on discontinued operations
|
| (234,205)
|
| (751,600)
|
Gain on sale of subsidiaries
|
| 164,736
|
| —
|
|
|
|
|
|
Net Income (Loss) from Discontinued Operations
|
| (69,469)
|
| (751,600)
|
|
|
|
|
|
Net Loss
|
| (2,419,406)
|
| (2,458,544)
|
|
|
|
|
|
Loss attributable to non-controlling interest - GK Manufacturing
|
| (114,467)
|
| (367,792)
|
Loss attributable to non-controlling interest - iBudTender
|
| (1,614)
|
| (3,878)
|
Income attributable to non-controlling interest - PrestoCorp
|
| 144,304
|
| 86,318
|
|
|
|
|
|
Net Loss Attributable To Cannabis Sativa, Inc.
|
| $(2,447,629)
|
| $(2,173,192)
|
|
|
|
|
|
Net Loss per Common Share: Basic and diluted
|
|
|
|
|
From continuing operations
|
| $(0.08)
|
| (0.06)
|
From discontinued operations
|
| (0.00)
|
| (0.03)
|
Total
|
| $(0.08)
|
| $(0.09)
|
|
|
|
|
|
Weighted Average Common Shares Outstanding:
|
|
|
|
|
Basic & Diluted
|
| 29,283,393
|
| 25,408,676
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6