NOTE 1 – NATURE OF BUSINESS AND
SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
MJ Harvest, Inc.
(the “Company”), develops, acquires, and distributes agricultural and horticultural tools and implements for sale primarily
to growers and operators in the hemp and cannabis retail industry. The Company owns 100% of G4 Products LLC, (“G4”) which
owns intellectual property for a patented manual Debudder product line marketed under the Original 420 Brand as the Debudder Bucket Lid
and Edge (“Debudder”). The Company also owns 100% of AgroExports LLC (“Agro”) which serves as the domestic and
international distribution arm for sales of agricultural and horticultural tools and implements. The Company operates a sales portal
website, www.procannagro.com, for online sales o
f its products.
In 2019, the Company
formed AgroExports.CA ULC (“Agro Canada”), a wholly owned Canadian subsidiary in order to facilitate online payments from
sales in Canada. Sales in Canada are currently serviced through a fulfillment center in Toronto.
In the year ended
May 31, 2021, the Company expanded its focus to include a minority investment interest in PPK Investment Group, Inc. (“PPK”),
a vertically integrated cannabis company in Oklahoma that operates as a grower, harvester, processor, manufacturer and distributor of
the Country Cannabis Brand of cannabis products. The investment in PPK represents a shift in focus from an agricultural implements-based
business to a broader cannabis industry focus. The Company has continued to expand its cannabis focus in the current year with new investments
in WDSY LLC and BLIP Holdings LLC, owners of the Weedsy and BLVK brands, respectively.
In the year ended
May 31, 2022, the Company began operations in Colorado under a wholly-owned Colorado corporation, Country Cannabis, Inc. (“CCCO”).
CCCO is in the process of acquiring cannabis licenses for the manufacture and distribution of products containing THC and/or THC derivatives.
Pending transfer of the licenses, the Company is operating the Colorado facility pursuant to a license agreement with the current owner
of the facility.
On July 18, 2022,
the Company acquired manufacturing equipment and two cannabis licenses for a cannabis manufacturing and distribution business in Cathedral
City, California, CCCA. CCCA is in the process of acquiring cannabis licenses for the manufacture and distribution of products containing
THC and/or THC derivatives. Pending transfer of the licenses, the Company is operating the California facility pursuant to a license
agreement with the current owner of the facility.
Basis of Presentation and Consolidation
The Company’s
fiscal year end is May 31. Our unaudited financial statements have been prepared by the Company in accordance with generally accepted
accounting principles in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not
include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company’s
management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair statement of the interim financial
statements have been included. Operating results for the three and nine-month periods ended February 28, 2023 are not necessarily indicative
of the results that may be expected for the fiscal year ending May 31, 2023.
For further information
refer to the financial statements and footnotes thereto in the Company’s audited financial statements for the year ended May 31,
2022, in the Form 10-K as filed with the Securities and Exchange Commission.
The consolidated
financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries Agro, G4, Agro Canada, and
CCCO/CCCA. All subsidiaries were wholly owned in the periods presented. All intercompany transactions have been eliminated.
Going Concern
The Company has an
accumulated deficit as of February 28, 2023 of $15,926,172 and negative working capital of $5,632,046. The ability of the Company to
continue as a going concern is dependent upon the Company’s ability to generate profitable operations in the future and/or to obtain
the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due.
These factors raise substantial doubt about the Company’s ability to continue as a going concern.
Management intends
to finance operating costs over the next twelve months with cash flows from operations, private placement or public offering of common
stock or debt instruments, and when necessary, advances from directors and officers. There can be no assurance that we will be successful
to procure necessary financing. The accompanying financial statements do not include any adjustments that might be required should the
Company be unable to continue as a going concern.
Use of Estimates
The preparation of
financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Share based compensation, impairment of long-lived assets, fair value of
acquired assets, of intangible assets, and income taxes are subject to estimates. Actual results could differ from those estimates.
New Accounting Standards
In August 2020, the
Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06 Debt with
Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):
Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The update is to address issues identified as a
result of the complexity associated with applying generally accepted accounting principles for certain financial instruments with characteristics
of liabilities and equity. The update is effective for fiscal years beginning after December 15, 2023, including interim periods within
those fiscal years and with early adoption permitted. The Company implemented the update early on June 1, 2022 with no impact to its
consolidated financial statements.
In October 2021, the
FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities
from Contracts with Customers, which requires entities to recognize and measure contract assets and contract liabilities acquired in a
business combination in accordance with ASC 2014-09, Revenue from Contracts with Customers (Topic 606). The update will
generally result in an entity recognizing contract assets and contract liabilities at amounts consistent with those recorded by the acquiree
immediately before the acquisition date rather than at fair value. The update is effective on a prospective basis for fiscal years beginning
after December 15, 2022, with early adoption permitted. The Company will adopt the update as of June 1, 2023 and does
not expect a significant impact to our consolidated financial statements or disclosures.
Other accounting
standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material
impact on the consolidated financial statements upon adoption.
Revenue Recognition
The Company generates
revenue based on sales of products and revenue is recognized when the Company satisfies its performance obligation by shipping products
to our customers. Our products consist of wholesale cannabis products, and agricultural tools and implements, soils, and soil additives
used primarily in growing and harvesting hemp and marijuana. Shipments terms are FOB origination, and revenue is recognized when the
product is delivered to the shipper by our fulfillment centers or, in the case of drop shipments of distributed products, when the products
are shipped from the manufacturer. At the time the products are delivered to the shipper, no other performance obligations remain. Revenue
is recognized in an amount that reflects the consideration that is received in exchange for the products shipped.
The Company accounts
for shipping and handling activities as a fulfillment cost and include fees received for shipping and handling as part of the transaction
price. Provision for sales incentives, discounts, and returns and allowances, if applicable, are accounted for as reductions of revenue
in the period the related sales are recorded. Sales incentives, discounts and returns and allowances were not material in the periods
presented in the accompanying consolidated financial statements. The Company had no warranty costs associated with the sales of its products
in the periods presented in the accompanying consolidated statements of operations and no provision for warranty expenses has been included.
Inventory
Inventory consists
of purchased products and is stated at the lower of cost or market, with cost being determined using the average cost method. Allowances
for obsolete inventory are recognized when the inventory is determined to be unsalable through the normal course of business.
Investments
Equity securities
are generally measured at fair value. Unrealized gains and losses for equity securities are included in earnings. If an equity security
does not have a readily determinable fair value, the Company may elect to measure the security at its cost minus impairment, if any,
plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment in the same
issuer. At the end of each reporting period, the Company reassesses whether an equity security without a readily determinable fair value
qualifies to be measured at cost minus impairment, considers whether impairment indicators exist to evaluate whether the investment is
impaired and, if so, records an impairment loss. Upon sale of an equity security, the realized gain or loss is recognized in earnings.
Accounting
for Acquisitions
Business acquisitions
are recorded using the acquisition method of accounting and, accordingly, the purchase price is allocated to the assets acquired and
liabilities assumed based on their estimated fair value as of the date of acquisition. After the purchase price has been allocated, goodwill
is recorded to the extent the total consideration paid for the acquisition, including the acquisition date fair value of contingent consideration,
if any, exceeds the sum of the fair values of the separately identifiable acquired assets and assumed liabilities. Acquisition costs
for business combinations are expensed when incurred.
Acquisitions
not meeting the accounting criteria to be accounted for as a business combination are accounted for as an asset acquisition. An asset
acquisition is recorded at its purchase price, inclusive of acquisition costs, which is allocated among the acquired assets and assumed
liabilities based upon their relative fair values at the date of acquisition.
The operating results
of an acquisition are included in the consolidated statements of operations from the date of acquisition.
The allocation of
the purchase consideration for acquisitions can require extensive use of accounting estimates and judgments to allocate the purchase
consideration to the assets acquired and liabilities assumed based on their respective fair values. Judgment is required in determining
which valuation technique should be applied. Critical estimates in valuing certain identifiable assets include but are not limited to
market comparables, expected long-term revenues; future expected operating expenses; cost of capital; assumed attrition rates; and discount
rates.
Intangible Assets
Intangible asset
amounts are initially recognized at the acquisition date at the fair values of the intangible assets acquired.
Finite-lived intangible
assets are amortized over their useful lives. The carrying amounts of finite-lived intangible assets are evaluated for recoverability
whenever events or changes in circumstances indicate that the Company may be unable to recover the asset’s carrying amount.
When there is no
foreseeable limit on the period of time over which an intangible asset is expected to contribute to the cash flows of the Company, an
intangible asset is determined to have an indefinite life. Indefinite-lived intangible assets are not amortized but tested for impairment
annually or more frequently when indicators of impairment exist.
Determination of
acquisition date fair values and intangible asset impairment tests require judgment. Significant judgments required to estimate the fair
value of intangible assets include determining the appropriate valuation method, identifying market prices for similar type items, estimating
future cash flows, determining appropriate discount rates and other assumptions. Changes in estimates and assumptions or the occurrence
of one or more confirming events in future periods could cause the actual results or outcomes to materially differ from such estimates.
Net Loss Per Share
Basic loss per share
is calculated by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted loss per share
is calculated by dividing net loss by the weighted average number of common shares and dilutive common stock equivalents outstanding.
During periods in which the Company incurs losses, common stock equivalents, if any, are not considered, as their effect would be anti-dilutive.
For the nine months ended February 28, 2023 and 2022, potentially dilutive common stock equivalents not included in the calculation of
diluted earnings per share because they were anti-dilutive are as follows:
Schedule of Earnings Per Share, Basic and Diluted
| | |
| |
|
| | |
2023 | |
2022 |
| Stock
purchase warrants | |
| 3,000,000 | | |
| 3,000,000 | |
| Convertible
notes | |
| 27,233,279 | | |
| — | |
| | |
| 30,233,279 | | |
| 3,000,000 | |
Share-Based Payments
All transactions
in which goods or services are received for the issuance of shares of the Company’s common stock are accounted for based on the
fair value of the common stock issued and recognized when the board of directors authorizes the issuance.
NOTE 2 –
EQUIPMENT
Equipment consisted of the following at
February 28, 2023 and May 31, 2022:
Schedule of equipment
| | |
| |
|
| | |
February 28 | |
May 31, |
| | |
2023 | |
2022 |
| Equipment - production
molds | |
$ | 49,823 | | |
$ | 25,109 | |
| Manufacturing equipment | |
| 301,723 | | |
| 30,837 | |
| Less:
Accumulated amortization | |
| (31,424 | ) | |
| (19,310 | ) |
| Net Equipment | |
$ | 320,122 | | |
$ | 36,636 | |
Depreciation expense
for the three and nine months ended February 28, 2023 and 2022 was $4,038 (2022: $1,260) and $12,114 (2022: $3,780), respectively.
During the nine month
period ended February 28, 2023, the Company acquired manufacturing equipment with a value of $270,886 for its California operations.
The acquisition was acquired with a note payable with Satellite Dip, LLC. (“Satellite”). See Note 4. At February 28, 2023,
the equipment has not yet been placed in service and no depreciation has been recognized for the equipment.
NOTE 3 - INTANGIBLE ASSETS
The Company’s
intangible assets consist of both finite and indefinite lived assets. At February 28, 2023 and May 31, 2022, intangibles assets are:
Schedule of Finite-Lived Intangible Assets
| | |
| |
|
| | |
February
28 | |
May
31, |
| Intangibles | |
2023 | |
2022 |
| Finite
lived intangibles | |
| | | |
| | |
| Patents | |
$ | 250,000 | | |
$ | 250,000 | |
| Less:
impairment of patents | |
| (100,000 | ) | |
| (100,000 | ) |
| | |
| 150,000 | | |
| 150,000 | |
| Less:
accumulated amortization | |
| (50,416 | ) | |
| (39,166 | ) |
| Patents,
net | |
| 99,584 | | |
| 110,834 | |
| Total
finite lived intangibles | |
| 99,584 | | |
| 110,834 | |
| | |
| | | |
| | |
| Indefinite
lived intangibles | |
| | | |
| | |
| Domain
names | |
| 6,000 | | |
| 6,000 | |
| Total
intangibles | |
$ | 105,584 | | |
$ | 116,834 | |
Amortization expense
for both the three and nine months ended February 28, 2023 and 2022 was $3,750 and $11,250, respectively. The patents are amortized over
their useful lives of ten years. Amortization of intangibles is expected to be $15,000 for each of the next five years.
On May 28, 2021,
the Company acquired the domain name, MJHI.com for $6,000. The new domain name matches the Company’s stock symbol and is likely
to be easier for customers and other stakeholders to remember. The domain name is an indefinite lived intangible asset and will not be
amortized.
See Note 10 regarding acquisition of cannabis
licenses during the nine months ending February 28, 2023.
NOTE 4 – INVESTMENTS
At February 28, 2023 and May 31, 2022,
investments are:
Schedule of investments
| | |
| |
|
| | |
February 28 | |
May 31, |
| Investments | |
2023 | |
2022 |
| PPK
Investment Group, Inc. | |
$ | 2,791,666 | | |
$ | 2,791,666 | |
| Satellite
Dip, LLC | |
| 10,000 | | |
| — | |
| WDSY,
LLC | |
| 200,000 | | |
| 200,000 | |
| BLIP
Holdings, LLC | |
| 100,000 | | |
| 100,000 | |
| Total
investments | |
$ | 3,101,666 | | |
$ | 3,091,666 | |
PPK
On March 24, 2021,
the Company, as lender, closed a loan to PPK Investment Group, Inc. (“PPK”) in the form of a convertible note (“Note”)
in the amount of $620,000. The convertible note bore interest at 6% per annum and was due on September 1, 2021. In accordance with its
terms, the Company converted the Note on May 19, 2021 into a 6.2% interest in PPK. Upon conversion, accrued interest of $5,707 was forgiven.
Upon conversion,
a Securities Purchase Agreement dated March 24, 2021 (the “PPK Agreement”) became effective and the Company acquired an additional
3.8% interest in PPK (10% in total) for payment of $380,000 by issuance of 1,520,000 shares of the Company’s restricted common
stock. The total fair value of shares issued was $972,800 based on the closing price of the Company’s shares of $0.64. The Company
determined that the fair value of the 3.8% interest on the conversion date was $380,000 which was the negotiated price between the two
parties. Thus, the Company recorded an impairment expense of $592,800 on the conversion date.
On August 26, 2021,
the Company acquired an additional 15% interest in PPK (25% ownership in total) pursuant to a Securities Purchase Agreement with an effective
date of May 19, 2021 through issuance of 5,972,222 shares of restricted common stock valued at $1,791,666 based on the closing price
of the Company’s common stock, which was $0.30 per share as of August 16, 2021, the date fixed by agreement for pricing the issuance
of the shares. The additional 15% acquisition under the Securities Purchase Agreement called for payment of $930,000 in cash and $570,000
in stock, but by supplemental agreement, PPK agreed to accept payment for 15% in the form of all common stock of the Company.
The PPK Agreement
includes a put option allowing PPK to put shares of the Company’s common stock received as part of the Company’s investment
in PPK, back to the Company at $0.25 per share. The put option protects PPK against a drop in the market price of the Company’s
common stock below a $0.25 per share. The put option may be exercised after nine months from the date of each investment. No more than
5% of the total shares held by PPK can be put back to the Company in any calendar quarter. Prior to the nine month period ended February
28, 2023, the trading price of the Company’s stock was above the $0.25 put price thus no value was assigned to the option. At February
28, 2023, the trading price was $0.03 per share and the put option had value of $82,414. The amount was recognized as a fair value of
put option expense in the condensed consolidated statement of operations and a corresponding liability on the condensed consolidated
balance sheet. The put option continues so long a PPK holds shares of MJHI that it received as part of MJHI’s investment in PPK.
The PPK Agreement
gives the Company the right to increase its investment up to a 100% ownership interest in PPK, provided such increased ownership is in
compliance with Oklahoma State cannabis licensing requirements. Terms of purchase for increased ownership of PPK will be similar to those
as the initial acquisition with a combination of cash and shares of the Company’s common stock.
The Company, pursuant to the PPK Agreement,
is also obligated to pay an earnout to PPK as follows:
| |
● |
The Company is required
to pay additional consideration to PPK for an earnout in the event the PPK business valuation at the end of a pre-determined look
back period is greater than $10,000,000. For purposes of the earnout, the valuation will be based on three times earnings before
interest, taxes, depreciation, and amortization (EBITDA). If EBITDA exceeds $3,333,333 in the twelve months immediately preceding
the look back date of March 31, 2023, additional consideration will be owed to PPK under the earnout in an amount sufficient to equal
the earnout valuation less $10,000,000 times the percentage of PPK then owned by the Company. Such additional consideration will
be paid 62% in cash and 38% in shares of the Company’s common stock. No liability has been accrued for this potential obligation
as the Company has assessed the probability of an obligation being incurred to be remote as of February 28, 2023. |
| |
● |
The Company also entered
into an employment agreement with Ralph Clinton Pyatt III (“Clinton Pyatt”), President of PPK, to continue his role as
Chief Executive Officer and President of PPK business for a three-year term effective May 22, 2021. |
The Company also
has an option to acquire the real estate that PPK uses in its operations. The real estate is currently under lease to PPK by an affiliated
company owned by Clinton Pyatt, the President of PPK.
At February 28, 2023
and May 31, 2022, the Company has a payable due to PPK of $481,807 and $230,524, respectively. The balance is included in payable to
related parties on the condensed consolidated balance sheets.
WDSY and BLIP
On October 8, 2021,
the Company entered into two brand development agreements with WDSY, LLC (“WDSY”) and Blip Holdings, LLC (“BLIP”)
for expansion of the WEEDSY and BLVK brands, respectively, into Oklahoma and South Dakota. Under the agreements, PPK will manufacture
and distribute these brands in Oklahoma and South Dakota and will pay the respective companies 10% royalties on all net sales of the
branded products in those territories.
On October 8, 2021,
the Company acquired a 10% interest in WDSY in exchange for 377,358 shares of the Company’s common stock and a 10% interest in
BLIP in exchange for 188,679 shares of the Company’s common stock. The shares to be issued were valued at the closing price of
the common stock, $0.53 per share, on October 8, 2021.
Additional
shares may be due to WDSY and BLIP based on lookback valuations of both companies. The lookback valuations will be based on trailing
twelve months sales for WDSY and trailing three-month sales for BLIP on the second anniversary of each agreement, or sooner if the agreements
are terminated before the second anniversaries. At February 28, 2023, management has assessed the probability of a potential liability
due under the lookback valuation provisions of WDSY and BLIP to be low and no stock payable was due. No liability has been accrued for
this potential obligation as the Company has assessed the probability of an obligation being incurred to be remote as of February 28,
2023. Brand royalties are due by the Company for sales of WDSY. See Note 8.
Satellites Dip,
LLC
On June 7, 2022,
the Company purchased 1% membership units of Satellites Dip, LLC (“Satellites”) for $10,000. The Company has a note payable
to Satellites for the purchase of a license and equipment. See Note 5.
The Company evaluated
its investment as of February 28, 2023 and identified no indicators of possible impairment on their carrying values.
NOTE 5 –
NOTES PAYABLE
SMC Convertible
Note Payable
On May 11, 2022,
the Company entered into an agreement with SMC Cathedral City Holdings, LLC, a Delaware limited liability company (“SMC-CCH”)
for the sale of Secured Convertible Promissory Note (the “Note”). Steve MacDonald, president of SMC-CCH, is a shareholder
and related party of the Company. The Note provides for an original issue discount of 35%, bears interest at the rate of 12%, and is
due at maturity which is twelve months from the issue date of the Note or May 10, 2023. The Note is secured by all assets of the Company.
Any principal amount
or interest on the Note that is not paid when due will bear interest at the lesser of 16% or the maximum amount permitted by law.
The principal amount
of the Note and interest may be converted at any time following the issue date into fully paid and nonassessable shares of the Company’s
common stock at a conversion price of $0.20 per share. The number of shares issuable upon conversion is limited to 4.99% of the outstanding
shares at the time of conversion, unless waived by SMC-CCH upon 61 days prior written notice.
So long as any balance
due on the Note remains outstanding, the Company has agreed to apply 50% of proceeds from issuance of debt or equity securities, conversion
of outstanding warrants, issuance of securities pursuant to an equity line of credit, or the sale of assets, to reduce the outstanding
balance of the Note.
During the year ended
May 31, 2022, the Company received a portion of the proceeds with a principal balance of $1,963,439 and original interest discount of
$692,439 for net proceeds of $1,271,000. On the date of receipt of the proceeds, the trading price of the Company’s common stock
exceeded the conversion price of the Note and the Company recognized a beneficial conversion feature of $1,498,757 as additional paid
in capital. Of this amount, $1,271,000 was additional discount on the note payable and $227,566 was recognized as financing costs in
the year ended May 31, 2022.
During the nine months
ended February 28, 2023, the Company borrowed additional funds under the note that had a principal balance of $2,255,406 and original
interest discount of $795,406 for net proceeds of $1,460,000.
At February 28, 2023,
the outstanding principal balance is $4,218,845 and unamortized discount is $544,582 for a net balance of $3,674,263. During the three
and nine months ended February 28, 2023, the Company recognized $112,696 and $279,086 respectively in interest expense on the note and
recognized $816,012 and $2,106,678 respectively, for the amortization of the note discount. At February 28, 2023 and May 31, 2022, the
accrued interest payable balance on the note is $291,996 and $12,910, respectively, which is included in accrued interest payable on
the condensed consolidated balance sheet.
At May 31, 2022,
the Company has a balance owing to Steve MacDonald $50,000 for advances was included in payables to related parties – long term
on the condensed consolidated balance sheets. The balance was satisfied with shares of the Company’s common stock during the nine
months ended February 28, 2023. See Note 7. At February 28, 2023, the Company has a balance owing to a company controlled by Mr. MacDonald
of $510,419 for unpaid rent. This amount is included in accrued rent payable – related party on the condensed consolidated balance
sheets.
Diagonal Convertible Note Payable
On June 17, 2022,
the Company entered into an agreement with 1800 Diagonal Lending, LLC (“Diagonal”) whereby the Company issued convertible
note to Diagonal with a principal amount of $103,750. The note bears interest at 10% and has a term of one year when payment of principal
and interest is due. After 180 days, the note is convertible into shares of the Company’s common stock the number of which determined
by dividing the principal balance outstanding by 65% of the trading price of the Company’s stock on the date of the conversion.
Satellites Note
Payable
On July 13, 2022,
the Company entered into an unsecured promissory note with Satellites that had a stated principal balance of $1,000,000 in exchange for
the Company acquiring a license agreement and equipment from Satellites. See Note 10. The note is non-interest bearing and has a term
of 24 months. Monthly payments of $41,657 are due starting August 1, 2022. Because the note is non-interest bearing, the Company recorded
a discount on the note of $97,048 using a discount rate of 10%. The discount is being amortized over the term of the note. Amortization
of the discount was $18,232 and $46,614, respectively, during the three and nine month periods ended February 28, 2023.
NOTE 6 – RELATED PARTY TRANSACTIONS
In addition to related
party transactions described in Notes 4 and 5, the Company had the following related party activity:
Payables to Related
Parties:
During three and
nine month period ended February 28, 2023, the Company recognized expense of $23,709 (2022: $23,709) and $65,000 (2022: $65,000), respectively,
for services performed by a company owned by the former chief financial officer (CFO). At May 31, 2022, the Company had a balance due
to the former CFO’s company of $197,683. During the nine month period ended February 28, 2023, the Company paid $150,000 in the
form of shares of its common stock to reduce the amount of the accounts payable due to the CFO, See Note 7. During the nine month period
ended February 28, 2023, the remaining amount due was converted to a note payable. The note bears interest at 5% and matures on July
31, 2024. The balance of the note payable at February 28, 2023 is $54,117 and is included in payable to related party – long term
on the condensed consolidated balance sheet.
At February 28, 2023,
the Company has a $162,000 note payable to the president of the Company for accrued compensation. The note bears interest at 6% and was
due on January 1, 2023. The amount is included in payable to related party on the condensed consolidated balance sheets. During the three
and nine month periods ended February 28, 2023 and 2022, the Company recognized officer compensation expense of $-0- (2022: $70,000)
and $170,000 (2022: $210,000), respectively.
At February 28, 2023,
the Company has a balance due to Cannabis Sativa, Inc., with whom the Company plans to merge, of $44,388 (see Note 10). The amount is
included in advances from related parties on the condensed consolidated balance sheets. The money was advanced from Cannabis Sativa,
Inc. to cover operating expenses.
Advances from
Related Parties:
At May 31, 2022,
the Company had advances from, and costs of services provided by, related parties totaling $1,821,482. These amounts were classified
as long-term liabilities and were settled with shares of the Company’s common stock in July 2022. See Note 7. During the three
and nine months ended February 28, 2023, the Company’s chief executive officer earned $70,000 and $240,000, respectively, in compensation
which was reflected as an increase in advances due to him. During the nine months ended February 28, 2023, the Company paid $48,000 on
the advance.
During the nine month
period ended February 28, 2022, the Company had the following activity in its related party advances balance:
Schedule of related party transactions
| | |
Related
Party Advances at | |
Additions
During the Nine Months Ended February 28, 2022 | |
Related
Party Advances at |
| | |
May
31, 2021 | |
Advances | |
Services | |
February
28, 2022 |
| Related
Parties | |
| | | |
| | | |
| | | |
| | |
| Patrick
Bilton, CEO and Director | |
| | | |
| | | |
| | | |
| | |
| Cash
Advances | |
$ | 928,414 | | |
$ | 211,500 | | |
$ | — | | |
$ | 1,139,914 | |
| Payable
for services | |
| 280,000 | | |
| — | | |
| 210,000 | | |
| 490,000 | |
| David
Tobias, Director | |
| 80,553 | | |
| 2,000 | | |
| — | | |
| 82,553 | |
| Jerry
Cornwell, Director | |
| 29,015 | | |
| — | | |
| — | | |
| 29,015 | |
| Total
for related parties | |
$ | 1,317,982 | | |
$ | 213,500 | | |
$ | 210,000 | | |
$ | 1,741,482 | |
NOTE 7 –
SHARE CAPITAL
In the nine month
period ended February 28, 2023, shares were issued for stock payable, conversion of advances from related parties and conversion of accounts
payable in the amounts set forth in the following table.
Schedule of conversion accounts payable
| | |
| |
Value
of Shares Issued for: |
| Nine
Months Ended February 28, 2023 | |
Total
Shares Issued | |
Stock
Payable | |
Conversion
of
Advances | |
Conversion
of
Accounts
Payable | |
Total
Value |
| Related
Parties | |
| | | |
| | | |
| | | |
| | | |
| | |
| David Tobias,
Director | |
| 477,779 | | |
$ | 10,000 | | |
$ | 81,553 | | |
$ | — | | |
$ | 91,553 | |
| Jerry Cornwell, Director | |
| 155,
158 | | |
| — | | |
| 29,015 | | |
| — | | |
| 29,015 | |
| Patrick Bilton, CEO | |
| 9,149,272 | | |
| — | | |
| 1,710,914 | | |
| — | | |
| 1,710,914 | |
| Brad Herr, CFO | |
| 864,638 | | |
| 15,000 | | |
| — | | |
| 150,000 | | |
| 165,000 | |
| Jason Roth, Director | |
| 41,667 | | |
| 10,000 | | |
| — | | |
| — | | |
| 10,000 | |
| Rich Turasky, Director | |
| 41,667 | | |
| 10,000 | | |
| — | | |
| — | | |
| 10,000 | |
| Randy
Lanier, Director | |
| 220,238 | | |
| 52,857 | | |
| — | | |
| — | | |
| 52,857 | |
| Total for
related parties | |
| 10,950,419 | | |
| 97,857 | | |
| 1,821,482 | | |
| 150,000 | | |
| 2,069,339 | |
| Unrelated
Parties | |
| 329,882 | | |
| 15,000 | | |
| — | | |
| 50,000 | | |
| 65,000 | |
| Aggregate
Totals February 28, 2023 | |
| 11,280,301 | | |
$ | 112,857 | | |
$ | 1,821,482 | | |
$ | 200,000 | | |
$ | 2,134,339 | |
Prior to the
nine months ended February 28, 2023, the Company paid its directors and certain consultants in shares of the Company’s common stock
for payment of services rendered. Effective June 1, 2022, the Company determined that it would no longer pay in shares of the Company’s
common stock in anticipation of its potential merger with Cannabis Sativa, Inc. (see Note 10).
In the nine-month
period ended February 28, 2022, shares were issued for services and investment in the amounts set forth in the following table.
Schedule of aggregate common stock payable
| | |
| |
Value
of Shares Issued for: |
| Nine
Months Ended February 28, 2022 | |
Total
Shares Issued | |
Stock
Payable | |
Services | |
Investments | |
Total
Value |
| Related
Parties | |
| | | |
| | | |
| | | |
| | | |
| | |
| David
Tobias, Director | |
| 54,377 | | |
$ | — | | |
$ | 20,000 | | |
$ | — | | |
$ | 20,000 | |
| Jerry
Cornwell, Director | |
| 54,377 | | |
| — | | |
| 20,000 | | |
| — | | |
| 20,000 | |
| Brad
Herr, CFO | |
| 81,566 | | |
| — | | |
| 30,000 | | |
| — | | |
| 30,000 | |
| Randy
Lanier, Director | |
| 155,475 | | |
| — | | |
| 77,356 | | |
| — | | |
| 77,356 | |
| Total
for related parties | |
| 345,795 | | |
| — | | |
| 147,356 | | |
| — | | |
| 147,356 | |
| Unrelated
Parties | |
| 7,421,035 | | |
| 100,000 | | |
| 210,760 | | |
| 2,091,666 | | |
| 2,402,426 | |
| Aggregate
Totals February 28, 2022 | |
| 7,766,830 | | |
$ | 100,000 | | |
$ | 358,116 | | |
$ | 2,091,666 | | |
$ | 2,549,782 | |
NOTE 8 – REVENUE
The Company’s
product revenue is generated though sales of Wholesale Cannabis Products and sales of its Debudder products which are produced by third
parties and distributed by the Company.
The following table
shows total revenue for the three and nine-month periods ended February 28, 2023 and 2022:
Schedule of revenues
| | |
Three months
ended
February 28, | |
Nine months
ended
February 28, |
| Wholesale Cannabis Product Revenue | |
2023 | |
2023 |
| Colorado | |
$ | 45,564 | | |
$ | 131,809 | |
| California | |
| 336,098 | | |
| 418,119 | |
| | |
| 381,662 | | |
| 549,928 | |
| Debudder
Revenue | |
| 578 | | |
| 1,467 | |
| Other | |
| — | | |
| 9,359 | |
| | |
| | | |
| | |
| Total | |
$ | 382,240 | | |
$ | 560,754 | |
All revenue for the
same periods in 2022 was from Debudder sales. All sales were domestic in the three and nine month periods ended February 28, 2023. All
Debudder sales were domestic except for $94 and $23,946 in the three and nine month periods ended February 28, 2022.
For Wholesale Cannabis
Products, we have Brand agreements that requires the Company to pay brand royalties on sales of that brand. For the three and nine-month
periods ended February 28, 2023, total brand royalties paid were $4,983 and $20,332, respectively, and are included in cost of revenue
on the condensed statement of operations.
During the nine month
period ended February 28, 2023, sales of the Debudder product line were substantially reduced due to the focus of the Company turning
to getting the Colorado and California Cannabis facilities up and running.
During the three
and nine month periods ended February 28, 2023, all debudder revenue were multiple customers for individual use. During the three and
nine month periods ended February 28, 2022, 98% and 97%, respectively, of debudder revenue was from four separate customers. Accounts
receivable from cannabis revenue was $69,104 and $-0-, at February 28, 2023 and May 31, 2022, respectively and is included in prepaid
and other current assets in the condensed consolidated balance sheets at February 28, 2023.
NOTE 9 – INVENTORY
Schedule of inventory
| Inventory consists of the following: | |
| |
|
| | |
February
28,
2023 | |
May
31,
2022 |
| Debudder products | |
$ | 110,013 | | |
$ | 24,794 | |
| Raw material - biomass | |
| 67,927 | | |
| 21,868 | |
| Raw material - distillate | |
| 101,189 | | |
| 76,916 | |
| Finished
goods | |
| 781,809 | | |
| 73,481 | |
| Total | |
$ | 1,060,938 | | |
$ | 197,059 | |
At February
28, 2023 and May 31, 2022, raw material – biomass, as listed above, is on consignment from a third-party company with which the
Company has a license agreement. Under the agreement, the Company obtains the biomass from the third party from which it produces the
cannabis products. The Company is required to split the revenue over the reduced purchase price for inventory 50/50 with the third party.
The Company absorbs all losses from sale of the products. To date, the Company’s revenue for this product has not been greater
than the reduced purchase price, therefore the Company nor the third- party has not earned any split revenue under this arrangement.
NOTE
10 – ACQUISITIONS AND PROPOSED MERGER
Acquisition of
License Agreements and Equipment
On
July 18, 2022, the Company acquired manufacturing equipment and two cannabis licenses for a cannabis manufacturing and distribution business
located in Cathedral City, California. The Company paid $1,000,000 for the acquisition by issuance of an unsecured non-interest bearing
note with Satellites payable in 24 monthly installments. The Company is currently operating the California facility under a management
services agreement pending transfer of the licenses into the Company’s name. The purchase price was $902,952 which consisted of
a note payable with a $1,000,000 principal balance discounted $97,048. The purchase price was allocated to the equipment for $270,886
and the licenses for $632,066 based on their relative fair value. Once payments have been made to reach 35% of the amount due, the Company
can file with the CA DCC to start
the process of transferring the license.
Merger with Cannabis
Sativa, Inc.
On August 8, 2022,
the Company entered into an Agreement of Merger and Plan of Reorganization dated August 8, 2022 with Cannabis Sativa, Inc. (“CBDS”),
to be effective on the first business day following approval of the merger by the shareholders of the Company and CBDS. The merger agreement
provides for the merger of the Company with and into CBDS, with CBDS as the surviving entity. Under the agreement, the Company’s
shareholders will receive 2.7 shares of CBDS common stock for each one share of the Company’s common stock held immediately prior
to the merger. Following the merger, the shareholders of the Company will hold approximately 72% of the total outstanding shares of common
stock of the surviving company, and the shareholders of CBDS will hold approximately 28% of the total outstanding common shares of the
surviving company. Presently, the merger is still proceeding and is scheduled to close Q3 2023 of the calendar year, subject to shareholder
approval.
NOTE 11
– LEASES
Colorado Lease:
On January 1, 2022, the Company signed a lease for its office and facilities located in Denver, Colorado for a five year term. Monthly
lease payments start at $6,000 and escalate to $7,293 in year five. Upon signing the lease, the Company recognized a lease liability
and a right of use asset of $308,127 based on the two-year payment stream discounted using an estimated incremental borrowing rate of
10.0%. At February 28, 2023, the remaining lease term is 3.8 years. As of February 28, 2023, total future lease payments are as follows:
Future lease payments
| |
|
|
|
| For
the year ended May 31, |
|
| Remaining
2023 |
|
$ |
18,900 |
|
| 2024 |
|
|
77,175 |
|
| 2025 |
|
|
81,033 |
|
| 2026 |
|
|
85,085 |
|
| 2027 |
|
|
51,051 |
|
| Total |
|
|
313,244 |
|
| Less
imputed interest |
|
|
(53,216 |
) |
| Net
lease liability |
|
|
260,028 |
|
| Current
portion |
|
|
(53,232 |
) |
| Long-term
portion |
|
$ |
206,796 |
|
For the three and
nine months ended February 28, 2023, rent expense of $19,715 and $59,144, respectively was recognized for this lease. For the three and
nine months ended February 28, 2022, rent expense of $19,715 and $19,715, respectively was recognized for the lease.
California Lease:
On July 14, 2022, the Company signed a lease for its office and facilities located in Cathedral City, California for a five year term.
Monthly lease payments are $72,917. Upon signing the lease, the Company recognized a lease liability and a right of use asset of $3,505,897
based on the five-year payment stream discounted using an estimated incremental borrowing rate of 10.0%. At February 28, 2023, the remaining
lease term is 4.33 years. As of February 28, 2023, total future lease payments are as follows:
Future lease payments
| |
|
|
|
|
| Remaining
2023 |
|
$ |
218,751 |
|
| 2024 |
|
|
875,004 |
|
| 2025 |
|
|
875,004 |
|
| 2026 |
|
|
875,004 |
|
| 2027
and thereafter |
|
|
1,020,838 |
|
| Total |
|
|
3,864,601 |
|
| Less
imputed interest |
|
|
(676,729 |
) |
| Net
lease liability |
|
|
3,187,872 |
|
| Current
portion |
|
|
(590,067 |
) |
| Long-term
portion |
|
$ |
2,597,805 |
|
For the three and
nine months ended February 28, 2023, $218,751 and $656,253, respectively was recognized as rent expense for this lease. The lessor of
the property is SMC Cathedral City Holdings, LLC, a company with which the Company has a convertible note payable due (See Note 5). This
lease has not been paid to date as required by the lease agreement and the balance owed of $510,419 is included in accrued rent payable
– related party on the condensed consolidated balance sheet.
NOTE 12
– COMMITMENTS AND CONTINGENCIES
See Notes 4 and 11 for commitments related
to royalties, earn-out provisions, and leases.
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. As of February 28, 2023, management believes it will be successful in the matter however is unable to estimate amounts,
if any, they could receive in the final judgment.
