F-5

MJ HARVEST, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

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 of 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 endingended 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-month periodthree and six-month periods ended August 31,November 30, 2022 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 August 31,November 30, 2022 of $12,973,69414,411,513 and negative working capital of $2,486,0553,979,419. 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.

Reclassifications

Certain prior period amounts have been reclassified to conform with the current period presentation.

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.

InvestmentsInvestments

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 Earnings (Loss)Loss Per Share

Basic earnings (loss)loss per share is calculated by dividing net income (loss)loss by the weighted average number of common shares outstanding for the period. Diluted earnings (loss)loss per share is calculated by dividing net income (loss)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 threesix months ended August 31,November 30, 2022 and 2021, 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

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 August 31,November 30, 2022 and May 31, 2022:

Schedule of equipment

Depreciation expense for the three and six months ended August 31,November 30, 2022 and August 31, 2021 were $4,038was $4,038 (2021: $1,260) and $1,260,$8,076 (2021: $2,520), respectively.

During the threesix month period ended August 31,November 30, 2022, the Company acquired manufacturing equipment with a value of $270,886$270,886 for its California operations. The acquisition was acquired with a note payable with Satellite Dip, LLC. (“Satellite”). See Note 4. At August 31,November 30, 2022, the equipment has not yet been placed in service and no depreciation has been recognized for the equipmentequipment.

NOTE 3 - INTANGIBLE ASSETS

The Company’s intangible assets consist of both finite and indefinite lived assets. At August 31,November 30, 2022 and May 31, 2022, intangibles assets are:

Schedule of Finite-Lived Intangible Assets

Amortization expense for both the three and six months ended August 31,November 30, 2022 and August 31, 2021 were $3,750was $3,750 and $3,750,$7,500, respectively. The patents are amortized over their useful lives of ten years. Amortization of intangibles is expected to be $15,000$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 threesix months ending August 31,November 30, 2022.

NOTE 4 – INVESTMENTS

At August 31,November 30, 2022 and May 31, 2022, investments are:

 Schedule of investments

PPK

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 six 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. ThePrior to the three month period ended November 30, 2022, the trading price of the Company’s stock was above the $0.25 put price thus no value was assigned to the option. At November 30, 2022, the trading price was $0.041 per share and the put option had value of $nil$78,294. The amount was recognized as a fair value of put option expense in the condensed consolidated statement of operations and $nil at August 31, 2022 and May 31, 2022.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 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 August 31,November 30, 2022 and May 31, 2022, the Company has a payable due to PPK of $271,791$460,313 and $230,524, respectively. The balance is included in Accounts 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 August 31,November 30, 2022, 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 August 31,November 30, 2022. Brand royalties are due by the Company for sales of WDSY. See Note 8.

The Company evaluated its investment in PPK, WDSY and BLIP as of August 31, 2022 and identified no indicators of possible impairment on their carrying values.

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 4.5.

The Company evaluated its investment as of November 30, 2022 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.

ThroughDuring the year ended May 31, 2022, the Company borrowed $2,317,198 underreceived 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 receiving $1,500,000payable and $227,566 was recognized as financing costs in cash, net of $817,198 for the original issue discount. year ended May 31, 2022.

During the threesix months ended August 31,November 30, 2022, the Company borrowed an additional $888,259funds under the note receiving $575,000,that had a principal balance of $1,963,439 and original interest discount of $558,419 for net proceeds of $313,259 for the original issue discount. $1,025,000.

At August 31,November 30, 2022, the outstanding principal balance is $2,851,698$3,546,858 and unamortized discount is $1,634,519$1,123,607 for a net balance of $1,217,179.$2,423,251. During the three and six months ended August 31,November 30, 2022, the Company recognized $70,942$95,448 and $166,390 respectively in interest expense on the note and recognized $534,593 in$756,072 and $1,290,666, respectively, for the amortization of the note discount. At August 31,November 30, 2022 and May 31, 2022, the accrued interest payable balance on the note is $83,852$179,300 and $12,910, respectively, which is included in accounts payable and accrued liabilitiespayables – related parties on the condensed consolidated balance sheet.

At May 31, 2022, the Company has a balance owing to Steve MacDonald of $50,000 for advance of fundsadvances was included in accounts payablepayables 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 threesix months ended August 31,November 30, 2022. See Note 7. At November 30, 2022, the Company has a balance owing to a company controlled by Mr. MacDonald of $291,668 for unpaid rent. This amount is included in payables to related parties 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 $7,525$20,857 and $28,382, respectively, during the three and six month periodperiods ended August 31,November 30, 2022. The Company made its first monthly payment of $41,657 (principal of $34,142 and interest of $7,525) on August 1, 2022.

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 six month period ended November 30, 2022, the Company recognized expense of $23,709 (2021: $23,709) and $65,000 (2021: $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 company of $197,683. During the six month period ended November 30, 2022, 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 six month period ended November 30, 2022, 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 November 30, 2022 is $66,300 and is included in payable to related party – long term on the condensed consolidated balance sheet.

At November 30, 2022, the Company has a $117,000 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 six month periods ended November 30, 2022 and 2021, the Company recognized officer compensation expense of $70,000 (2021: $70,000) and $140,000 (2021: $140,000), respectively.

At November 30, 2022, the Company has a balance due to Cannabis Sativa, Inc., with whom the Company plans to merge, of $19,388 (see Note 10). The amount is included in payable to related party 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 threethe six month period ended August 31, 2022 and 2021, the Company recognized expense of $41,291 and 112,641, respectively, for services performed by a company owned by the CFO. At August 31, 2022 and May 31, 2022, the Company had accounts payable to the company of $60,000 and $197,683, respectively. During the three month period ended August 31, 2022, 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.

At August 31, 2022, the Company has a $55,000 payable to the president of the Company for accrued salary. The amount is included in accounts payable – related parties on the condensed consolidated balance sheets.

During the three month period ended August 31,November 30, 2021, the Company had the following activity in its related party advances balance:

Schedule of related party transactions

NOTE 7 – SHARE CAPITAL

In the three-monthsix month period ended August 31,November 30, 2022, 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

Prior to the threesix months ended August 31,November 30, 2022, 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).