"The accompanying notes are an integral part of these condensed consolidated financial statements"
CANNABIS SATIVA, INC.
For the Three and Six Months Ended June 30, 2015 and 2014
(Unaudited)
1. Summary of Significant Accounting Policies and Use of Estimates:
Presentation of Interim Information:
The condensed consolidated financial statements included herein have been prepared by Cannabis Sativa, Inc., formerly named Ultra Sun Corp. (“we”, “us”, “our” or “Company”), without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) and should be read in conjunction with the annual report on Form 10-k filed with the SEC April 15, 2015. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, as permitted by the SEC, although we believe the disclosures, which are made, are adequate to make the information presented not misleading. Further, the condensed financial statements reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly our financial position at June 30, 2015, and the results of our operations and cash flows for the periods presented.
Interim results are subject to significant seasonal variations and the results of operations for the period ended June 30, 2015 are not necessarily indicative of the results to be expected for the full year.
Nature of Corporation:
We were incorporated under the laws of Nevada in November 2005. Our wholly-owned subsidiary Kush was acquired by us in June 2014 in exchange for shares of our common stock. Our wholly-owned subsidiary Wild Earth Naturals, Inc. (“Wild Earth”) was acquired by us in July 2013 in exchange for shares of our common stock. The acquisition of Kush resulted in a change of control of the Company and at or after the closing of the acquisition of Kush, the persons designated by Kush became the officers and directors of the Company. From our inception through September 30, 2013 we were engaged in the tanning salon business and operated a tanning salon in Saratoga Springs, Utah under the name “Sahara Sun Tanning.” As a result of our acquisition of Wild Earth in July 2013, we became engaged in the herbal skin care products business. On September 30, 2013 we sold the assets of the tanning salon business to a third party. As a result of our acquisition of Kush in June 2014, along with our Wild Earth operations we are now engaged in the developing and promoting natural cannabis products.
The following unaudited proforma condensed combined statement of operations reflects the results of operations of CANNABIS SATIVA for the six months ended June 30, 2014, the results of operations for WILD EARTH NATURALS for the six months ended June 30, 2014, and the results of operations for KUSH for the six months ended June 30, 2014 as if the Companies had been consolidated effective January 1, 2014.
| | | Cannabis Sativa | | | Wild Earth Naturals | | | Kush | | | Proforma | |
| | | | | | | | | | | | | |
| Revenue | | $ | - | | | $ | 1,672 | | | $ | - | | | $ | 1,672 | |
| | | | | | | | | | | | | | | | | |
| Cost of revenue | | | - | | | | 1,631 | | | | - | | | | 1,631 | |
| | | | | | | | | | | | | | | | | |
| Gross profit | | | - | | | | 41 | | | | - | | | | 41 | |
| | | | | | | | | | | | | | | | | |
| General and adminstrative expense | | | 3,940 | | | | 161,221 | | | | 278,374 | | | | 443,535 | |
| | | | | | | | | | | | | | | | | |
| Other expense | | | | | | | | | | | | | | | | |
| Realized loss from for sale securities | | | | | | | - | | | | 337,440 | | | | 337,440 | |
| Interest expense | | | 6,908 | | | | 6,188 | | | | - | | | | 13,096 | |
| | | | | | | | | | | | | | | | | |
| Loss from continued operations | | | (10,848 | ) | | | (167,368 | ) | | | (615,814 | ) | | | (794,030 | ) |
| | | | | | | | | | | | | | | | | |
| Net loss | | $ | (10,848 | ) | | $ | (167,368 | ) | | $ | (615,814 | ) | | $ | (794,030 | ) |
CANNABIS SATIVA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2015 and 2014
(Unaudited)
Development Stage Activities and Operations:
Wild Earth has been in its initial stages of formation and for the six months ended June 30, 2015 had minimal revenues. A development stage activity is one in which all efforts are devoted substantially to establishing a new business and even if planned principal operations have commenced, revenues are insignificant.
Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Accounts Receivable:
We estimate credit loss reserves for accounts receivable on an individual receivable basis. A specific impairment allowance reserve is established based on expected future cash flows and the financial condition of the debtor. We charge off customer balances in part or in full when it is more likely than not that we will not collect that amount of the balance due. We consider any balance unpaid after the contract payment period to be past due. At June 30, 2015 the company has established an allowance for doubtful accounts of $3,697 which is equal to the full amount of recorded accounts receivable.
Inventory:
The Company calculates inventory using the average cost method to value inventory. Inventory cost includes those costs directly attributable to the product before sale.
Fair Value of Financial Instruments:
The estimated fair values for financial instruments are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The carrying amounts of accounts payable, accrued liabilities, and notes payable approximate fair value given their short term nature or effective interest rates.
Cash and Cash Equivalents:
For financial accounting purposes, cash and cash equivalents are considered to be all highly liquid investments purchased with an initial maturity of three (3) months or less.
Earnings per Share:
Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period and contains no dilutive securities. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity. As of June 30, 2015 and 2014, the Company has no outstanding potentially dilutive securities.
Revenue Recognition:
The Company recognizes revenue from product sales or services rendered when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, and collectability is reasonably assured.
CANNABIS SATIVA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2015 and 2014
(Unaudited)
Intangible Assets:
Intangible assets are comprised of patents, trademarks, the Company’s “CBDS.com” website domain and intellectual property rights. The patent is being amortized using the straight-line method over its economic life, which is estimated to be twenty (20) years. The trademark, which is still in the application phase, is expected to have an indefinite useful life. The CBDS.com website is expected to have an indefinite useful life. The intellectual property rights are being amortized using the straight-line month over its economic life, which is estimated to be (20) years.
Income Taxes:
The Company estimates the annual tax rate based on projected taxable income for the full year and records a quarterly income tax provision in accordance with the anticipated annual rate. As the year progresses, we refine the estimates of the year’s taxable income as new information becomes available, including year-to-date financial results. This continual estimation process can result in a change to the expected effective tax rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected annual tax rate. Significant judgment may be required in determining the Company’s effective tax rate and in evaluating our tax positions.
The effective income tax rate of 0% for the periods ended June 30, 2015 and 2014 differed from the statutory rate, due primarily to net operating losses incurred by the Company in the respective periods. For the six months ended June 30, 2015 a tax benefit of approximately $59,000 would have been generated. For the six months ended June 30, 2014 a tax benefit of approximately $122,098 would have been generated. However, all benefits have been fully offset through an allowance account due to the uncertainty of the utilization of the net operating losses. As of June 30, 2015 the Company had net operating losses of approximately $16,145,936 resulting in a deferred tax asset of approximately $5,489,618. As of June 30, 2014 the Company had net operating losses of approximately $359,111 resulting in a deferred tax asset of approximately $122,098.
The Company has established a valuation allowance in the full amount of the deferred tax asset due to the uncertainty of the utilization of operating losses in future periods.
Pending Accounting Pronouncements:
There have been no recent accounting pronouncements issued which are expected to have a material effect on the Company’s financial statements.
2. Eden Holdings LLC
During the quarter ended September 30, 2014, the Company created Eden Holdings LLC. The purpose of the entity is to hold the intellectual property of Cannabis Sativa, Inc. As of June 30, 2015 there has been no activity in the LLC.
3. Available-for-Sale Securities
On January 10, 2014 the Company received 10,835 shares of BioAdaptives, Inc. as a result of Kush’s holdings in Hemp, Inc. The shares were received when Hemp, Inc. completed a spin-off of BioAdaptives, Inc. Each 923 shares of Hemp, Inc. received 1 share of BioAdaptives, Inc. At the time of the spin-off, Kush, Inc. was the owner of 10,000,000 shares of Hemp, Inc. common stock. This resulted in Kush receiving 10,835 shares of BioAdaptives, Inc. At June 30, 2015 the market price of BioAdaptives, Inc. was $.63 per share resulting in a value of $6,826.
Available-for-sale securities are an investment in a marketable trading security. As such it will be adjusted to fair market value at each reporting date. The unrealized price variation will be reflected on our statement of comprehensive income (loss) as well as in our equity section of our balance sheet as an accumulated comprehensive loss.
CANNABIS SATIVA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2015 and 2014
(Unaudited)
The following is a summary of the Company’s available-for-sale securities at June 30 , 2015:
| | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value (Net Carrying Amount) | | | Accumulated Other Comprehensive Income | |
| | | | | | | | | | | | | | | | |
| Equity Securities | | $ | - | | | $ | 6,826 | | | $ | - | | | $ | 6,826 | | | $ | 6,826 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total Available-for-Sale Securities | | $ | - | | | $ | 6,826 | | | $ | - | | | $ | 6,826 | | | $ | 6,826 | |
4. Fair Value Measurements
We adopted ASC Topic 820 for financial instruments measured at fair value on a recurring basis. ASC Topic 820 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about fair value measurements.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:
· | Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; |
· | Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and |
· | Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
The estimated fair values for financial instruments are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The carrying amounts of accounts receivable, inventory, notes payable, accounts payable, accrued liabilities approximate fair value given their short term nature or effective interest rates. We measure certain financial instruments at fair value on a recurring basis. As of June 30, 2015, assets and liabilities measured at fair value on a recurring basis were as follows:
| | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
| Assets: | | | | | | | | | | | | |
| Available-for-sale securities | | $ | 6,826 | | | $ | 6,826 | | | $ | - | | | $ | - | |
| Total assets measured at fair value | | $ | 6,826 | | | $ | 6,826 | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | |
| Liabilities: | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| Total liabilities measured at fair value | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
CANNABIS SATIVA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2015 and 2014
(Unaudited)
5. Due to Related Parties
During the six months ended June 30, 2015 the Company received additional short-term advances from related parties and officers of the Company to cover operating expenses. As of June 30, 2015, net advances to the Company were $798,982. These advances are non-interest bearing in nature. The Company has imputed interest on these sums at the rate of 5% per annum and has recorded interest expense related to these balances in the amount of $16,426. Because the related parties do not expect the imputed interest to be repaid, the interest has been recorded as a contribution of capital at June 30, 2015.
Kush, a wholly-owned subsidiary of the Company, is a party to three individual license agreements with Steve Kubby. Pursuant to the license agreements Kush owed a total of $3,060,000 in license fees to Mr. Kubby at various dates.
On June 30, 2015 Kush sold $3,060,000 of its originally price Intellectual Property to CBDS, net of $165,750 of accumulated amortization for a gross sales price of $2,894,250 for which CBDS assumed a liability to Steve Kubby, the licensor of the intellectual property, of $2,890,499. Additionally, CBDS received Kush’s interest in K-Pal, which is the holder of the intellectual property in the amount of $8,938, less a non-controlling interest of $894.
Correspondingly, for Cannabis Sativa's books as of June 30, 2015, the Long Term Investment in K-Pal was booked at $8,938 and the non-controlling interest of $894 was recognized as a reduction of equity. The acquisition of intellectual property assets was also booked for $3,060,000 which had accumulated amortization of $165,750 and based on agreement with Steve Kubby, all liability to him was retired in exchange for 1,500,000 shares of Cannabis Sativa Preferred Stock at par value of $.001, resulting in a credit to the Preferred Stock account of $1,500, with the balance to Paid in Capital of $2,888,999.
Under the terms of the agreements, in the event any such payment is not made in full when due, and if the stock of Licensee or its parent is publicly traded in the over-the-counter market or on a national exchange, Licensee may pay or the Licensor may elect to be paid the unpaid payment amount in the form of unregistered shares of such publicly traded stock of Licensee or its parent, which shares shall be valued at a 35% discount to the average closing price for such stock in the over-the-counter market or on a national exchange during the 30 trading days preceding the issuance of such shares.
6. Common Stock
On January 1, 2015, the Company’s board of directors authorized the issuance of 100,000 shares of its common stock to one of its officers. The value of the shares on the date of issuance was $690,000. As of June 30, 2015, the Company has recognized $345,000 in compensation expense related to this transaction with the remaining $345,000 being recorded as a prepaid.
On January 1, 2015, the Company’s board of directors authorized the issuance of 10,000 shares of its common stock to each of its seven board of directors for each year of service. The Company issued 2,500 shares to each board member retroactive to the fourth quarter of 2014 in addition to 10,000 each for 2015 for a total of 12,500 shares each. The Company had recorded a liability in the amount of $120,750 related to the retroactive issuance in its December 31, 2014 financial statements. The Company recorded $241,500 in professional fees on its statement of operations for the six months ended June 30, 2015 with an additional $241,500 being recorded as a prepaid on the Company’s balance sheet.
On January 1, 2015, the Company’s board of directors authorized the issuance of 35,000 shares of its common stock to one of its officers for retroactive compensation in 2014. The value of the shares was determined to be $241,500 based on the trading price of the stock on the date of authorization. The Company had recorded a liability in the same amount in its balance sheet dated December 31, 2014. These shares were issued during the first quarter of 2015.
CANNABIS SATIVA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2015 and 2014
(Unaudited)
On January 7, 2015, the Company’s board of directors authorized the issuance of 500,000 shares of its common stock to a consulting group for services to be provided during the year ended December 31, 2015. The value of the issuance was determined to be $3,500,000 based on the market value of the Company’s common stock on the date of issuance. The Company recorded $1,750,000 in consulting expense during the six months ended June 30, 2015 related to this transaction with the remaining $1,750,000 being recorded as a prepaid as of June 30, 2015, which will be amortized over the remainder of the year.
January 30, 2015, the Company’s board of directors authorized the issuance of 200,000 shares to two consultants for services to be provided during the year ended December 31, 2015. The value of the issuance was determined to be $1,640,000. The Company has recorded $820,000 in consulting expense during the six months ended June 30, 2015 related to this transaction with the remaining $820,000 being recorded as prepaid as of June 30, 2015 consulting services as of June 30, 2015 which will be amortized over the remainder of the year.
7. Preferred Stock
There are 5,000,000 preferred shares authorized with a par value of $.001. Of the preferred shares authorized, 1,500,000 have been designated Series A Convertible Preferred Stock. On June 30, 2015 the Company has issued 1,500,000 shares of its Series A Convertible Preferred Stock for related party payables(see note 5). The rights and preferences of the Series A Convertible Preferred Stock are as follows:
Dividends. If the Company declares a dividend or distribution on the common stock of the Company (the “Common Stock” or “Common Shares”), the holders of shares of this Series shall be entitled to receive for each share of this Series a dividend or distribution of the amount of the dividend or distribution that would be received by a holder of the same number of Common Shares.
No Liquidation Preference. The holders of this Series shall receive for each share of this Series a liquidation amount equal to the liquidation amount that would be received by a holder of the same number of Common Shares.
Voting Rights. Each holder of any shares of this Series shall have the right to 1 vote for each share of this Series held on the record date for the determination of the stockholders entitled to vote on such matters or, if no record date is established, at the day prior to the date such vote is taken or any written consent of stockholders is first executed. With respect to such vote, such holders (i) shall have voting rights and powers equal to the same voting rights and powers of the holders of Common Stock, (ii) shall be entitled, notwithstanding any provision hereof, to notice of any stockholders meeting in accordance with the bylaws of the Company, and (iii) shall be entitle to vote, together with holders of Common Stock with respect to any question upon which holders of Common Stock have the right to vote.
Conversion. Conversion of the shares of the Series shall be as follows, whichever is to occur first: (1) In connection with the spinoff of KUSH, a Nevada corporation, to the shareholders of the Company, all shares of the Series held by Steve Kubby shall be converted into 74,780,075 common shares of KUSH. Following this conversion, shares of the Series held by Mr. Kubby shall be returned to the treasury of the Company. (2) After two years following the issuance of any shares of the Series, at the option of the Company or the holder of the shares, the shares may be converted into common shares of the Company on a 1 for 1 basis.
No Preemptive Rights. Holders of shares of this Series shall have no first right of refusal to purchase any shares sold by the Company in the future.
Effect of Stock Split. In the event the Common Stock of the Company is split on either a forward or reverse basis, the shares of this Series shall also be split on a like basis.
8. Hi Brands International Inc. – Centuria Foods Agreement
On February 6, 2015, the Company formed Hi Brands International Inc., a Nevada Corporation and wholly owned subsidiary of Cannabis Sativa, Inc.
CANNABIS SATIVA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2015 and 2014
(Unaudited)
On February 25, 2015, the Company through its wholly owned subsidiary Hi Brands International, Inc. (jointly referred to hereinafter as “Cannabis Sativa”), entered into a Purchase, Supply and Joint Venture Agreement (the “Agreement”), with Centuria Natural Foods, Inc. (“Centuria”) whereby Cannabis Sativa will market Centuria’s proprietary CBD (Cannabidiol) Rich Hemp Oil products (the “Products”).
The initial term of the Agreement is one year which may be renewed for additional one year periods upon the mutual agreement of the parties. Within the first 90 days of the initial term of the Agreement, Cannabis Sativa shall order at least 5,000 units of Product. Thereafter, Cannabis Sativa shall order at least 5,000 units of Product per month with the additional requirement that Cannabis Sativa order a minimum of 55,000 units of Product during the first 12 months of the Agreement. Fifty percent of all gross revenue generated by the sale of the Products will be paid to Cannabis Sativa and fifty percent will be paid to Centuria.
As of June 30, 2015, there has not been any activity in Hi Brands International Inc. other than the execution of the above agreement. Centuria Natural Foods, Inc. had not manufactured any product as of June 30, 2015. Therefore, the Company has not ordered any product under this agreement as of June 30, 2015.
9. Going Concern Considerations
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The Company has incurred net losses since inception. As reported in the financial statements, the Company has an accumulated deficit of $50,690,494. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The ability of the Company to continue as a going concern is dependent on its ability to raise adequate capital to fund operating losses until it is able to engage in profitable business operations. To the extent financing is not available, the Company may not be able to, or may be delayed in, developing its services and meeting its obligations. The Company will continue to evaluate its projected expenditures relative to its available cash and to evaluate additional means of financing in order to satisfy its working capital and other cash requirements. The accompanying financial statements do not reflect any adjustments that might result from the outcome of these uncertainties.
10. Subsequent Events
Shareholders of Cannabis Sativa, Inc. received 4.32 shares of Kush for every share of ownership of common stock in the Company as a shareholder dividend on August 25, 2015.
Cannabis Sativa, Inc., received a total of $58,500 from a related party on various dates since June 30, 2015.
On August 24, 2015, the Company issued 80,000 shares of its common stock to consultants.
On November 6, 2015, the Company issued 2,500 shares of its common stock to a director of the Company.
On September 30, 2015, an agreement was entered into by the Company to exchange $857,170 in debt held by three related parties for 428,585 shares of the Company's preferred stock based on the common share closing price on September 29, 2015 of $2 per share. The preferred shares have no other preferences other than upon liquidation, have no voting rights, and will be convertible into common stock on a one to one basis. The agreements contain a contingency clause that should the common share price drop below $2 per share between October to December, 2015, then the average of the daily high and low price over those subsequent 90 days will be taken, and additional preferred shares will be issued to equal that average 90 day price.
