Cannabis Sativa, Inc. - Annual Report: 2018 (Form 10-K)

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filing requirements for the past 90 days.

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State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.

The market value of the voting and non-voting common stock was $40,554,923 based on 12,713,142 shares held by non-affiliates.    The shares were valued at $3.19 per share, that being the closing price on June 29, 2018, the last business day of the registrant’s most recently completed second quarter.

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PROCEEDINGS DURING THE PRECEDING FIVE YEARS

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Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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As of April 1, 2019, there were 22,027,476 (including 584,214 net amount shares held in escrow that are not considered outstanding for financial reporting purposes) shares of the issuer’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

    List hereunder the following documents if incorporated by reference and the part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933.  The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980). 

None.

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CANNABIS SATIVA, INC.

TABLE OF CONTENTS TO ANNUAL REPORT ON FORM 10-K

YEAR ENDED DECEMBER 31, 2018

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FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.  These statements reflect the Company’s views with respect to future events based upon information available to it at this time.  These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from these statements.  These uncertainties and other factors include, but are not limited to: the ability of the Company to locate business opportunities for acquisition or participation by the Company; the terms of the Company’s acquisition of or participation in a business opportunity; the operating and financial performance of any business opportunity following its acquisition or participation by the Company and the risk factors described herein under the caption “Risk Factors.”  The words “anticipates,” “believes,” “estimates,” “expects,” “plans,” “projects,” “targets” and similar expressions identify forward-looking statements.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made.  The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, changes in assumptions, future events or otherwise.

Part I

Cannabis Sativa, Inc., formerly named Ultra Sun Corporation was incorporated under laws of Nevada in November, 2005.  We conduct some of our operations through our subsidiaries Wild Earth Naturals, Inc., a Nevada corporation, iBudtender, Inc., a Colorado corporation, Eden Holdings LLC, a Virginia limited liability company, Kubby Patent and Licenses, Limited Liability Company, a Texas limited liability company and Hi Brands International Inc., a Nevada corporation.  We acquired a wholly-owned subsidiary named Kush, a Nevada corporation, in June 2014 in exchange for shares of our common stock.  Since November 2015, Kush has been spun off and is no longer a subsidiary of the Company.  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.  We acquired a 50.1% interest in our subsidiary iBudtender, Inc., including its wholly-owned subsidiary iBudtender, LLC, a California limited liability company (collectively, "iBudtender") in August of 2016 in exchange for cash and shares of our common stock. Effective August 1, 2017, we acquired a 51% interest in PrestoCorp, a Delaware corporation, in exchange for shares of our common stock.  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.

Our common stock is quoted for trading on the OTC Market QB under the symbol CBDS.

Our principal executive offices are located at 1646 W. Pioneer Blvd., Suite 120, Mesquite, Nevada  89027. Our telephone number is (702) 346-3906.

Business Strategy

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We are engaged in the research, development, acquisition and licensing of specialized cannabis related products, including cannabis formulas, edibles, topicals, strains, recipes and delivery systems.  We also are engaged in marketing and branding within the cannabis space, including our trademark pending "hi" brand and others. We hold a license for a proprietary cannabis lozenge delivery methodology, and a proprietary cannabis trauma cream formula.  We have recently been awarded a U.S. patent for a strain of cannabis plant named Ecuadorian Sativa (also referred to as CTS-A or CTA).  We also have U.S. patents pending on cannabis-based compositions and methods of treating hypertension and a lozenge delivery system. We plan to license our intellectual property, including patents, branding and know-how to companies licensed under, and in full compliance with, state regulations applicable to cannabis businesses.

Through our iBudtender subsidiary, we are in the technology space with proprietary software, and an application (the “iBudtender App”) focused on sharing information between cannabis products, patients and businesses, which application we plan releasing in 2019. The iBudtender App will feature patient reviews, nutritional information, directions, warnings, local availability and more.  We intend to monetize this technology through advertisements, business to business sales and additional technology offerings.

Through its 51% owned subsidiary PrestoCorp, the Company operates a proprietary online telemedicine service that allows patients to use secure a confidential video conference technology to speak with a licensed physician for a medical marijuana evaluation. PrestoCorp currently offers its services in California, Nevada and New York and is actively targeting expansion into additional states where medical marijuana is legal.

In addition to licensing, branding and technology, we have the ability to offer, free of charge to patients, mainstream medical prescription discount cards, for which the Company will receive a small percentage on each prescription refill with the hi Benefits Discount Pharmacy Card. The Company has yet to receive monies from prescription refills but expects to do so once cards are distributed and the program implemented.  Furthermore, the Company continues to seek the acquisition of companies, intellectual property and other assets that fit within the company's strategic plan of assembling a portfolio of cannabis industry related businesses that have a high growth potential and are accretive to shareholder value.

Wild Earth Naturals, Inc.

Wild Earth Naturals, Inc. is an herbal skin care products formulation and marketing company that targets the growing natural health care products market in the United States and abroad.  We develop and manufacture high-quality, herbal based skin care products providing healthier choices to consumers.  We use specialized ingredient mixing processes to produce plant glycerite/mineral herbal blends and oil extractions, which we believe will be unique to the natural health products industry.  The ingredients for our products are and will continue to be selected to meet a number of criteria, including, but not limited to: safety, potency, purity, stability, bio-availability, and efficacy.  We plan to control the quality of our products beginning at the formulation stage and continuing through controlled sourcing of raw ingredients, manufacturing, packaging, and labeling.

iBudtender

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iBudtender (www.ibudtender.com) is an online portal that offers information and patient reviews on marijuana dispensaries, cannabis businesses, marijuana strains, edibles, concentrates and products. iBudtender's software has been designed to help cannabis patients find cannabis products that are right for them via patient reviews, nutritional information, directions, warnings and local availability; and order it locally for pickup or delivery. The iBudtender business platform for dispensary owners, delivery services owners and manufacturers is designed to increase business as well as promote data sharing in an effort to help patients find the best and most effective products.

PrestoCorp

Eden Holdings LLC

Eden Holdings LLC ("Eden Holdings") was formed under the laws of Virginia as a wholly owned subsidiary of the Company.  Eden Holdings was formed on August 8, 2014, for the purpose of holding the intellectual property of the Company.  As of December 31, 2018 and 2017, there has been no activity in Eden Holdings.

Hi Brands International Inc.

On February 6, 2015, the Company formed Hi Brands International Inc., a Nevada Corporation and wholly owned subsidiary of the Company ("Hi Brands").  On February 25, 2015, Hi Brands entered into a Purchase, Supply and Joint Venture Agreement (the "Agreement"), with Centuria Natural Foods, Inc. ("Centuria") whereby Cannabis Sativa would market Centuria's proprietary CBD (Cannabidiol) Rich Hemp Oil products.  No business was ever transacted under the Agreement.  The Agreement was terminated on October 6, 2016, by the mutual consent of the parties.  As of December 31, 2018 and 2017, there has been no activity in Hi Brands other than the execution of and the termination of the Agreement.

Kubby Patent and Licenses, Limited Liability Company ("KPAL").

KPAL is a Texas limited liability company which holds the Company's U.S. patent for a strain of cannabis plant named "Ecuadorian Sativa" (also known as CTS-A and CTA) and patent applications on cannabis-based compositions and methods of treating hypertension and a lozenge delivery system.  During the year ended December 31, 2016, the U.S. Patent and Trademark issued a patent to KPAL for the Ecuadorian Sativa strain of cannabis.

Perceived Cannabis Industry Trends

We believe the cannabis industry will be characterized by the following principal trends: an increased

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emphasis on high quality products; an increased emphasis on scientific validation for products in the market place; more liberal regulation in regard to cannabis, even under the current administration as states' rights continue to emerge; more consolidation, take-over, and buy-out of companies in the retail, wholesale, and supply side channels; more mainstream companies entering the marketplace; and more funded research on the potential long-term health benefits of cannabis as well as its potential curative properties.

Vision

Our vision is to become a highly visible, diversified, international business promoting superior quality branded products and offering effective customer service, fair compensation, sound management and a great working environment. Over time, we plan to expand our branding, research and development, intellectual properties and licensing activities to reach markets worldwide.  In order to achieve this vision, our goal is to develop and/or acquire intellectual property which will allow our licensees to provide innovative and effective medicinal cannabis products and cost-effective alternatives for customers seeking quality, affordable natural health products to aid in wellness and appearance.  In conducting our day-to-day operations, we will strive to:

• Treat all colleagues and co-workers with respect & fairness.

• Follow a philosophy that says, "Delivering quality and customer satisfaction is our business."

• Develop and enhance the skills of its associates with the intention of providing financially rewarding business opportunities.

Through a long-term commitment to this vision statement, we hope to become known as a company that is committed to its customers, associates, and communities.

Products

Online Telemedicine.  Through PrestoDoctor we provide access to knowledgeable physicians for a safe and confidential way to get a medical marijuana recommendation using secure video conferencing technology.  Our online telemedicine generates over 95% of our revenues.  Through December 31, 2018, the balance of the products discussed below in this section have produced no significant revenues.

Proprietary Cannabis Strain. The Company owns a patented cannabis sativa plant strain known as Ecuadorian Sativa or "CTA".  The Company intends to further research the CTA strain and to ultimately monetize this intellectual property through licensing agreements in conjunction with state medical marijuana laws as well as establish business relationships with scientific research organizations to develop agricultural biologic applications based upon specific plant strain research and development methodologies.

Lozenges and Edibles. The Company owns intellectual property (recipes and process/methods) for use in medical marijuana edibles and lozenges.  The Company's proprietary lozenge is unlike other edibles of which may take up to an hour or more to take effect. Based upon preliminary results, our lozenges generally take effect within a period of five to 15 minutes.  We believe the rapid acting characteristics of our lozenges will overcome a major issue with cannabis consumption, which has

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been the need to inhale cannabis in order to receive a rapid response.  In addition to the lozenges, we have other forms of edibles under development.

Recover. Recover Deep Penetrating Healing Balm is a fast acting anti-inflammatory pain reliever for sore muscles, joints, arthritic and back pain. Organic with hemp seed oil, menthol, capsicum, and black pepper.

Trauma Cream. Developed for blended infusion of cannabinoids and THC; Arnica is a primary ingredient for its numbing effect.

Face Garden.  An antioxidant, moisturizing cream for the face.  The ingredients in this formula include DMAE, Vitamins Ester C, B5, Oils of Evening Primrose and Borage Seed, which are believed to firm the skin and reduce puffiness and wrinkles, while restoring the skin to a natural glow and supple appearance. Hempseed, Neem, and Jojoba Oils are added to lock in moisture.

Body Garden.  A moisturizing body lotion designed to relieve itchy dry skin and protect against sun damage.  The ingredients in this formula include Hempseed Oil, Green Tea, and Blue Green Algae. The organic herbs, essential oils, butters, and minerals used in "Body Garden" have been formulated to provide nutrition to the skin which we believe encourages the dermis to remain healthy or return to health.

Lip Garden.  An emollient balm containing Vitamin E and Hemp Butter that we believe can assist with healing of the lips while keeping them supple and moist.

Clothing and Merchandise. We offer Wild Earth Naturals and "hi" branded logo men's and women's fashion tee shirts and sweatshirts from American Apparel, as well as caps and coffee mugs through the Company's www.wildearthnaturals.com website.  However, as of the date of this filing the website is not operational.  We expect that it will be operational again later in 2019.

Objectives

Our current strategy is to continue prosecution of the pending patents, to develop and acquire new patents, trade secrets, trademarks and other intellectual property. In addition, we will seek new branding and licensing opportunities for our intellectual property and we will seek strategic corporate and product acquisitions.

Marketing & Distribution

Market Conditions in the Cannabis Industry

Our target markets are those where states have legalized the production and use of cannabis.  Ten states plus the District of Columbia have approved measures to legalize cannabis for adult recreational use.  Thirty-two states, the District of Columbia and the territories of Guam and Puerto Rico have legalized the use of cannabis for medical use in some form. However, it may take multiple years for a state to establish regulations and for cannabis businesses to begin generating revenue from operations in a given state.

Non-Infused Products and Merchandise

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We launched our wildearthnaturals.com website in August 2013, employing high quality graphic artists and designers. We use social media, primarily Facebook, to drive traffic to our websites.  Our online stores at www.wildearthnaturals.com are producing sales at this time.

During 2019, we plan to utilize direct business to business sales, internet advertising, social media market, and trade show participation to generate sales leads, orders and to entry into leading retailers and wholesalers throughout the U.S.  No assurances can be given that we will be successful in such efforts.

Infused Products

For cannabis infused products, we are developing our customer base through licensing agreements with third parties who are compliant with state cannabis laws in the states in which they conduct business.

We plan to build brand awareness by utilizing a mix of social media, trade shows, education efforts, and direct marketing to targeted businesses.

Geographic Presence

We plan to build brand awareness for our products in states where medical cannabis is legal, and to sell non-infused products throughout the United States.

Competition

Cannabis Industry

While we do not sell cannabis, we expect to license our intellectual property to others in the future who do sell cannabis in states where medicinal cannabis is legal.  Therefore, we look to the participants in the medical cannabis market for information on competition, as such competition will have an effect on our ability to license our branding and other intellectual property.

We believe the competition in the cannabis market will include numerous cannabis product companies that are highly fragmented in terms of geographic market coverage, distribution channels and product categories – with companies taking a state by state approach.  We believe that competition is principally based upon price, quality, efficacy of products, branding, marketing, customer service, and trade support.  We anticipate that large pharmaceutical companies may begin to compete in the cannabis product market. These companies and certain larger entities may have broader product lines and/or larger sales volumes than companies such as ours our those of our licensees.  Larger entities entering this market may have significantly greater financial and other resources available to them and possess extensive manufacturing, distribution and marketing capabilities. We anticipate that many of the larger competitors will be able to compete more effectively due to a greater extent of vertical integration. The entry of larger competitors could have a material adverse effect on our results of operations and financial condition.

Skin Care

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Our competition includes numerous skin care companies that are highly fragmented in terms of geographic market coverage, distribution channels, and product categories. In addition, large pharmaceutical companies compete with us in the skin care market.  These companies and certain large entities have broader product lines and larger sales volumes than us and have greater financial and other resources available to them and possess extensive manufacturing, distribution and marketing capabilities. Among our more prominent competitors are: Earthly Body, Burt's Bees, Melaleuca and Clarins, all of which have substantially longer track records and greater financial resources and operating efficiencies than do we. As a company with limited capital resources, we believe will be at a competitive disadvantage until such time as we develop a broad portfolio of products that are known and accepted in the industry and we are able to demonstrate a history of financial stability. There can be no assurance that we will be able to compete effectively in the market.

Technology

The competition against our information technology platform iBudtender.com and the iBudtender App, both of which will be released in 2019, include companies such as Weedmaps, Leafly, MassRoots, and Leafstrain.  Competition in the information technology market for cannabis is growing rapidly and many of our competitors are have more experience and greater financial resources than do we. As a company with limited capital resources, we may be at a competitive disadvantage in a rapidly changing information technology market.

Raw Materials and Suppliers

Our products are produced using ingredients that we believe to be readily available from several sources. We purchase our raw materials from a number of different vendors. Our apparel and merchandise are procured through Printful.com.

Intellectual Property

We hold certain intellectual property (the "IP") consisting of recipe and process/method to maximize the cannabinoid concentrations to be used to make a medical marijuana ("MMJ") edible or to make a MMJ lozenge.  We also hold rights to a proprietary recipe and process/method to maximize the cannabinoid concentrations to be used to make a salve/ointment containing CBD and Arnica Montana.

We also hold the rights of a patent for the CTA strain of cannabis and we hold two patent applications filed with the U.S. Patent and Trademark Office with regard to use of the CTA strain in a lozenge and as a treatment for hypertension. We are continuing to pursue these applications; however, no assurances can be given that the remaining patent applications will result in the issuance of any patents.

We are also pursuing the "hi" mark in several categories filed with the U.S. Patent and Trademark Office. An objection has been filed by Tweed Corporation which wishes to use the mark on apparel. Settlement talks are ongoing.  The Company uses (or licenses) the "hi" branding for skin care products, edibles (infused and non-infused), apparel and branded merchandise.

We hold a Federal trademark on the name and stylized branding of "Wild Earth Naturals".  We have acquired the following registered U.S. Trademarks: Cannabis*Sativa(R), DISPENSARxY(R), and

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CannaRx(R). The IP identifiers are Cannabis*Sativa(R), Registration Number 4,868,622, DISPENSARxY(R), Registration Number 4,642,830 and CannaRx(R), Registration Number 4,725,687. The Marks are registered in CL 35 under Goods and Services.  No assurance can be given that such steps as the company has and will take will provide sufficient protection against potential competitors and we may be unable to successfully assert our intellectual property rights or these rights may be invalidated, circumvented or challenged.  Any such invalidity, particularly with respect to our product names, or a successful intellectual property challenge or infringement proceeding against us, could have a material adverse effect on our business.

Effect of Existing or Probable Governmental Regulations on the Business

Cannabis is currently a Schedule I controlled substance under the Controlled Substances Act (CSA) and is, therefore, illegal under federal law. Even in those states in which the use of cannabis has been legalized pursuant to state law, its use, possession or cultivation remains a violation of federal law. A Schedule I controlled substance is defined as one that has no currently accepted medical use in the United States, a lack of safety for use under medical supervision and a high potential for abuse. The U.S. Department of Justice (the "DOJ") defines Schedule I controlled substances as "the most dangerous drugs of all the drug schedules with potentially severe psychological or physical dependence." If the federal government decides to enforce the CSA, persons that are charged with distributing, possessing with intent to distribute or growing cannabis could be subject to fines and/or terms of imprisonment, the maximum being life imprisonment and a $50 million fine, even though these persons are in compliance with state law.

In light of such conflict between federal laws and state laws regarding cannabis, the previous administration under President Obama had effectively stated that it was not an efficient use of resources to direct federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical cannabis.  The new administration under President Trump could decide to strongly enforce the federal laws applicable to cannabis. See Justice Department Memo on Marijuana Enforcement discussed below.  Any such change in the federal government's enforcement of current federal laws could cause significant financial damage to us. While we do not currently harvest, distribute or sell cannabis, we may be irreparably harmed by a change in enforcement policies of the federal government.

The Company and our licensed products will also be subject to a number of other federal, state and local laws, rules and regulations.  We anticipate that our licensees and vendors will be required to manufacture our products in accordance with the Good Manufacturing Practices guidelines and will be subject to regulations relating to employee safety, working conditions, protection of the environment, and other items.  The current administration has indicated that it will closely scrutinize the cannabis industry, in particular, recreational marijuana.  Changes in laws, rules and regulations or the recall of any product by a regulatory authority, could have a material adverse effect on our business and financial condition.

In addition to cannabis related regulations, our skin care and nutraceuticals products are subject to a number of federal, state and local laws, rules and regulations.  We are required to manufacture our products in accordance with the Good Manufacturing Practices guidelines and we are also subject to regulations relating to employee safety, working conditions, protection of the environment, and other items.  Changes in such laws, rules and regulations or the recall of any product by a regulatory authority, could have a material adverse effect on our business and financial condition.

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Justice Department Memo on Marijuana Enforcement

Because of the inconsistencies in federal and state law, on January 4, 2018, the Department of Justice (DOJ) issued a memo on federal marijuana enforcement policy announcing what it deemed to be a return to the rule of law and the rescission of previous guidance documents which would include the so called Cole Memorandum. Since the passage of the Controlled Substances Act in 1970, Congress has generally prohibited the cultivation, distribution, and possession of marijuana.  In the memorandum, Attorney General Jeff Sessions directs all U.S. Attorneys to enforce the laws enacted by Congress and to follow well-established principles when pursuing prosecutions related to marijuana activities. The DOJ asserts this return to the rule of law is also a return of trust and local control to federal prosecutors who know where and how to deploy Justice Department resources most effectively to reduce violent crime, stem the tide of the drug crisis, and dismantle criminal gangs.

"It is the mission of the Department of Justice to enforce the laws of the United States, and the previous issuance of guidance undermines the rule of law and the ability of our local, state, tribal, and federal law enforcement partners to carry out this mission," said Attorney General Jeff Sessions. "Therefore, today's memo on federal marijuana enforcement simply directs all U.S. Attorneys to use previously established prosecutorial principles that provide them all the necessary tools to disrupt criminal organizations, tackle the growing drug crisis, and thwart violent crime across our country."

We intend to conduct rigorous due diligence to verify the legality of all activities that we engage in and ensure that our activities do not interfere with any of the enforcement priorities of the Department of Justice.

Research and Development

We plan to conduct research, develop products and engage in development activities with an initial focus on the following:

• Identify and research new strains of cannabis and combinations of cannabis and cannabinoid nutrients that may be candidates for new products;

• Identify and research products, including intellectual property, that will benefit enhance or benefit the cannabis industry, from cultivation to consumers;

• Introduce new herbal ingredients for use in supplements;

• Study the metabolic activities of existing and newly identified ingredients;

• Enhance existing products, as new discoveries in cannabis are made;

• Formulate products to meet diverse regulatory requirements across all of its markets;

• Investigate processes for improving the production of its formulated products; and

• Investigate activities of natural extracts and formulated products in laboratory and clinical settings.

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It is through our internal research and development efforts and our relationships with outside research organizations and health care providers that we believe we will be able to develop high quality products. We plan for our research and development activities to include developing products that are new to the industry, updating existing formulas to keep them current with the latest science, and adapting existing formulas to meet ever-changing regulations in new and existing domestic markets.  We will select our ingredients to meet a number of criteria, including, but not limited to: safety, potency, purity, stability, bio-availability, and efficacy. We will require our licensees and vendors to control the quality of our products beginning at the formulation stage, and maintain quality control through controlled sourcing of raw ingredients, manufacturing, packaging, and labeling.  Going forward, we intend to increase our spending and resources for research and development.

Environmental Laws

We have no known costs, and none are anticipated, from environmental laws, rules and regulations.

Number of Total Employees and Number of Full Time Employees

As of March 20, 2019, we had one employee, not including our five executive officers who receive non-cash salary.  Our employees are not represented by unions and we consider our relationship with our employees to be good. The Company also has relationships with several independent contractors who provide services to the Company on a regular and on-going basis.

Facilities

Our office and warehouse facility is located at 1646 W. Pioneer Blvd., Suite 120, Mesquite, Nevada.  The leased space constitutes a total of approximately 900 square feet.  The building is in an industrial park setting, and a new exit off of Interstate 15 was recently completed, indicating more growth in the area which is the fastest growing city in Nevada. We pay a total of $600 per month for our space.  We signed a new 12 month lease on September 1, 2018, that has an option to renew of an addition 12 months.

Our subsidiary PrestoDoctor leases an office in New York for $800 per month.

Not required.

None

We are not a party to any material legal proceedings and, to the best of our knowledge, no such legal proceedings have been threatened against us.

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Not Applicable.

Part II

Market Information

Our shares of common stock are quoted on the OTCQB by the OTC Markets Group Inc. of the Financial Industry Regulatory Authority, Inc. (“FINRA”) under the symbol “CBDS”.  Set forth below are the high and low closing bid prices for our common stock for each quarter of 2017 and 2018.  All prices listed herein reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not represent actual transactions.  

On March 19, 2019, the stock closed at $2.95.

Holders of Record

On March 29, 2019, there were 58 holders of record of our common stock, as reported by the Company’s transfer agent.  In computing the number of holders of record, each broker-dealer and clearing corporation holding shares on behalf of its customers is counted as a single stockholder.

No Dividends

No dividends have ever been paid on our securities, and we have no current plans to pay dividends in the foreseeable future.  

Equity Compensation Plan

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During 2017, the Company adopted the Cannabis Sativa, Inc. 2017 Stock Plan which authorizes the board of directors to issue up an aggregate of 3,000,000 shares of common stock to allow the Company to compensate employees and consultants from time to time by issuing them shares of Company common stock in return for services provided to the Company rather than paying for the services in cash thereby depleting the cash assets of the Company.  Under the plan there were no set issuances of stock to which any party is entitled.  Distributions are only allowed pursuant to the discretion of the board of directors if and when it is in the best interest of the Company to make any distribution.

Transfer Agent

Colonial Stock Transfer Co., Inc., 66 Exchange Place, Suite 100, Salt Lake City, Utah 84111, telephone (801) 355-5740, serves as the transfer agent and registrar for our common stock.

Recent Sales of Unregistered Securities

During the quarter ended December 31, 2018, the Company issued 27,426 shares of restricted preferred stock to one of our officers and 216,895 shares of restricted common stock to various officers and consultants.

Special Sales Practice Requirements with Regard to “Penny Stocks”

To protect investors from patterns of fraud and abuse that have occurred in the market for low priced securities commonly referred to as “penny stocks,” the SEC has adopted regulations that generally define a “penny stock” to be any equity security having a market price (as defined) less than $5.00 per share, or an exercise price of less than $5.00 per share, subject to certain exceptions.  Our stock is subject to the “penny stock” regulations during periods in which the price is below $5.00 per share.  During any such periods, broker-dealers selling our common stock are subject to additional sales practices when they sell our stock to persons other than established clients and “accredited investors.”  For transactions covered by these rules, before the transaction is executed, the broker-dealer must make a special customer suitability determination, receive the purchaser’s written consent to the transaction and deliver a risk disclosure document relating to the penny stock market.  The broker-dealer must also disclose the commission payable to both the broker-dealer and the registered representative taking the order, current quotations for the securities and, if applicable, the fact that the broker-dealer is the sole market maker and the broker-dealer’s presumed control over the market.  Monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.  Such “penny stock” rules may restrict trading in our common stock and may deter broker-dealers from effecting transactions in our common stock.

Not Applicable.  The Company is a “smaller reporting company” and not subject to the Selected Financial Data requirement of Item 6.

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Certain statements in this Report constitute “forward-looking statements.” Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Factors that might cause such a difference include, among others, uncertainties relating to general economic and business conditions; industry trends; changes in demand for our products and services; uncertainties relating to customer plans and commitments and the timing of orders received from customers; announcements or changes in our pricing policies or that of our competitors; unanticipated delays in the development, market acceptance or installation of our products and services; changes in government regulations; availability of management and other key personnel; availability, terms and deployment of capital; relationships with third-party equipment suppliers; and worldwide political stability and economic growth. The words “believe,” “expect,” “anticipate,” “intend” and “plan” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made.

Results of Operations

Fiscal year ended December 31, 2018 compared with fiscal year ended December 31, 2017

Revenue for the fiscal years ended December 31, 2018 and 2017 was $505,705 and $317,985, respectively. Cost of revenues for the fiscal years ended December 31, 2018 and 2017 was $209,871 and $154,451, respectively. Gross profit for the fiscal years ended December 31, 2018 and 2017 was $295,834 and $163,534, respectively.  The increase in each of the numbers for 2018 is primarily a result of the increased impact of the business operations of PrestoCorp, our 51% owned subsidiary, on the business operations of the Company.

Net loss for the fiscal year ended December 31, 2018 was $4,909,769 compared to net loss of $7,811,489 for the fiscal year ended December 31, 2017.  The decrease resulted primarily from a change in our compensation structure in 2018 for members of management, consultants, board members, and attorneys.  In 2017, these persons were compensated primarily with the issuance of set amounts of stock.  Compensation expense during 2017 rose with the rise in our stock price resulting in a higher net loss.  In 2018, we changed our compensation arrangements with persons being issued stock based upon the value of the stock at the time of issuance rather than a set number of shares.

Total operating expenses were $5,336,005 for the fiscal year ended December 31, 2018 and $8,010,622 for the fiscal year ended December 31, 2017.  The bulk of the expenses for both years were paid using the Company’s common stock and therefore required no cash.  In 2018, consulting and legal services were incurred in the amount of $2,186,796.  In 2017, the large non-cash transaction was also stock issued for services in the amount of $4,729,452.  During 2018 and 2017, the Company impaired its goodwill and intangible assets an aggregate of $1,173,000 and $980,944, respectively. Despite the large net loss amounts for both years, because of non-cash transactions, the net cash used in operating activities was $689,876 for 2018 and $964,661 for 2017.  Also during the year ended December 31, 2018, 332,447 shares were returned due to cancellation of a service contract that was originated in 2017.  The value of the shares returned was approximately $991,000 which was recorded as a reduction of the professional fees incurred since the inception of the contract.

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Liquidity and Capital Resources

As stated above, our operations used $689,876 in cash for the year ended December 31, 2018. During the same year, financing activities provided cash of $665,295. Cash required during 2018 came from cash proceeds from sales of restricted stock and warrant exercises in the amount of $361,750 and from proceeds from related parties in the amount of $303,545.

As stated above, our operations used $964,661 in cash for the year ended December 31, 2017. During the same year, financing activities provided cash of $1,042,370. Cash required during 2017, came from proceeds from related parties in the amount of $271,214 and cash proceeds from a private offering of stock in the amount of $771,156.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business.  We incurred net loss of $3,736,769 and $7,811,489, respectively, for the years ended December 31, 2018 and 2017 and had an accumulated deficit of $70,320,531 as of December 31, 2018.  The Company may seek to raise money for working capital purposes through a public offering of its equity capital or through a private placement of equity capital or convertible debt.  The Company also has outstanding warrants that upon potential exercise could bring funding into the Company.  It will be important for the Company to be successful in its efforts to raise capital in this manner if it is going to be able to further its business plan in an aggressive manner.  Raising capital in this manner will cause dilution to current shareholders.

As of March 20, 2019, the Company had cash on hand of $15,810.  As a result, the Company has does not have sufficient liquidity to meet the immediate needs of our current operations.  Cash represents cash deposits held at financial institutions. Cash is held at major financial institutions and insured by the Federal Deposit Insurance Corporation (FDIC) up to federal insurance limits.

Off Balance Sheet Arrangements

None

Not Applicable.  The Company is a “smaller reporting company.”

The following financial statements are being filed with this report and are located immediately following the signature page.

Financial Statements, December 31, 2018 and 2017

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets, December 31, 2018 and 2017

Consolidated Statements of Operations for the Years Ended December 31, 2018 and 2017

Consolidated Statement of Other Comprehensive Loss for the Year Ended December 31, 2018 (included in the Consoldated Statement of Operations)

Consolidated Statements of Changes in Stockholders’ Equity from January 1, 2017 through

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  December 31, 2018

Consolidated Statements of Cash Flows for the years ended December 31, 2018 and 2017

Notes to the Consolidated Financial Statements

None

Disclosure Controls and Procedures

Under the supervision and with the participation of our management including our chief executive officer and our chief financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were not effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding disclosure. A discussion of the material weaknesses in our controls and procedures is described below.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes of accounting principles generally accepted in the United States.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework (2013). Based on management’s assessment, management concluded that its internal control over financial reporting was effective as of December 31, 2018, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP.

Remediation of Previous Material Weaknesses

During the year ended December 31, 2018, we implemented the initiatives described below:

Performed a risk assessment and mapped our processes to control objectives. 

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Documented our controls and procedures in accordance with COSO, identified gaps and, where necessary, implemented additional controls. 

Evaluated our entity-level controls, identified gaps, and updated our processes and documentation. 

Implemented controls and procedures to identify, evaluate and record significant transactions, along with the necessary documentation. 

Evaluated our system controls and, as needed, implemented additional controls. 

Established appropriate levels of segregation of duties as part of our overall assessment and implementation of internal control processes and procedures. 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.

Our independent registered public accounting firm, Hall & Company, has issued an audit report on our internal controls over financial reporting, which appears in Part II, Item 8 of this Annual Report on Form 10-K.

This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.

Changes in Internal Control over Financial Reporting

The remedial actions set forth above with regard to changes in our internal control over financial reporting were made during the quarter ended December 31, 2018, and materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

None.  

Part III

Directors and Executive Officers

The following table indicates the name, age, term of office and position held by each of our executive officers and directors.  The term of office for each officer position is for one year or until his or her successor is duly elected and qualified by the board of directors.  The term of office for a

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director is for one year or until his or her successor is duly elected and qualified by the stockholders.

Certain biographical information with respect to our executive officers and directors.

Mike Gravel.  Mike Gravel, retired, served as a U.S. Senator from Alaska from 1969 to 1981.  Senator Gravel sat on the Finance, Interior, Environmental and Public Works committees, and chaired the Energy, Water Resources, Buildings and Grounds and Environmental Pollution subcommittees.  Senator Gravel is best known for his work on the Vietnam War.  He filibustered for five months which contributed to the end of the military draft.  He challenged the U.S. Government by releasing the Pentagon Papers.  When the Nixon administration refused to allow the New York Times to publish information on the Pentagon Papers, Senator Gravel attempted to read the entire 7,000 pages of the document into the Senate record. The Supreme Court blocked his attempt.  Senator Gravel then wrote The Senator Gravel Edition, The Pentagon Papers in 1971.  He again had to go before the Supreme Court and received a ruling that affected the Speech and Debate Clause of the Constitution.  In retirement, Gravel has written two books, Jobs and More Jobs, and Citizen Power.  Senator Gravel served as a director of Kush, Inc. (“Kush”) from March 2013 to July 2014, prior to its acquisition by the Registrant.  Effective December 31, 2018, Mr. Gravel retired from his position as CEO but will continue to serve as a member of the board of directors until the next annual meeting of shareholders.

David Tobias.  Mr. Tobias has served as President of Wild Earth Naturals, Inc. since May, 2013.  He also served as the President of Hemp, Inc. from August 2011 to January 9, 2014.  Prior to that, from October 2009 until May 2011, Mr. Tobias held the position of Vice President at Medical Marijuana Inc. where he was instrumental in bringing forward and culminating the merger between CannaBank and Medical Marijuana, Inc. He was earlier Sales Manager for Tulsa custom builder Xcite Homes, from October 2008 to August 2009. Among other qualifications, Mr. Tobias brings to the Board executive leadership experience, including his service as a president of a public company, along with extensive entrepreneurial experience. Mr. Tobias also has a keen sense of the social, political, and economic environment in which the company operates.  On January 1, 2019, Mr. Tobias was appointed CEO as a result of the resignation of Mr. Gravel.

Catherine Carroll.  Ms. Carroll has been self-employed since 1984. Ms. Carroll brings an extensive background in accounting, tax preparation, IRS audits, and appeals to the company. The Board believes that her insights gained from teaching basic tax preparation classes for 15 years, being an expert witness in tax court; along with her “Life Time Limited Services” teacher’s credential in accounting at Delta College in Stockton, CA for 6 years brings the company a valuable perspective.  Ms. Carroll had been serving as the CFO, Director and as the Treasurer of the Company since July of 2013.  Effective January 30, 2017, she will no longer function as the

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Company’s CFO and will focus her efforts on her positions as Treasurer and Director and keeping the books of the Company.

Stephen Downing.  Mr. Downing served as a member of the Los Angeles Police Department for 20 years.  He started as a patrol officer and rose through the ranks working assignments that included vice, narcotics, detectives, and staff and command positions, ultimately being appointed to the rank of Deputy Chief of Police, where he oversaw the LAPD’s Special Investigations and Personnel and Training Bureaus. While still on the force, Downing wrote for numerous network television series. After retiring from the LAPD, Mr. Downing expanded his creative endeavors into television production, working both as a writer and producer, ultimately becoming the executive producer/show runner of several series including MacGyver, Robocop, and Fx – The Series.  Mr. Downing has been semi-retired for the past 10 years.  During that time, because of his law enforcement experiences commanding the LAPD’s narcotic enforcement program, he has become a nationally recognized advocate for finding an exit strategy to end the war on drugs.  Mr. Downing currently divides his time between drug reform advocacy and his love of creative writing.  Mr. Downing served as a director of Kush from March 2013 to July 2014 prior to its acquisition by the Company.

Deborah Goldsberry. Ms. Goldsberry’s business affiliations during the past six years include the following:

Works as Executive Director for Magnolia Wellness of Oakland, California where she is responsible for operations and management. She has worked for Magnolia since February 2014, and in this position from October 2014 to the present.

Works as a business consultant for Liana Limited of Oakland, California where she is responsible for policy analysis and advocacy work, and public relations and outreach to clients. She also consults on a variety of medical marijuana and related projects.

Ms. Goldsberry is a long-time medical cannabis activist. She has hands-on experience having pioneered the highly acclaimed Berkeley Patients Group in Berkeley, California and Magnolia Wellness in Oakland, California. As an activist, Ms. Goldsberry co-founded several industry non-profit organizations, including Americans for Safe Access, the Medical Cannabis Safety Council, and Cannabis Action Network. She is a former board member at California NORML and the Marijuana Policy Project. She was twice named Freedom Fighter of the Month by HIGH TIMES, as well as Freedom Fighter of the Year at the 2011 Cannabis Cup in Amsterdam. Ms. Goldsberry was also honored with NORML’s Paula Sabine Award for the importance of women in leadership in ending marijuana prohibition.

Ms. Goldsberry’s thirty years of experience in the medical cannabis industry and her high-profile work in the cannabis industry in California is a natural fit as the Company prepares to expand its reach in the California medical cannabis community.

Trevor Reed. Mr. Reed has experience as a contractor, builder and cannabis producer. Mr. Reed started his first company 1989, a hardwood flooring company in Santa Fe, New Mexico. That experience led 15-year career as a custom builder of spec homes in New Mexico. Mr. Reed also engaged in small scale land development and commercial construction in New Mexico.  In 2008, Trevor moved to Bend, Oregon to be closer to family. During his time in Oregon, Mr. Reed began

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to learn about the cannabis business and started growing cannabis.  Mr. Reed then returned to New Mexico where he became one of the twenty-five licensed producers of cannabis in the State of New Mexico.  Mr. Reed’s curiosity and tenacity have led him to being the number one cannabis producer in the State of New Mexico for three years in a row. Mr. Reed has also consulted with State regulatory authorities regarding the development their state cannabis programs. Under Mr. Reed’s direction Natural Rx in New Mexico was the first dispensary to become a United Food and Commercial Workers International Union (UFCW) cannabis division member company in 2014. In 2015, Mr. Reed (with partners) established several cannabis dispensaries and cannabis farms in the State of Oregon.

The following is a brief description of the specific experience and qualifications, attributes or skills of each director that led to the conclusion that such person should serve as a director of the Company.

Mr. Gravel’s experience as a director of Kush prior to its acquisition by the Company are important to the continued functioning of the Company.  His contacts as a prior U.S. senator are important to the Company.

Mr. David Tobias’ knowledge regarding the business of Wild Earth and the implementation of its business plan, provides a critical link between management and the board, enabling the board to provide its oversight function with the benefit of management’s perspective of the business.

Ms. Carroll’s knowledge regarding the history, operations and financial condition of Wild Earth provides a critical link between management and the board, enabling the board to provide its oversight function with the benefit of management’s perspective of the business.

Mr. Downing’s background of commanding the Los Angeles Police Department’s narcotic enforcement program and his being a nationally recognized advocate for finding an exit strategy to end the war on drugs makes him an ideal choice as a board member to assist our push into the cannabis industry.

Ms. Goldsberry’s twenty-five years of experience in the medical cannabis industry and her high-profile work in the cannabis industry in California is a natural fit as the Company prepares to expand its reach in the California medical cannabis community.

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Mr. Reed’s knowledge of the cannabis industry and his work with state regulators in connection with cannabis legislation brings valuable insight regarding the emerging cannabis industry and regulation to the board of directors.

Family Relationships

There are no family relationships between any of our officers and directors.

Term of Office

The term of office of each director is one year and until his or her successor is elected at the Registrant's annual stockholders' meeting and is qualified, subject to removal by the stockholders.  The term of office for each officer is for one year and until his or her successor is elected at the annual meeting of the board of directors and is qualified, subject to removal by the board of directors.  Mr. Tobias and Ms. Carroll assumed their respective offices and positions in connection with the Wild Earth acquisition in July 2013.   Except as noted below, our other officers and directors assumed their respective offices and positions in connection with the Kush acquisition in June 2014.  Mike Gravel and David Tobias have served as directors since 2014 and 2013, respectively.  However, David Tobias was appointed President of the Company on March 29, 2016, and CEO of the Company on January 9, 2019.  Donald Lundbom was elected CFO on June 20, 2017.

Board of Directors

Our board of directors consists of six persons, three of whom are "independent" within the meaning of Rule 5605(a)(3) of the NASDAQ Marketplace.  The three that are not independent are officers of the Company.

Our board of directors has designated an audit committee comprised of two independent directors.  The two directors who serve on this committee are Stephen Downing and Trevor Reed.  The board of directors does not have an independent "financial expert" because it does not believe the scope of the Company's activities to date has justified the expenses involved in obtaining such a financial expert.  In addition, our securities are not at this time listed on a national exchange and we are not subject to the special corporate governance requirements of any such exchange.

The board of directors has designated a compensation committee comprised of two independent directors.  The two directors who serve on this committee are Stephen Downing and Trevor Reed.  To date, the Company has not engaged independent compensation consultants to determine or recommend the amount or form of executive or director compensation.

The Company does not have a standing nominating committee and the Company's Board of Directors performs the functions that would customarily be performed by a nominating committee.  The Board of Directors does not believe a separate nominating committee is required at this time due to the limited resources of the Company.  The Board of Directors has not established policies with regard to the consideration of director candidates recommended by security holders or the minimum qualifications of such candidates.

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Director Meetings

Generally, the Company’s Board of Directors held meetings every two weeks during 2018. At almost every meeting every director was in attendance.

Communications with Directors

Stockholders may communicate with the Board of Directors by sending written communications addressed to the Board of Directors, or any individual director, to: Cannabis Sativa, Inc., Attention: Corporate Secretary, 1646 W. Pioneer Blvd., Suite 120, Mesquite, NV 89027.  All communications will be compiled by the corporate secretary and forwarded to the Board of Directors or any individual director, as appropriate.  In order to facilitate a response to any such communication, the Company’s Board of Directors suggests, but does not require, that any such submission include the name and contact information of the shareholder submitting the communication.

Code of Ethics

We have not adopted a Code of Ethics that applies to our executive officers, including our principal executive, financial and accounting officers.  We do not believe the adoption of a code of ethics at this time would provide any meaningful additional protection to the Company because we have only four executive officers and our business operations are not complex.

During the past ten years none of our directors, executive officers, promoters or control persons was:

1.the subject of any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;  

2.convicted in a criminal proceeding or is subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);  

3.subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or  

4.found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law.   

Section 16(a) Beneficial Ownership Reporting Compliance  

Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own more than 10 percent of a registered class of our equity securities to file reports of securities ownership and changes in such ownership with the SEC.  Officers, directors, and greater than ten percent shareholders also are required by rules promulgated by the SEC to furnish us with copies of all Section 16(a) reports they file.  Based solely on a review of the copies of such reports furnished to us, we believe that three of the six directors need to file a Form 3.

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The following table sets forth certain information regarding the annual compensation paid to our principal executive officer and principle financial officer in all capacities for the fiscal years ended December 31, 2018 and 2017.  No other person served as an executive officer of the Company or received total annual compensation from the Company in excess of $100,000 other than Mr. Tobias, Mr. Gravel, Mr. Lundbom and Ms. Carroll as set forth in the table.

Summary Compensation Table

(2)  During 2017 Ms. Merrill served as CFO from January 30, 2017, through June 20, 2017, and for those services was paid the compensation indicated.

(3)  During 2017 Mr. Lundbom served as CFO from June 20, 2017, through December 31, 2017, and for those services was paid $278,000 in common stock.

(4) Mr. Gravel resigned his position as CEO on December 31, 2018.

We do not have any retirement, pension or profit sharing plans covering our officers or directors, and we are not contemplating implementing any such plans at this time.

Director Compensation

Our directors are issued shares of common stock quarterly for their service on the board of directors.  As of September 30, 2017 the Directors are issued $10,000 of shares quarterly and the Chairman is issued $12,500 of shares quarterly.

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The following table sets forth as of April 1, 2019, the number of shares of our common stock, par value $0.001, owned of record or beneficially by each person known to be the beneficial owner of 5% or more of our issued and outstanding shares of common stock, and by each of our officers and directors, and by all officers and directors as a group.  On such date, there were 22,027,477 issued and outstanding shares of our common stock.  As of such date, we had 798,835 shares of preferred stock issued and outstanding that are convertible into shares of common stock on a share for share basis.  Unless indicated otherwise, the address for any shareholder is the same as the address of the Registrant.

(1) Ms. Barrameda is deemed to be the beneficial owner of the 4,665,008 shares owned by New Compendium Corporation as a result of her status as an officer, director and sole stockholder of New Compendium. 

(2) Of the 4,665,008 shares indicated, 3,800,172 are directly held common shares and 864,836 are indirectly held shares as described in note (3) below.

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(3) New Compendium is the beneficial owner of 713,252 shares owned by Honeysuckle Research, Inc. since New Compendium owns 92% of Honeysuckle Research, Inc.  New Compendium is also the owner of 151,584 preferred shares that may be converted into common shares on a share for share basis.  The Honesuckle shares and the preferred shares total the 864,836 shares indicated that are indirectly held.

(4) Of the 4,364,835 shares indicated, 3,819,223 are common shares directly owned by Mr. Tobias, 35,000 are common shares owned by Mr. Tobias’ spouse, and 510,612 are preferred shares that may be converted into common shares on a share for share basis.

* Less than 1%.  

During the year ended December 31, 2018 the Company received additional short-term advances from related parties and officers of the Company to cover operating expenses.  As of December 31, 2018, net advances to the Company were $926,638.  The Company has imputed interest on these sums at rates between 5% and 8% per annum and has recorded interest expense related to these balances in the amount of $39,429 during 2018.    

Approval of Related Party Transactions

Related party transactions are reviewed and approved or denied by the board of directors of the Company.  If the related party to a transaction is a member of the board of directors, the transaction must be approved by a majority of the board that does not include the related party.

The following table presents aggregate fees that were billed or expected to be billed for the fiscal years ended December 31, 2018, and 2017, for professional services rendered by Hall & Company, Inc.

“Audit Fees” represents fees for professional services provided in connection with the audit of our annual financial statements, review of financial statements included in our quarterly reports and related services normally provided in connection with statutory and regulatory filings and engagements and consents.

“Audit-Related Fees” represent fees for professional services provided in connection with the audit of the financial statements of Presto Corp.

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“Tax Fees” consists of fees for professional services rendered by our principal accountants for tax compliance, tax advice and tax planning.

“Other Fees” consists of fees for products and services provided by our principal accountants, other than the services reported under “Audit Fees,” “Audit-Related Fees,” or “Tax Fees” above.

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors

It is the policy of the Company for all work performed by our principal accountant to be approved in advance by our audit committee. All of the services described above in this Item 14 were approved in advance by our audit committee or by our Board of Directors for engagements prior to the formation of our audit committee.

The following documents are included as exhibits to this report.  

(a) Exhibits

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^* The exhibits and schedules to the Agreement and Plan of Reorganization are not included in the foregoing exhibit.  The Registrant undertakes to furnish supplementally to the Commission copies of any omitted items on request.

⁽¹⁾ Incorporated by reference to the Company’s current report on Form 8-K report filed July 18, 2013.

⁽²⁾  Incorporated by reference to Exhibits 3(i) and 3(ii) of the Company’ s registration statement on Form 10-12G, filed with the SEC on January 28, 2009.

⁽³⁾  Incorporated by reference to the Company’s current report on Form 8-K filed October 25, 2013.

⁽⁴⁾  XBRL information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, and is not subject to liability under those sections, is not part of any registration statement or prospectus to which it relates and is not incorporated or deemed to be incorporated by reference into any registration statement, prospectus or other document. These files will be added by amendment.

[SIGNATURES ON NEXT PAGE]

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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

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CANNABIS SATIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2018 and 2017

1. Organization and Summary of Significant Accounting Policies      

Nature of Corporation:

Ultra Sun Corp (the “Company,” “us”, “we” or “our”) was incorporated under the laws of Nevada in November 2004.  On November 13, 2013, we changed our name to Cannabis Sativa, Inc.   Our wholly-owned subsidiary Kush, Inc. (“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.  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 of natural cannabis products.  On November 2, 2015, Kush was spun off from the Company.  On August 8, 2016 the Company entered into a securities purchase agreement with iBudtender Inc. to purchase 50.1% of iBudtender Inc.  On August 1, 2017, the Company entered into a securities purchase agreement with PrestoCorp, Inc. (“PrestoCorp”) to purchase 51% of PrestoCorp.  

During the quarter ended September 30, 2014, the Company created Eden Holdings LLC, (the “LLC”).  The purpose of the LLC is to hold the intellectual property of Cannabis Sativa, Inc.  As of December 31, 2018 and December 31, 2017 there has been no activity in the LLC.  

Principles of Consolidation:

The consolidated financial statements include the accounts of Cannabis Sativa, Inc., and its wholly-owned subsidiaries; Wild Earth Naturals, Inc., Hi-Brands International, Inc., Eden Holdings LLC, our 50.1% ownership of iBudtender Inc. and our 51% ownership of PrestoCorp, (collectively referred to as the “Company”).  All significant inter-company balances have been eliminated in consolidation.

Method of Accounting:

The Company maintains its books and prepares its consolidated financial statements on the accrual basis of accounting.

Use of Estimates:

The preparation of these condensed consolidated 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Such management estimates include valuation of intangible assets in connection with business combinations, recoverability of long-lived assets and goodwill, and the valuation of equity-based instruments. Actual results could differ from those estimates.  

Liquidity:

Our operations have been financed primarily through proceeds from notes payable, convertible notes payable, sale of common stock, warrants exercised for common stock and revenue generated from sales of our products. These funds have provided us with the resources to operate our business, sell and support our products, attract and retain key personnel and add new products to our portfolio. We have experienced net losses and negative cash flows from operations each year since our inception. As of December 31, 2018, we had an accumulated deficit of approximately $71,000,000 and negative working capital.

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CANNABIS SATIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2018 and 2017

Liquidity: – continued

We have raised funds through the issuance of debt and the sale of common stock. We have also issued equity instruments in certain circumstances to pay for services from vendors and consultants.  During the year ended December 31, 2018, approximately $362,000 was raised in gross proceeds from the issuance of common stock from the exercise of warrants.  

Segment Information:

We operate our business on the basis of a single reportable segment, which is the business of delivering products and services ancillary to the medical cannabis market. Our chief operating decision-maker is the Chief Executive Officer, who evaluates us as a single operating segment.

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 December 31, 2018 and 2017 the Company has established an allowance for doubtful accounts of $-0- and $-0-, respectively.

Inventories:

Inventory cost includes those costs directly attributable to the product before sale. Inventory consists of salves, ointments, lotions, creams and balms and is carried at the lower of cost or (net realizable value), using first-in, first-out method of determining cost.  As of December 31, 2018, the Company had $5,714 in raw materials and $-0- in finished goods inventory. At December 31, 2017 there was $8,346 in raw materials and $165 in finished goods inventory.

Property and Equipment:

Property and equipment are recorded at cost.  Depreciation is provided for on the straight-line method over the estimated useful lives of the assets.  The average lives range from five (5) to ten (10) years.  Leasehold improvements are amortized on the straight-line method over the lesser of the lease term or the useful life. Maintenance and repairs that neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred.  Betterments or renewals are capitalized when incurred.  

Fair Value of Financial Instruments:

The 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, accounts payable, accrued liabilities, and notes payable approximate fair value given their short term nature or effective interest rates.

Cash:

Cash is held at major financial institutions and insured by the Federal Deposit Insurance Corporation (FDIC) up to federal insurance limits.

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CANNABIS SATIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2018 and 2017

Net Loss per Share:

Net loss per share is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding for the period and contains no dilutive securities. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity.  Potentially dilutive shares are excluded from the calculation of diluted net loss per share because the effect is anti-dilutive.

Revenue Recognition:

On January 1, 2018, the Company adopted the new revenue recognition standard ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, using the cumulative effect (modified retrospective) approach. Modified retrospective adoption requires entities to apply the standard retrospectively to the most current period presented in the financial statements, requiring the cumulative effect of the retrospective application as an adjustment to the opening balance of retained earnings at the date of initial application. No cumulative-effect adjustment in retained earnings was recorded as the adoption of ASU 2014-09 did not significantly impact the Company’s reported historical revenue. Revenue from substantially all of our contracts with customers continues to be recognized over time as services are rendered. The impact of the adoption of the new standard was not material to the Company’s consolidated financial statements for the year ended December 31, 2018. The Company expects the impact to be immaterial on an ongoing basis. The 2017 comparative information has not been restated and continues to be reported under the accounting standards in effect for that period.

The primary change under the new guidance is the requirement to report the allowance for uncollectible accounts as a reduction in net revenue as opposed to bad debt expense, a component of operating expenses. The Company has historically included the allowance for uncollectible accounts amounts with its allowance for contractual adjustments as a reduction in operating expenses. However most contracts are collected in full at time of delivery and the Company has immaterial account receivables and also related uncollectible accounts.  Accordingly, the adoption of this guidance did not have an impact on our condensed consolidated financial statements, other than additional financial statement disclosures.

The guidance requires increased disclosures, including qualitative and quantitative disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

At the adoption of Topic 606, the majority of what was previously classified as the provision for bad debts in the consolidated statements of income is now reflected as implicit price concessions and, therefore, included as a reduction to revenues in 2018. For changes in credit issues not assessed at the date of service, the Company will prospectively recognize those amounts in operating expenses on the consolidated statements of income.

The Company operates as one reportable segment.

The Company receives payments from individual clients. As the period between the time of service and time of payment is typically one day or less if it is an internet sale otherwise payment can be up to 30 days, the Company elected the practical expedient under ASC 606-10-32-18 and did not adjust for the effects of a significant financing component.

Under the new revenue standard, the Company has elected to apply the following practical expedients and optional exemptions:

· Recognize incremental costs of obtaining a contract with amortization periods of one year or less as expense when incurred. These costs are recorded within general and administrative expenses.  

· Recognize revenue in the amount of consideration to which the Company has a right to invoice the customer if that amount corresponds directly with the value to the customer of the Company’s services completed to date.   

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CANNABIS SATIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2018 and 2017

Revenue Recognition -  continued:

· Exemptions from disclosing the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less, (ii) contracts for which revenue is recognized in the amount of consideration to which the Company has a right to invoice for services performed, and (iii) contracts for which variable consideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct service that forms part of a single performance obligation.  

· No adjustment is made for the effects of a significant financing component as the period between the time of service and time of payment is typically one year or less.  

The Company recognizes revenue from product sales or services rendered when the following five revenue recognition criteria are met: identify the contract with the client, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to performance obligations in the contract and recognize revenues when or as the Company satisfies a performance obligation.  For the years ended December 31, 2018 and 2017, approximately 98% and 95% of the revenue is from PrestoCorp operations, respectively.

Digital Currencies Translations and Re-measurements

Digital currencies are included in current assets in the consolidated balance sheets. As the digital currencies are not financial assets and they lack physical substance, such assets meet the definition of an intangible asset. Accordingly, the Company records the assets at cost less impairment.

Realized gain (loss) on sale of digital currencies is included in other income (expense) in the consolidated statements of operations.

Investment

Investments in marketable securities are stated at fair value, and consist of minority ownership in a cannabis related company.  Beginning in 2018, the Company recognizes unrealized holding gains and losses in other (Income) Expenses in the consolidated statement of operations.

During the year ended December 31, 2018, the Company purchased 10,000,000 shares of common stock of Medical Cannabis Payment Solutions (ticker:  REFG) in exchange for 1,000,000 units of Weed coins (valued at $200,000).  There has been no change in the fair value of the investment in REFG during the year ended December 31, 2018.  During the period January 1, 2019 through March 22, 2019 the investment was extremely volatile. The value being as low as $128,000 and as high as $285,000.  There can be no assurances that when the Company liquidates its position of REFG, that it will realize the valuation at December 31, 2018.

Goodwill and Intangible Assets:

Intangible assets other than goodwill, are comprised of patents, trademarks, the Company’s “CBDS.com” website domain and intellectual property rights.  The patents are being amortized using the straight-line method over its economic life, which is estimated to be ten (10) years.  The trademarks are being amortized between 5 and 10 years.  The CBDS.com website is being amortized using the straight-line method over its economic life, which is estimated to be five (5) years.  The intellectual property rights are being amortized using the straight-line month over its economic life, which are estimated to be between three (3) and five (5) years.

The Company tests its goodwill for impairment annually, or whenever events or changes in circumstances indicates an impairment may have occurred, by comparing its reporting unit's carrying value to its implied fair value. The goodwill impairment test consists of a two-step process as follows:

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CANNABIS SATIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2018 and 2017

Step 1. The Company compares the fair value of each reporting unit to its carrying amount, including the existing goodwill. The fair value of each reporting unit is determined using a discounted cash flow valuation analysis. The carrying amount of each reporting unit is determined by specifically identifying and allocating the assets and liabilities to each reporting unit based on headcount, relative revenue or other methods as deemed appropriate by management. If the carrying amount of a reporting unit exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired, and the Company then perform the second step of the impairment test. If the fair value of a reporting unit exceeds its carrying amount, no further analysis is required.

Step 2. If further analysis is required, the Company compares the implied fair value of the reporting unit’s goodwill, determined by allocating the reporting unit’s fair value to all of its assets and its liabilities in a manner similar to a purchase price allocation, to its carrying amount. If the carrying amount of the reporting unit’s goodwill exceeds its fair value, an impairment loss will be recognized in an amount equal to the excess.

Impairment may result from, among other things, deterioration in the performance of the acquired business, adverse market conditions, adverse changes in applicable laws or regulations and a variety of other circumstances. If the Company determines that an impairment has occurred, it is required to record a write-down of the carrying value and charge the impairment as an operating expense in the period the determination is made. In evaluating the recoverability of the carrying value of goodwill, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the acquired assets. Changes in strategy or market conditions could significantly impact those judgments in the future and require an adjustment to the recorded balances.

The goodwill was recorded as part of the acquisition of PrestoCorp that occurred on August 1, 2017 and iBudtender that occurred on August 8, 2016. The Company recorded an impairment of its PrestoCorp goodwill in the amount of $1,173,000 for the year ended December 31, 2018.  There was impairment recorded for PrestoCorp goodwill for approximately $509,000 during the year ended December 31, 2017.

Advertising Expense:

Advertising costs are expensed as incurred and are included in general and administrative expense in the accompanying consolidated statements of operations. Advertising costs were approximately $104,000 and $353,000 for the years ended December 31, 2018 and 2017, respectively.

40

CANNABIS SATIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2018 and 2017

Long-Lived Assets:

Stock-Based Compensation:

Stock-based compensation is computed in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718. FASB ASC 718 requires all share-based payment to employees, including grants of employee stock options, to be recognized as compensation expense in the consolidated financial statements based on their fair values.  That expense will be recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). The Company has selected the Black-Scholes option pricing model as the most appropriate fair value method for our awards and have recognized compensation costs immediately as our awards are 100% vested.  

 Stock-Based Compensation: - continued

The Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of FASB ASC 505-50.  The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete.

In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.  Stock-based compensation related to non-employees is accounted for based on the fair value of the related stock or options or the fair value of the services, whichever is more readily determinable in accordance with ASC 718.  

Business Combinations:

We account for business combinations by recognizing the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair values on the acquisition date. The final purchase price may be adjusted up to one year from the date of the acquisition. Identifying the fair value of the tangible and intangible assets and liabilities acquired requires the use of estimates by management and was based upon currently available data. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to future expected cash flows from product sales, support agreements, consulting contracts, other customer contracts, and acquired developed technologies and patents and discount rates utilized in valuation estimates.

Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results. Additionally, any change in the fair value of the acquisition-related contingent consideration subsequent to the acquisition date, including changes from events after the acquisition date, such as changes in our estimate of relevant revenue or other targets, will be recognized in earnings in the period of the estimated fair value change. A change in fair value of the acquisition-related contingent consideration or the occurrence of events that cause results to differ from our estimates or assumptions could have a material effect on the consolidated statements of operations, financial position and cash flows in the period of the change in the estimate.

41

CANNABIS SATIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2018 and 2017

Income Taxes:

The Company adopted FASB Accounting Standard Codification (ASC) 740 which clarifies the accounting for uncertainty in income taxes recognized in the Company's consolidated financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on derecognition and measurement of a tax position taken or expected to be taken in a tax return. The Company had no unrecognized tax benefits during the year nor any interest or penalties on unrecognized tax benefits as of December 31, 2018.

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 years ended December 31, 2018 and 2017 differed from the statutory rate, due primarily to net operating losses incurred by the Company in the respective periods. For the year ended December 31, 2018 a tax benefit of approximately $1,130,000 would have been generated.  For the year ended December 31, 2017 a tax benefit of approximately $2,500,000 would have been generated.  However, all benefits have been fully offset through a valuation allowance account due to the uncertainty of the utilization of the net operating losses. As of December 31, 2018 the Company had accumulated net operating losses of approximately $10,028,000 that would result in a deferred tax asset of approximately $3,200,000.  However, the Company has established a valuation allowance in the full amount of the deferred tax asset due to the uncertainty of the utilization of operating losses in future periods.

Correction of Error

Company management has determined, after discussion with our independent registered public accounting firm, the Company’s digital currency were not properly accounted for and the amounts previously reported were misstated.

Based on our analysis, the Company has concluded that it erroneously recorded its digital currencies at fair value in the prior year and previous quarters rather than at cost, less impairment. Accordingly, the digital currency asset has been stated at zero value, which represents the cost basis, and the related decrease in valuation of approximately $30,000 was recorded as an impairment and the accumulated other comprehensive income of $11,022 was expensed to general and administrative expense. The prior year balance of approximately $230,000 and the prior periods unrealized gain/loss have not been restated, as such amounts are determined not to be significant to the Company’s overall financial statements as such amounts represent less than 5% of assets and less than 1% of net loss.

Recent Accounting Pronouncements:

In February 2016, the FASB issued ASU 2016-02, Leases. The standard requires lessees to recognize lease assets and lease liabilities on the consolidated balance sheet and requires expanded disclosures about leasing arrangements. We plan to adopt the standard on January 1, 2019. Based on our assessment of the new standard on our consolidated financial statements, which will consist primarily of a balance sheet gross up of our operating leases to show equal and offsetting lease assets and lease liabilities, we have concluded that the impact is insignificant to our consolidated financial statements.

42

CANNABIS SATIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2018 and 2017

Recent Accounting Pronouncements: - continued

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718) to expand the scope of ASC 718, Compensation - Stock Compensation (Topic 718) (“ASU 2018-07”), to include share-based payment transactions for acquiring goods and services from nonemployees. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. We do not expect this ASU to have a significant impact on our consolidated financial statements and related disclosures.

FASB ASU 2017-11 “Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815)” - In July 2017, the FASB issued 2017-11. The guidance eliminates the requirement to consider “down round” features when determining whether certain equity-linked financial instruments or embedded features are indexed to an entity’s own stock. Our warrants issued with our convertible notes are treated as derivative instruments, because they include a “down round” feature. The ASU is effective for annual periods beginning after December 15, 2018, and for interim periods within those years, with early adoption permitted. We do not expect this ASU to have a significant impact on our consolidated financial statements and related disclosures.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – “Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”).  ASU 2016-01 provides guidance to improve certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.  Specifically, the guidance: (1) Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income.  However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.  (2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment.  When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value.  (3) Eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities. (4) Eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet.  (5) Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.  (6) Require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.  (7) Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or accompanying notes to the financial statements.  (8) Clarity that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.  This guidance was effective for the Company in 2018.  Accordingly, the Company adopted this guidance in 2018, but it had no effect on its opening retained earnings.

2.   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:

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CANNABIS SATIVA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2018 and 2017

2.   Fair Value Measurements – continued

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 our investment in marketable securities at fair value on a recurring basis.  The Company’s available for sale securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within the fair value hierarchy.

3.  Fixed Assets

Property and equipment consisted of the following at December 31, 2018 and 2017: