Cannabis Sativa, Inc. - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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450 Hillside Dr. #A224, Mesquite, NV 89027

(Address of Principal Executive Office) (Zip Code)

(702) 762-3123

(Registrant's telephone number, including area code)

N/A

(Former name, former address, and former fiscal year, if changed since last report)

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Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes     ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes     ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes     ☒ No

The number of shares of the issuer's Common Stock outstanding as of November 15, 2021, is _________________.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Attached after signature page.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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

Prior to April 22, 2021, the Company operated two business segments: PrestoCorp, Inc. (“PrestoCorp”), a telehealth business, and GK Manufacturing and Packaging, Inc. (“GKMP”), a contract manufacturing business. On April 22, 2021, the Company sold its controlling interest in GKMP and iBud Tender, Inc. (“iBud”). The discontinued operations of GKMP and iBud are reported separately, below. Discussion of results of operations includes the consolidated results of PrestoCorp.

Three Months Ended September 30, 2021, compared with the Three Months Ended September 30, 2020

Revenues increased 11% in the three months ended September 30, 2021 compared to the three months ended September 30, 2020, primarily due to expansion of the states in which the Company offers its services of providing patients with a telehealth platform for seeking medical marijuana cards. Activity levels in specific states declined in third quarter of 2021 to more closely match pre-pandemic levels of activity, but this slow-down was offset by the expanded markets that the Company operates in. We no longer anticipate a significant spike in patients seeking our services due to pandemic effects, but the impact of other variants of the virus cannot be determined at this time.

Gross profit margins for our services remained constant in the quarter ended September 30, 2021, compared with the same quarter a year earlier. Maintaining the gross margin percentage in the third quarter of 2021 compared to the same period in 2020 is a reflection of the efficiency of our telehealth platform and our ability to hold down the costs of our service delivery process.

Net operating loss from operations for the three-month period ended September 30, 2021, decreased 7% compared to net loss for the three-month period ended September 30, 2020. We spent more on wages and salaries and general and administrative expenses in the three months ended September 30, 2021 when compared to the same period in 2020, but these increases were offset by decreases in advertising and depreciation. The reduction in advertising costs resulted from less need for an initial marketing push into new states and operations in our territories reached sustainable levels with regular recurring advertising expenditures.

Nine Months Ended September 30, 2021, compared with the Nine Months Ended September 30, 2020

Revenues declined 9% in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. Revenues in the nine months of 2021 decreased primarily due to a slow-down in the number of patients seeking medical marijuana cards when compared to year earlier period which saw a significant uptick in activity due to the pandemic. Activity levels in the first nine months of 2021 more closely matched our historic operating levels. We do not anticipate a significant spike in patients seeking our services due to pandemic effects, but the impact of the delta and other variants of the virus cannot be determined at this time.

Gross profit margins for our services, as a percentage of sales, were essentially unchanged in the nine months ended September 30, 2021, compared with the same period a year earlier. Holding our gross profit percentages unchanged despite a 9% decline in revenues is attributable to our efforts to control costs at all operating levels.

Total operating costs decreased slightly in the first nine months of 2021 compared to the same period in 2020. We substantially reduced professional fees, depreciation and amortization, and advertising but these decreases were offset by increases in wages and salaries, and general and administrative costs. The cost increases were primarily the result of our research into the operating requirements of new regions, and the costs to support general operational levels while pursuing funding efforts for targeted acquisition activities. Our targeted acquisition activities have not resulted in operational improvements to date, largely as a result of limited capital.

Net operating loss for the nine-month period ended September 30, 2021 increased 5% compared to net loss for the nine-month period ended September 30, 2020. The increase in our net operating loss was primarily the result of declines in revenue that were not offset by corresponding declines in cost structure. While management remains focused on keeping costs to manageable levels, we do not expect to see significant operating cost reductions in coming periods as we continue to seek other opportunities for expansion.

Discontinued Operations.

In April 2021, the Company entered into discussions with THC Farmaceuticals, Inc. (“CBDG”) regarding sale of CBDS’s controlling interest positions in GKMP and iBudtender Inc. (iBud”). The discussions were triggered by an interest on the part of CBDS management to refocus business efforts on growing PrestoCorp while streamlining financial reporting and management processes by eliminating assets that are no longer considered essential to the Company’s core focus. The sale was completed on April 22, 2021. Management believes that the sale of GKMP and iBud will free up management time and resources to seek other acquisitions that are more closely aligned with the PrestoCorp business model. Consideration for the sale of the controlling interests consisted of 1,500,000 shares of CBDG common stock and 1,500,000 shares of CBDG preferred stock valued at $600,000 on the date of the acquisition. iBud had no revenues in the periods presented. Summaries of the discontinued operations of GKMP and the operations of iBud through April 22, 2021 are provided below.

GKMP and iBud generated losses from operations during the periods they were operated by the Company. In the third quarter of 2021, management determined that the time and effort required to turn these businesses around would be a significant drain on resources and would limit expansion of our PrestoCorp operations. The sale of our interests in GKMP and iBud will now allow management to devote more resources to PrestoCorp.

Liquidity and Capital Resources

Net cash used in operating activities for the nine-month period ended September 30, 2021 was $180,849. During the same period, our cash position decreased by $57,070. Financing activities generated $101,083 in the nine months from the following sources:

We also reported stock-based compensation of $1,197,390 during the nine-month period from issuance of common stock and preferred stock as compensation for services performed by officers, directors, and contractors. On September 30, 2021, our cash position was $265,037. The sale of GKMP and iBud has reduced our net operating loss and negative cash flows, and our remaining operating subsidiary, PrestoCorp, is profitable. The overhead related to our status as a public company and our continuing efforts to acquire businesses that will supplement the operations of PrestoCorp will continue to generate consolidated losses from operations in the coming periods. Given our level of operations in the first nine months of 2021, we expect that additional funds will be required. In the remainder of 2021, we expect to generate additional capital primarily from issuances of stock as compensation for services.

Management is currently evaluating fund-raising alternatives including private placement of equity securities, a secondary public offering, and various debt instruments. We have filed documents with the Securities and Exchange Commission for an offering of securities under Regulation A, but the offering has not been approved and the amount that may be raised when the offering is approved is uncertain. In addition, key members of management have indicated a willingness to provide additional operating capital from time to time. We are also currently selling a portion of our investment securities to generate cash for operations, and we have restructured our intercompany loans to PrestoCorp with a monthly amortization schedule and required monthly payments that will begin to address ongoing operating expenses that must be paid in cash. Based on all these considerations, we believe we will have sufficient capital to operate the business for the next twelve months. It will be important for the Company to be successful in its efforts to raise capital 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.

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. We incurred net losses attributable to Cannabis Sativa, Inc. of $1,151,572 and $2,032,070, respectively, for the nine-month periods ended September 30, 2021 and 2020, and had an accumulated deficit of $79,060,409 as of September 30, 2021. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company’s ability to generate profitable operations in the future and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they are due.

COVID-19

COVID-19 has been declared a pandemic by the World Health Organization and the Centers for Disease Control and Prevention. Its rapid spread around the world and throughout the United States prompted many countries, including the United States, to institute restrictions on travel, public gatherings, and certain business operations. These restrictions significantly disrupted economic activity in the United States and Worldwide. The Delta variant of the COVID-19 virus now appears to be creating another wave of infections and concerns about the virus’ impact on business operations continues. To date, the disruption did not materially impact the Company’s financial statements. The pandemic has had a positive impact on the telehealth business. If the severity of the economic disruptions increase as the duration of the COVID-19 pandemic continues, the negative financial impact due to reduced demand could be significantly greater in future periods.

In addition, the economic disruptions caused by COVID-19 could also adversely impact the impairment risks for certain long-lived assets, equity method investments and goodwill. Management evaluated these impairment considerations and determined that no such impairments occurred through the date of this report.

Off Balance Sheet Arrangements

None

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not required.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

Conclusions of Management Regarding Effectiveness of Disclosure Controls and Procedures

At the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operations of the Company’s disclosure controls and procedures (as defined in Rule 13a – 15(e) and Rule 15d – 15(e) under the Exchange Act). Based on that evaluation, the CEO and the CFO have concluded that as of the end of the period covered by this report, the Company’s disclosure controls and procedures were not effective as it was determined that there were material weaknesses affecting our disclosure controls and procedures.

Management of the Company believes that these material weaknesses are due to the small size of the company’s accounting staff. The small size of the Company’s accounting staff may prevent adequate controls in the future, such as segregation of duties, due to the cost/benefit of remediation. To mitigate the current limited resources and limited employees, we rely heavily on direct management oversight of transactions, along with the use of external legal and accounting professionals. As the Company grows, management expects to increase the number of employees, which will enable us to implement adequate segregation of duties within the internal control framework.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during the quarter ended September 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings. 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.

Item 1A. Risk Factors. Not required.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

During the fiscal quarter ended September 30, 2021, the board of directors issued 442,711 shares of unregistered common stock, and 78,126 shares of unregistered preferred stock to seven persons/entities in exchange for services rendered to the Company. These unregistered shares were in addition to an aggregate of 127,318 common shares that were registered for resale on Form S-8. The unregistered shares were valued at the closing price of the shares in the OTCQB Market on the date the shares became issuable which $0.48 per share. The Company also issued 127,994 shares of common stock on conversion of 127,994 shares of preferred stock. The issuances of the unregistered shares were exempt from the registration requirements of Section 5 of the Securities Act of 1933 pursuant to Section 4(2) of the Act since the recipients of the shares were persons closely associated with the Company and/or the issuance of the shares did not involve any public offering.

Item 3. Defaults Upon Senior Securities. None.

Item 4. Mine Safety Disclosures. Not applicable.

Item 5. Other Information. None.

Item 6. Exhibits. The following documents are included as exhibits to this report:

(a) Exhibits

SIGNATURES

Pursuant to the requirements 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.

Cannabis Sativa, Inc.

Date: November 15, 2021