UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | |
| For the quarterly period ended: August 31, 2022 |
| or |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | |
For the transition period from: _____________ to _____________ Commission File Number: 000-56250 |
MJ Harvest, Inc.
(Exact name of registrant as specified in its charter)
| Nevada | | 82-3400471 |
| (State or Other Jurisdiction | | (I.R.S. Employer |
| of Incorporation) | | Identification No.) |
9205 W. Russell Road, Suite 240, Las Vegas, Nevada 89148-1425
(Address of Principal Executive Office) (Zip Code)
(954) 519-3115
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered. |
| None | | |
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 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.
| Large accelerated filer | ☐ | | | Accelerated filer | ☐ | |
| Non-accelerated filer | ☒ | | | Smaller reporting company | ☒ | |
| Emerging growth company | ☒ | | | | | |
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 August 31, 2022 is 44,854,737
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 differences 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; inflation, the war in Ukraine, supply chain slowdowns, reoccurring Covid-19 outbreaks both nationally and internationally, particularly in China, and worldwide political stability and economic growth. The words “believe,” “expect,” “anticipate,” “hope,” “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
Three Months Ended August 31, 2022 compared with the Three Months Ended August 31, 2021
The narrative comparison of results of operations for the three-month periods ended August 31, 2022 and 2021, is based on the following table.
| | | August 31, 2022 | | August 31, 2021 |
| REVENUE | | $ | 44,718 | | | $ | 74,685 | |
| COST OF REVENUE | | | 83,071 | | | | 20,129 | |
| Cost of revenue as a % of total revenue | | | 186 | % | | | 27 | % |
| Gross Profit (Loss) | | | (38,353 | ) | | | 54,556 | |
| Gross profit as a % of revenue | | | (86 | %) | | | 73 | % |
| OPERATING EXPENSES | | | | | | | | |
| Officer and director compensation | | | 95,000 | | | | 135,000 | |
| General and administrative | | | 187,770 | | | | 26,354 | |
| Professional fees and contract services | | | 61,517 | | | | 74,893 | |
| Advertising and promotion | | | 3,117 | | | | 279,857 | |
| Total operating expenses | | | 347,404 | | | | 516,104 | |
| NET LOSS FROM OPERATIONS | | | (385,757 | ) | | | (461,548 | ) |
Revenues in the quarter ended August 31, 2022 decreased when compared to the same period in 2021. The decrease is largely attributable to an intensified effort to bring our Colorado and California facilities online. We do not anticipate that the short-term decrease in sales will continue for long, as sales ramp up in our Colorado and California facilities, and we expect to see an increase in sales of farm implements and plant nutrients in the fiscal year ended May 31, 2023. In this quarter, the Company generated $38,652 in sales of cannabis products at our Colorado facility. The Colorado facility was newly opened in our previous fiscal fourth quarter and was in the very early stage of commencing sales activities. We expect a slow ramp up of sales of cannabis products through the remainder of calendar year 2022. The Company generated $5,316 in sales of cannabis products at our California facility, with the first sales occurring in August 2022.
Cost of revenues as a percentage of sales increased in the quarter ended August 31, 2022, when compared with the same period in 2021. The increase is attributable to the costs incurred in our Colorado and California operations. In the three months ended August 31, 2022, we incurred operating costs associated with setting up and documenting our manufacturing processes and producing test batches of products to verify our systems were generating expected results at our Colorado and California facilities. During this phase, we did not produce significant quantities of product for resale. The production expenses of the test batches were, however, recorded as manufacturing costs. We expect margins to improve on our cannabis product lines in the coming periods as our manufacturing processes are standardized and our need to run test batches and adjust processes decreases.
Our General and Administrative costs (“G&A”) increased in the quarter ended August 31, 2022, compared with the same period in the prior year. The increase in G&A costs were primarily due to our decision to further develop our cannabis business through acquisition of the Colorado and California facilities and the related costs of setting up geographically disbursed manufacturing operations. Our advertising and promotion costs decreased significantly when compared to the same reporting period in the previous year.
Net loss from operations decreased in the reporting period ending August 31, 2022 compared with the same period in 2021. The decrease in the net loss is attributable to the factors identified above.
Liquidity and Capital Resources
Cash flow used by operating activities for the quarter ended August 31, 2022, was $559,756 compared with $164,942 in the same period in 2021. During the period, our total cash increased by $35,138 to $76,025. The increase in our cash position at August 31, 2022, is largely attributable to the cash requirements for starting up operations in Colorado and California. Cash to fund cash flow from operations was derived primarily from proceeds of notes payable.
We continue to seek potential acquisition candidates with a focus on acquiring additional operating companies with scale sufficient to support all aspects of the Company’s operations, including the public company infrastructure. The Company is currently heavily dependent on funding through advances from related parties, but no assurances can be given that such funding will continue to be available in future periods. Our historic operations have not been sufficient to support the existing infrastructure, much of which is required in order to maintain public company status.
We have maintained active operations as a manufacturer and distributor of the Debudder product line since 2018. We do not consider the Company to be a shell company as that term is defined in the Securities Act of 1933, as amended.
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 a net loss of $999,653 for the quarter ended August 31, 2022, bringing our accumulated deficit to $12,973,694 as of August 31, 2022. These factors raise substantial doubt about the Company’s ability to continue as a going concern. 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. It will be important for the Company to succeed in its efforts to raise capital in this manner to further its business plan in an aggressive manner. Raising additional capital may cause dilution to current shareholders. There are no assurances we can be successful in our efforts to raise working capital.
COVID-19
The effects of the continued outbreak of COVID-19 and related government responses have, and could continue to include, extended disruptions to supply chains and capital markets, reduced labor availability, and a prolonged reduction in economic activity. These effects could have a variety of adverse impacts to the Company, including our ability to operate. As of August 31, 2022, there were no material adverse impacts to our operations noted due to COVID-19.
The economic disruptions caused by COVID-19 could also adversely impact the impairment risks for certain long-lived assets. Management evaluated these impairment considerations and determined that no such impairments occurred as of August 31, 2022.
Off Balance Sheet Arrangements
None
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not required.
Item 4. 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”), who also serves as our Chief Finance and Accounting Officer, of the effectiveness of the design and operations of the Company’s disclosure controls and procedures (as defined in Rule 13a – 15(e) under the Exchange Act). Based on that evaluation, the CEO has 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 primarily 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 such 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 have been no changes during the quarter ended August 31, 2022 in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
The Company and PPK are plaintiffs in lawsuit against Country Cannabis, LLC of Yale, Oklahoma for trademark infringement for the use of the name “Country Cannabis”. The lawsuit was filed with the Payne County, Oklahoma Courts on February 7, 2022. The Company has motioned the Court for summary judgment in this matter and for legal fees. The motion for summary judgement is currently pending before the Court.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There were no unregistered sales of equity securities during the three-month period ending August 31, 2022.
Item 6. Exhibits.
The following documents are included as exhibits to this report:
(a) Exhibits
| Exhibit Number | SEC Reference Number | | Title of Document |
| 31.1 | 31 | | Section 302 Certification of Principal Executive Officer and Principal Financial Officer |
| 32.1 | 32 | | Section 1350 Certification of Principal Executive Officer and Principal Financial Officer |
| 101.INS | | | XBRL Instance Document |
| 101.SCH | | | XBRL Taxonomy Extension Schema |
| 101.CAL | | | XBRL Taxonomy Extension Calculation Linkbase |
| 101.DEF | | | XBRL Taxonomy Extension Definition Linkbase |
| 101.LAB | | | XBRL Taxonomy Extension Label Linkbase |
| 101.PRE | | | XBRL Taxonomy Extension Presentation Linkbase |
| | | | |
| 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, prospectus or other document to which it relates and is not incorporated or deemed to be incorporated by reference into any registration statement, prospectus or other document. |
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.
| | MJ Harvest, Inc. |
| | |
| Date: October 31, 2022 | By: /s/ Patrick Bilton |
| | |
| | |
| | Patrick Bilton, CEO |
MJ HARVEST, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
| | | | | |
| | | August 31, | | May 31, |
| ASSETS | | 2022 | | 2022 |
| CURRENT ASSETS: | | | | | | | | |
| Cash and cash equivalents | | $ | 76,025 | | | $ | 40,887 | |
| Inventory | | | 484,444 | | | | 197,059 | |
| Prepaids and other current assets | | | 48,326 | | | | 20,225 | |
| Total current assets | | | 608,795 | | | | 258,171 | |
| | | | | | | | | |
| Investments in equity securities, at cost | | | 3,101,666 | | | | 3,091,666 | |
| Equipment, net | | | 328,198 | | | | 36,636 | |
| Right to use asset | | | 3,736,702 | | | | 287,716 | |
| Cannabis licenses | | | 632,066 | | | | — | |
| Finite-lived intangible assets, net | | | 107,084 | | | | 110,834 | |
| Indefinite-lived intangible assets, net | | | 6,000 | | | | 6,000 | |
| Total Assets | | $ | 8,520,511 | | | $ | 3,791,023 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| CURRENT LIABILITIES: | | | | | | | | |
| Accounts payable and accrued liabilities | | $ | 477,196 | | | $ | 256,577 | |
| Accounts payable to related parties | | | 326,792 | | | | 278,207 | |
| Lease liability - current portion | | | 537,343 | | | | 46,761 | |
| Satellite note payable, net of discount | | | 432,590 | | | | — | |
| Diagonal convertible note payable | | | 103,750 | | | | — | |
| Convertible note payable, net of discount | | | 1,217,179 | | | | 107,586 | |
| Total current liabilities | | | 3,094,850 | | | | 689,131 | |
| | | | | | | | | |
| LONG-TERM LIABILITIES: | | | | | | | | |
| Common stock payable | | | — | | | | 112,857 | |
| Accounts payable - long-term | | | — | | | | 200,000 | |
| Lease liability - long term | | | 3,134,568 | | | | 247,366 | |
| Satellite note payable, net of discount – long term | | | 436,220 | | | | — | |
| Advances from related parties | | | — | | | | 1,821,482 | |
| Total long-term liabilities | | | 3,570,788 | | | | 2,381,705 | |
| Total Liabilities | | | 6,665,638 | | | | 3,070,836 | |
| | | | | | | | | |
| STOCKHOLDERS’ EQUITY: | | | | | | | | |
| Preferred stock, par value $0.0001, 5,000,000 shares authorized, no shares issued and outstanding | | | — | | | | — | |
| Common stock, $0.0001 par value per share, 100,000,000 shares authorized, 44,854,737 and 33,574,436 issued and outstanding, respectively | | | 4,485 | | | | 3,357 | |
| Additional paid-in capital | | | 14,824,082 | | | | 12,690,871 | |
| Accumulated deficit | | | (12,973,694 | ) | | | (11,974,041 | ) |
| Total stockholders’ equity | | | 1,854,873 | | | | 720,187 | |
| Total Liabilities and Stockholders’ Equity | | $ | 8,520,511 | | | $ | 3,791,023 | |
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
MJ HARVEST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the three months ended August 31, 2022 and 2021
| | | | | |
| | | 2022 | | 2021 |
| | | | | |
| REVENUE | | $ | 44,718 | | | $ | 74,685 | |
| COST OF REVENUE | | | 83,071 | | | | 20,129 | |
| Gross profit (loss) | | | (38,353 | ) | | | 54,556 | |
| | | | | | | | | |
| OPERATING EXPENSES: | | | | | | | | |
| Officer and director compensation | | | 95,000 | | | | 135,000 | |
| General and administrative | | | 187,770 | | | | 26,354 | |
| Professional fees and contract services | | | 61,517 | | | | 74,893 | |
| Advertising and promotion | | | 3,117 | | | | 279,857 | |
| Total operating expenses | | | 347,404 | | | | 516,104 | |
| | | | | | | | | |
| NET LOSS FROM OPERATIONS | | | (385,757 | ) | | | (461,548 | ) |
| | | | | | | | | |
| NON-OPERATING EXPENSES | | | | | | | | |
| Interest expense | | | 613,896 | | | | 478,646 | |
| | | | | | | | | |
| NET LOSS | | $ | (999,653 | ) | | $ | (940,194 | ) |
| | | | | | | | | |
| NET LOSS PER COMMON SHARE - Basic and diluted | | $ | (0.03 | ) | | $ | (0.04 | ) |
| | | | | | | | | |
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - Basic and diluted | | | 39,891,195 | | | | 26,359,821 | |
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
MJ HARVEST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited)
For the three months ended August 31, 2022 and 2021
| | | | | | | | | | | |
| | | | | | | Additional | | | | |
| | | Common Stock | | Paid-In | | Accumulated | | |
| | | Shares | | Amount | | Capital | | Deficit | | Total |
| | | | | | | | | | | |
| BALANCES, May 31, 2021 | | | 25,302,122 | | | $ | 2,530 | | | $ | 8,440,302 | | | $ | (9,098,257 | ) | | $ | (655,425 | ) |
| Stock issued for services | | | 175,000 | | | | 18 | | | | 80,232 | | | | — | | | | 80,250 | |
| Stock issued for investment in PPK | | | 5,972,222 | | | | 597 | | | | 1,791,069 | | | | — | | | | 1,791,666 | |
| Net loss | | | — | | | | — | | | | — | | | | (940,194 | ) | | | (940,194 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| BALANCES, August 31, 2021 | | | 31,449,344 | | | $ | 3,145 | | | $ | 10,311,603 | | | $ | (10,038,451 | ) | | $ | 276,297 | |
| | | | | | | | | | | | | | | | | | | | | |
| BALANCES, May 31, 2022 | | | 33,574,436 | | | $ | 3,357 | | | $ | 12,690,871 | | | $ | (11,974,041 | ) | | $ | 720,187 | |
| | | | | | | | | | | | | | | | | | | | | |
| Share issued for advances from related parties | | | 9,740,543 | | | | 974 | | | | 1,820,508 | | | | — | | | | 1,821,482 | |
| Shares issued for accounts payable – long term | | | 1,069,519 | | | | 107 | | | | 199,893 | | | | — | | | | 200,000 | |
| Shares issued for common stock payable | | | 470,239 | | | | 47 | | | | 112,810 | | | | — | | | | 112,857 | |
| Net loss | | | — | | | | — | | | | — | | | | (999,653 | ) | | | (999,653 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| BALANCES, August 31, 2022 | | | 44,854,737 | | | $ | 4,485 | | | $ | 14,824,082 | | | $ | (12,973,694 | ) | | $ | 1,854,873 | |
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
MJ HARVEST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the three months ended August 31, 2022 and 2021
| | | | | |
| | | 2022 | | 2021 |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | |
| Net loss for the period | | $ | (999,653 | ) | | $ | (940,194 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
| Depreciation and amortization | | | 7,788 | | | | 5,010 | |
| Share based compensation issued and to be issued | | | — | | | | 194,471 | |
| Amortization of note payable discount | | | 534,593 | | | | 450,000 | |
| Compensation paid with payable to related parties | | | 70,000 | | | | 70,000 | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | — | | | | (38,050 | ) |
| Prepaids and other current assets | | | (28,101 | ) | | | (11,467 | ) |
| Inventories | | | (287,385 | ) | | | 9,810 | |
| Accounts payable and other current liabilities | | | 149,417 | | | | 87,718 | |
| Accounts payable to related parties | | | (6,415 | ) | | | — | |
| Customer deposits | | | — | | | | 7,760 | |
| NET CASH USED IN OPERATING ACTIVITIES | | | (559,756 | ) | | | (164,942 | ) |
| | | | | | | | | |
| CASH FLOW FROM INVESTING ACTIVITES | | | | | | | | |
| Acquisition of investment in equity securities | | | (10,000 | ) | | | — | |
| Acquisition of equipment | | | (24,714 | ) | | | — | |
| NET CASH USED IN INVESTING ACTIVITIES | | | (34,714 | ) | | | — | |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
| Proceeds from Diagonal convertible notes payable | | | 103,750 | | | | — | |
| Proceeds from SMC convertible notes payable | | | 575,000 | | | | — | |
| Proceeds from advances from related parties | | | | | | | 64,000 | |
| Payments on advances from related parties | | | (15,000 | ) | | | — | |
| Principal payments on SMC convertible note payable – related party | | | (34,142 | ) | | | — | |
| NET CASH PROVIDED BY FINANCING ACTIVITIES | | | 629,608 | | | | 64,000 | |
| | | | | | | | | |
| NET CHANGE IN CASH AND CASH EQUIVALENTS | | | 35,138 | | | | (100,942 | ) |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | | | 40,887 | | | | 123,319 | |
| | | | | | | | | |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | | $ | 76,025 | | | $ | 22,377 | |
| | | | | | | | | |
| NON-CASH FINANCING AND INVESTING ACTIVITIES: | | | | | | | | |
| Shares issued for investment in PPK | | $ | — | | | $ | 1,791,666 | |
| Share issued for advances from related parties | | | 1,821,482 | | | | — | |
| Shares issued for accounts payable – long term | | | 200,000 | | | | — | |
| Shares issued for common stock payable | | | 112,857 | | | | — | |
| Right to use asset acquired with lease liability | | | 3,505,897 | | | | — | |
| License agreement acquired with Satellite note payable | | | 632,066 | | | | — | |
| Equipment acquired with Satellite note payable | | | 270,886 | | | | — | |
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
MJ HARVEST, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
MJ Harvest, Inc. (the “Company”), develops, acquires, and distributes agricultural and horticultural tools and implements for sale primarily to growers and operators in the hemp and cannabis retail industry. The Company owns 100% of G4 Products LLC, (“G4”) which owns intellectual property for a patented manual Debudder product line marketed under the Original 420 Brand as the Debudder Bucket Lid and Edge (“Debudder”). The Company also owns 100% of AgroExports LLC (“Agro”) which serves as the domestic and international distribution arm for sales of agricultural and horticultural tools and implements. The Company operates a sales portal website, www.procannagro.com, for online sales of its products.
In 2019, the Company formed AgroExports.CA ULC (“Agro Canada”), a wholly owned Canadian subsidiary in order to facilitate online payments from sales in Canada. Sales in Canada are currently serviced through a fulfillment center in Toronto.
In the year ended May 31, 2021, the Company expanded its focus to include a minority investment interest in PPK Investment Group, Inc. (“PPK”), a vertically integrated cannabis company in Oklahoma that operates as a grower, harvester, processor, manufacturer and distributor of the Country Cannabis Brand of cannabis products. The investment in PPK represents a shift in focus from an agricultural implements-based business to a broader cannabis industry focus. The Company has continued to expand its cannabis focus in the current year with new investments in WDSY LLC and BLIP Holdings LLC, owners of the Weedsy and BLVK brands, respectively.
In the year ending May 31, 2022, the Company began operations in Colorado under a wholly-owned Colorado corporation, Country Cannabis, Inc. (“CCCO”). CCCO is in the process of acquiring cannabis licenses for the manufacture and distribution of products containing THC and/or THC derivatives. Pending transfer of the licenses, the Company is operating the Colorado facility pursuant to a license agreement with the current owner of the facility.
On July 18, 2022, the Company acquired manufacturing equipment and two cannabis licenses for a cannabis manufacturing and distribution business in Cathedral City, California, CCCA. CCCA is in the process of acquiring cannabis licenses for the manufacture and distribution of products containing THC and/or THC derivatives. Pending transfer of the licenses, the Company is operating the California facility pursuant to a license agreement with the current owner of the facility
Basis of Presentation and Consolidation
The Company’s fiscal year end is May 31. Our unaudited financial statements have been prepared by the Company in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company’s management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair statement of the interim financial statements have been included. Operating results for the three-month period ended August 31, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending May 31, 2023.
For further information refer to the financial statements and footnotes thereto in the Company’s audited financial statements for the year ended May 31, 2022 in the Form 10-K as filed with the Securities and Exchange Commission.
The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries Agro, G4, Agro Canada, and CCCO/CCCA. All subsidiaries were wholly owned in the periods presented. All intercompany transactions have been eliminated.
Going Concern
The Company has an accumulated deficit as of August 31, 2022 of $12,973,694 and negative working capital of $2,486,055. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to generate profitable operations in the future and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
Management intends to finance operating costs over the next twelve months with cash flows from operations, private placement or public offering of common stock or debt instruments, and when necessary, advances from directors and officers. There can be no assurance that we will be successful to procure necessary financing. The accompanying financial statements do not include any adjustments that might be required should the Company be unable to continue as a going concern.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Share based compensation, impairment of long-lived assets, fair value of acquired assets, of intangible assets, and income taxes are subject to estimates. Actual results could differ from those estimates.
Reclassifications
Certain prior period amounts have been reclassified to conform with the current period presentation.
New Accounting Standards
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06 Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The update is to address issues identified as a result of the complexity associated with applying generally accepted accounting principles for certain financial instruments with characteristics of liabilities and equity. The update is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years and with early adoption permitted. The Company implemented the update early on June 1, 2022 with no impact to its consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires entities to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 2014-09, Revenue from Contracts with Customers (Topic 606). The update will generally result in an entity recognizing contract assets and contract liabilities at amounts consistent with those recorded by the acquiree immediately before the acquisition date rather than at fair value. The update is effective on a prospective basis for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company will adopt the update as of June 1, 2023 and does not expect a significant impact to our consolidated financial statements or disclosures.
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
Revenue Recognition
The Company generates revenue based on sales of products and revenue is recognized when the Company satisfies its performance obligation by shipping products to our customers. Our products consist of agricultural tools and implements, soils, and soil additives used primarily in growing and harvesting hemp and marijuana. Shipments terms are FOB origination, and revenue is recognized when the product is delivered to the shipper by our fulfillment centers or, in the case of drop shipments of distributed products, when the products are shipped from the manufacturer. At the time the products are delivered to the shipper, no other performance obligations remain. Revenue is recognized in an amount that reflects the consideration that is received in exchange for the products shipped.
The Company accounts for shipping and handling activities as a fulfillment cost and include fees received for shipping and handling as part of the transaction price. Provision for sales incentives, discounts, and returns and allowances, if applicable, are accounted for as reductions of revenue in the period the related sales are recorded. Sales incentives, discounts and returns and allowances were not material in the periods presented in the accompanying consolidated financial statements. The Company had no warranty costs associated with the sales of its products in the periods presented in the accompanying consolidated statements of operations and no provision for warranty expenses has been included.
Inventory
Inventory consists of purchased products and is stated at the lower of cost or market, with cost being determined using the average cost method. Allowances for obsolete inventory are recognized when the inventory is determined to be unsalable through the normal course of business.
Investments
Equity securities are generally measured at fair value. Unrealized gains and losses for equity securities are included in earnings. If an equity security does not have a readily determinable fair value, the Company may elect to measure the security at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment in the same issuer. At the end of each reporting period, the Company reassesses whether an equity security without a readily determinable fair value qualifies to be measured at cost minus impairment, considers whether impairment indicators exist to evaluate whether the investment is impaired and, if so, records an impairment loss. Upon sale of an equity security, the realized gain or loss is recognized in earnings.
Accounting for Acquisitions
Business acquisitions are recorded using the acquisition method of accounting and, accordingly, the purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair value as of the date of acquisition. After the purchase price has been allocated, goodwill is recorded to the extent the total consideration paid for the acquisition, including the acquisition date fair value of contingent consideration, if any, exceeds the sum of the fair values of the separately identifiable acquired assets and assumed liabilities. Acquisition costs for business combinations are expensed when incurred.
Acquisitions not meeting the accounting criteria to be accounted for as a business combination are accounted for as an asset acquisition. An asset acquisition is recorded at its purchase price, inclusive of acquisition costs, which is allocated among the acquired assets and assumed liabilities based upon their relative fair values at the date of acquisition.
The operating results of an acquisition are included in the consolidated statements of operations from the date of acquisition.
The allocation of the purchase consideration for acquisitions can require extensive use of accounting estimates and judgments to allocate the purchase consideration to the assets acquired and liabilities assumed based on their respective fair values. Judgment is required in determining which valuation technique should be applied. Critical estimates in valuing certain identifiable assets include but are not limited to market comparables, expected long-term revenues; future expected operating expenses; cost of capital; assumed attrition rates; and discount rates.
Intangible Assets
Intangible asset amounts are initially recognized at the acquisition date at the fair values of the intangible assets acquired.
Finite-lived intangible assets are amortized over their useful lives. The carrying amounts of finite-lived intangible assets are evaluated for recoverability whenever events or changes in circumstances indicate that the Company may be unable to recover the asset’s carrying amount.
When there is no foreseeable limit on the period of time over which an intangible asset is expected to contribute to the cash flows of the Company, an intangible asset is determined to have an indefinite life. Indefinite-lived intangible assets are not amortized but tested for impairment annually or more frequently when indicators of impairment exist.
Determination of acquisition date fair values and intangible asset impairment tests require judgment. Significant judgments required to estimate the fair value of intangible assets include determining the appropriate valuation method, identifying market prices for similar type items, estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in estimates and assumptions or the occurrence of one or more confirming events in future periods could cause the actual results or outcomes to materially differ from such estimates.
Net Earnings (Loss) Per Share
Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares and dilutive common stock equivalents outstanding. During periods in which the Company incurs losses, common stock equivalents, if any, are not considered, as their effect would be anti-dilutive. For the three months ended August 31, 2022 and 2021, potentially dilutive common stock equivalents not included in the calculation of diluted earnings per share because they were anti-dilutive are as follows:
Schedule of Earnings Per Share
| | | | | |
| | | 2022 | | 2021 |
| Stock purchase warrants | | | 3,000,000 | | | | 3,000,000 | |
| Convertible notes | | | 14,258,492 | | | | — | |
| | | | 17,258,492 | | | | 3,000,000 | |
Share-Based Payments
All transactions in which goods or services are received for the issuance of shares of the Company’s common stock are accounted for based on the fair value of the common stock issued and recognized when the board of directors authorizes the issuance.
NOTE 2 – EQUIPMENT
Equipment consisted of the following at August 31, 2022 and May 31, 2022:
Schedule of equipment
| | | | | |
| | | August 31, | | May 31, |
| | 2022 | | 2022 |
| Equipment - production molds | | $ | 49,823 | | | $ | 25,109 | |
| Manufacturing equipment | | | 301,723 | | | | 30,837 | |
| Less: Accumulated amortization | | | (23,348 | ) | | | (19,310 | ) |
| Net Equipment | | $ | 328,198 | | | $ | 36,636 | |
Depreciation expense for the three months ended August 31, 2022 and August 31, 2021 were $4,038 and $1,260, respectively.
During the three month period ended August 31, 2022, the Company acquired manufacturing equipment with a value of $270,886 for its California operations. The acquisition was acquired with a note payable with Satellite Dip, LLC. (“Satellite”). See Note 4. At August 31, 2022, the equipment has not yet been placed in service and no depreciation has been recognized for the equipment
NOTE 3 - INTANGIBLE ASSETS
The Company’s intangible assets consist of both finite and indefinite lived assets. At August 31, 2022 and May 31, 2022, intangibles assets are:
Schedule of Finite-Lived Intangible Assets
| | | | | |
| | | August 31, | | May 31, |
| Intangibles | | 2022 | | 2022 |
| Finite lived intangibles | | | | | | | | |
| Patents | | $ | 250,000 | | | $ | 250,000 | |
| Less: impairment of patents | | | (100,000 | ) | | | (100,000 | ) |
| | | | 150,000 | | | | 150,000 | |
| Less: accumulated amortization | | | (42,916 | ) | | | (39,166 | ) |
| Patents, net | | | 107,084 | | | | 110,834 | |
| Total finite lived intangibles | | | 107,084 | | | | 110,834 | |
| | | | | | | | | |
| Indefinite lived intangibles | | | | | | | | |
| Domain names | | | 6,000 | | | | 6,000 | |
| Total intangibles | | $ | 113,084 | | | $ | 116,834 | |
Amortization expense for the three months ended August 31, 2022 and August 31, 2021 were $3,750 and $3,750, respectively. The patents are amortized over their useful lives of ten years. Amortization of intangibles is expected to be $15,000 for each of the next five years.
On May 28, 2021, the Company acquired the domain name, MJHI.com for $6,000. The new domain name matches the Company’s stock symbol and is likely to be easier for customers and other stakeholders to remember. The domain name is an indefinite lived intangible asset and will not be amortized.
See Note 10 regarding acquisition of cannabis licenses during the three months ending August 31, 2022.
NOTE 4 – INVESTMENTS
At August 31, 2022 and May 31, 2022, investments are:
Schedule of investments
| | | | | |
| | | August 31 | | May 31, |
| Investments | | 2022 | | 2022 |
| PPK Investment Group, Inc. | | $ | 2,791,666 | | | $ | 2,791,666 | |
| Satellite Dip, LLC | | | 10,000 | | | | — | |
| WDSY, LLC | | | 200,000 | | | | 200,000 | |
| BLIP Holdings, LLC | | | 100,000 | | | | 100,000 | |
| Total investments | | $ | 3,101,666 | | | $ | 3,091,666 | |
PPK
On March 24, 2021, the Company, as lender, closed a loan to PPK Investment Group, Inc. (“PPK”) in the form of a convertible note (“Note”) in the amount of $620,000. The convertible note bore interest at 6% per annum and was due on September 1, 2021. In accordance with its terms, the Company converted the Note on May 19, 2021 into a 6.2% interest in PPK. Upon conversion, accrued interest of $5,707 was forgiven.
Upon conversion, a Securities Purchase Agreement dated March 24, 2021 (the “PPK Agreement”) became effective and the Company acquired an additional 3.8% interest in PPK (10% in total) for payment of $380,000 by issuance of 1,520,000 shares of the Company’s restricted common stock. The total fair value of shares issued was $972,800 based on the closing price of the Company’s shares of $0.64. The Company determined that the fair value of the 3.8% interest on the conversion date was $380,000 which was the negotiated price between the two parties. Thus, the Company recorded an impairment expense of $592,800 on the conversion date.
On August 26, 2021, the Company acquired an additional 15% interest in PPK (25% ownership in total) pursuant to a Securities Purchase Agreement with an effective date of May 19, 2021 through issuance of 5,972,222 shares of restricted common stock valued at $1,791,666 based on the closing price of the Company’s common stock, which was $0.30 per share as of August 16, 2021, the date fixed by agreement for pricing the issuance of the shares. The additional 15% acquisition under the Securities Purchase Agreement called for payment of $930,000 in cash and $570,000 in stock, but by supplemental agreement, PPK agreed to accept payment for 15% in the form of all common stock of the Company.
The PPK Agreement includes a put option allowing PPK to put shares of the Company’s common stock received as part of the Company’s investment in PPK, back to the Company at $0.25 per share. The put option protects PPK against a drop in the market price of the Company’s common stock below a $0.25 per share. The put option may be exercised after six months from the date of each investment. No more than 5% of the total shares held by PPK can be put back to the Company in any calendar quarter. The put option had value of $nil and $nil at August 31, 2022 and May 31, 2022. The put option continues so long a PPK holds shares of MJHI that it received as part of MJHI’s investment in PPK.
The PPK Agreement gives the Company the right to increase its investment up to a 100% ownership interest in PPK, provided such increased ownership is in compliance with Oklahoma State cannabis licensing requirements. Terms of purchase for increased ownership of PPK will be similar to those as the initial acquisition with a combination of cash and shares of the Company’s common stock.
The Company, pursuant to the PPK Agreement, is also obligated to pay an earnout to PPK as follows:
| | ● | The Company is required to pay additional consideration to PPK for an earnout in the event the PPK business valuation at the end of a pre-determined look back period is greater than $10,000,000. For purposes of the earnout, the valuation will be based on three times earnings before interest, taxes, depreciation, and amortization (EBITDA). If EBITDA exceeds $3,333,333 in the twelve months immediately preceding the look back date of March 31, 2023, additional consideration will be owed to PPK under the earnout in an amount sufficient to equal the earnout valuation less $10,000,000 times the percentage of PPK then owned by the Company. Such additional consideration will be paid 62% in cash and 38% in shares of the Company’s common stock. No liability has been accrued for this potential obligation as the Company has assessed the probability of an obligation being incurred to be remote as of August 31, 2022. |
| | ● | The Company also entered into an employment agreement with Ralph Clinton Pyatt III (“Clinton Pyatt”), President of PPK, to continue his role as Chief Executive Officer and President of PPK business for a three-year term effective May 22, 2021. |
The Company also has an option to acquire the real estate that PPK uses in its operations. The real estate is currently under lease to PPK by an affiliated company owned by Clinton Pyatt, the President of PPK.
At August 31, 2022 and May 31, 2022, the Company has a payable due to PPK of $271,791 and $230,524, respectively. The balance is included in Accounts payable to related parties on the condensed consolidated balance sheets.
WDSY and BLIP
On October 8, 2021, the Company entered into two brand development agreements with WDSY, LLC (“WDSY”) and Blip Holdings, LLC (“BLIP”) for expansion of the WEEDSY and BLVK brands, respectively, into Oklahoma and South Dakota. Under the agreements, PPK will manufacture and distribute these brands in Oklahoma and South Dakota and will pay the respective companies 10% royalties on all net sales of the branded products in those territories.
On October 8, 2021, the Company acquired a 10% interest in WDSY in exchange for 377,358 shares of the Company’s common stock and a 10% interest in BLIP in exchange for 188,679 shares of the Company’s common stock. The shares to be issued were valued at the closing price of the common stock, $0.53 per share, on October 8, 2021. Additional shares may be due to WDSY and BLIP based on lookback valuations of both companies. The lookback valuations will be based on trailing twelve months sales for WDSY and trailing three-month sales for BLIP on the second anniversary of each agreement, or sooner if the agreements are terminated before the second anniversaries. At August 31, 2022, management has assessed the probability of a potential liability due under the lookback valuation provisions of WDSY and BLIP to be low and no stock payable was due. No liability has been accrued for this potential obligation as the Company has assessed the probability of an obligation being incurred to be remote as of August 31, 2022.
The Company evaluated its investment in PPK, WDSY and BLIP as of August 31, 2022 and identified no indicators of possible impairment on their carrying values.
Satellites Dip, LLC
On June 7, 2022, the Company purchased 1% membership units of Satellites Dip, LLC (“Satellites”) for $10,000. The Company has a note payable to Satellites for the purchase of a license and equipment. See Note 4.
NOTE 5 – NOTES PAYABLE
SMC Convertible Note Payable
On May 11, 2022, the Company entered into an agreement with SMC Cathedral City Holdings, LLC, a Delaware limited liability company (“SMC-CCH”) for the sale of Secured Convertible Promissory Note (the “Note”). The Note provides for an original issue discount of 35%, bears interest at the rate of 12%, and is due at maturity which is twelve months from the issue date of the Note or May 10, 2023. The Note is secured by all assets of the Company.
Any principal amount or interest on the Note that is not paid when due will bear interest at the lesser of 16% or the maximum amount permitted by law.
The principal amount of the Note and interest may be converted at any time following the issue date into fully paid and nonassessable shares of the Company’s common stock at a conversion price of $0.20 per share. The number of shares issuable upon conversion is limited to 4.99% of the outstanding shares at the time of conversion, unless waived by SMC-CCH upon 61 days prior written notice.
So long as any balance due on the Note remains outstanding, the Company has agreed to apply 50% of proceeds from issuance of debt or equity securities, conversion of outstanding warrants, issuance of securities pursuant to an equity line of credit, or the sale of assets, to reduce the outstanding balance of the Note.
Through May 31, 2022, the Company borrowed $2,317,198 under the note receiving $1,500,000 in cash, net of $817,198 for the original issue discount. During the three months ended August 31, 2022, the Company borrowed an additional $888,259 under the note receiving $575,000, net of $313,259 for the original issue discount. At August 31, 2022, the outstanding principal balance is $2,851,698 and unamortized discount is $1,634,519 for a net balance of $1,217,179. During the three months ended August 31, 2022, the Company recognized $70,942 in interest on the note and recognized $534,593 in for the amortization of the note discount. At August 31, 2022 and May 31, 2022, the accrued interest payable balance on the note is $83,852 and $12,910, respectively, which is included in accounts payable and accrued liabilities on the condensed consolidated balance sheet.
At May 31, 2022, the Company has a balance owing to Steve MacDonald, of $50,000 for advance of funds included in accounts payable – long term on the condensed consolidated balance sheets. The balance was satisfied with shares of the Company’s common stock during the three months ended August 31, 2022. See Note 7.
Diagonal Convertible Note Payable
On June 17, 2022, the Company entered into an agreement with 1800 Diagonal Lending, LLC (“Diagonal”) whereby the Company issued convertible note to Diagonal with a principal amount of $103,750. The note bears interest at 10% and has a term of one year when payment of principal and interest is due. After 180 days, the note is convertible into shares of the Company’s common stock the number of which determined by dividing the principal balance outstanding by 65% of the trading price of the Company’s stock on the date of the conversion.
Satellites Note Payable
On July 13, 2022, the Company entered into an unsecured promissory note with Satellites that had a stated principal balance of $1,000,000 in exchange for the Company acquiring a license agreement and equipment from Satellites. See Note 10. The note is non-interest bearing and has a term of 24 months. Monthly payments of $41,657 are due starting August 1, 2022. Because the note is non-interest bearing, the Company recorded a discount on the note of $97,048 using a discount rate of 10%. The discount is being amortized over the term of the note. Amortization of the discount was $7,525 during the three month period ended August 31, 2022. The Company made its first monthly payment of $41,657 (principal of $34,142 and interest of $7,525) on August 1, 2022.
NOTE 6 – RELATED PARTY TRANSACTIONS
In addition to related party transactions described in Notes 4 and 5, the Company had the following related party activity:
At May 31 2022, the Company had advances from, and costs of services provided by, related parties totaling $1,821,482. These amounts were classified as long-term liabilities and were settled with shares of the Company’s common stock in July 2022. See Note 7.
During three month period ended August 31, 2022 and 2021, the Company recognized expense of $41,291 and 112,641, respectively, for services performed by a company owned by the CFO. At August 31, 2022 and May 31, 2022, the Company had accounts payable to the company of $60,000 and $197,683, respectively. During the three month period ended August 31, 2022, the Company paid $150,000 in the form of shares of its common stock to reduce the amount of the accounts payable due to the CFO. See Note 7.
At August 31, 2022, the Company has a $55,000 payable to the president of the Company for accrued salary. The amount is included in accounts payable – related parties on the condensed consolidated balance sheets.
During the three month period ended August 31, 2021, the Company had the following activity in its related party advances balance:
Schedule of related party transactions
| | | Related Party Advances at | | Additions During the Three Months Ended August 31, 2021 | | Related Party Advances at |
| | | May 31, 2022 | | Advances | | Services | | August 31, 2022 |
| Related Parties | | | | | | | | | | | | | | | | |
| Patrick Bilton, CEO and Director | | | | | | | | | | | | | | | | |
| Cash Advances | | $ | 928,414 | | | $ | 64,000 | | | $ | — | | | $ | 992,414 | |
| Payable for services | | | 280,000 | | | | | | | | 70,000 | | | | 350,000 | |
| David Tobias, Director | | | 80,553 | | | | — | | | | — | | | | 80,553 | |
| Jerry Cornwell, Director | | | 29,015 | | | | — | | | | — | | | | 29,015 | |
| Total for related parties | | $ | 1,317,982 | | | $ | 64,000 | | | $ | 70,000 | | | $ | 1,451,982 | |
| | | | | | | | | | | | | | | | | |
NOTE 7 – SHARE CAPITAL
In the three-month period ended August 31, 2022, shares were issued for stock payable, conversion of advances from related parties and conversion of accounts payable in the amounts set forth in the following table.
Schedule of conversion accounts payable
| | | | | Value of Shares Issued for: |
| Three Months Ended August 31, 2022 | | Total Shares Issued | | Stock
Payable | | Conversion of Advances | | Conversion of Accounts Payable | | Total Value |
| Related Parties | | | | | | | | | | | | | | | | | | | | |
| David Tobias, Director | | | 477,779 | | | $ | 10,000 | | | $ | 81,553 | | | $ | — | | | $ | 91,553 | |
| Jerry Cornwell, Director | | | 155,158 | | | | — | | | | 29,015 | | | | — | | | | 29,015 | |
| Patrick Bilton, CEO | | | 9,149,272 | | | | — | | | | 1,710,914 | | | | — | | | | 1,710,914 | |
| Brad Herr, CFO | | | 864,638 | | | | 15,000 | | | | — | | | | 150,000 | | | | 165,000 | |
| Jason Roth, Director | | | 41,667 | | | | 10,000 | | | | — | | | | — | | | | 10,000 | |
| Rich Turasky, Director | | | 41,667 | | | | 10,000 | | | | — | | | | — | | | | 10,000 | |
| Randy Lanier, Director | | | 220,238 | | | | 52,857 | | | | — | | | | — | | | | 52,857 | |
| Total for related parties | | | 10,950,419 | | | | 97,857 | | | | 1,821,482 | | | | 150,000 | | | | 2,069,339 | |
| Unrelated Parties | | | 329,882 | | | | 15,000 | | | | — | | | | 50,000 | | | | 65,000 | |
| Aggregate Totals August 31, 2022 | | | 11,280,301 | | | $ | 112,857 | | | $ | 1,821,482 | | | $ | 200,000 | | | $ | 2,134,339 | |
Prior to the three months ended August 31, 2022, the Company paid its directors and certain consultants in shares of the Company’s common stock for payment of services rendered. Effective June 1, 2022, the Company determined that it would no longer pay in shares of the Company’s common stock in anticipation of its potential merger with Cannabis Sativa, Inc. (see Note 10).
In the three-month period ended August 31, 2021, shares were issued for services and investment in the amounts set forth in the following table. The Company had an aggregate of $214,221 of common stock payable as of August 31, 2021 which is comprised of the following:
Schedule of aggregate common stock payable
| Three Months Ended August 31, 2021 | | Shares issued for Services & Other | | Shares issuable for Services & Other |
| | | Shares | | Value | | Shares | | Value |
| Related Parties | | | | | | | | | | | | | | | | |
| David Tobias, Director | | | — | | | $ | — | | | | 29,377 | | | $ | 10,000 | |
| Jerry Cornwell, Director | | | — | | | | — | | | | 29,377 | | | | 10,000 | |
| Brad Herr, CFO | | | — | | | | — | | | | 44,066 | | | | 15,000 | |
| Total for related parties | | | — | | | | — | | | | 102,820 | | | | 35,000 | |
| Unrelated Parties | | | | | | | | | | | | | | | | |
| Services | | | 175,000 | | | | 80,250 | | | | 219,245 | | | | 79,221 | |
| Patent issuance | | | | | | | | | | | 400,000 | | | | 100,000 | |
| Investment in PPK | | | 5,972,222 | | | | 1,791,666 | | | | — | | | | — | |
| Aggregate Totals May 31, 2021 | | | 6,147,222 | | | $ | 1,871,916 | | | | 722,065 | | | $ | 214,221 | |
NOTE 8 – REVENUE
The Company product revenue is generated though sales of its Debudder products, produced by third parties and distributed by the Company. The Company’s customers, to which we extend trade credit terms, consist almost exclusively of domestic companies. The following table shows product sales for the three-month periods ended August 31, 2022 and 2021, along with customer concentration information for each period.
Schedule of revenues
| | | | | |
| | | Three months ended August 31, |
| | | 2022 | | 2021 |
| Debudder product revenues | | $ | 760 | | | $ | 82,754 | |
| Customer concentrations | | | | | | | | |
| Debudder sales | | | | | | | | |
| Customer A | | $ | — | | | $ | 42,320 | |
| Customer B | | | 532 | | | | — | |
| Totals | | $ | 532 | | | $ | 42,320 | |
| % of total revenues | | | 70 | % | | | 51 | % |
All sales were domestic in the three-month period ended August 31, 2022. All sales were domestic except for $168 in the three-month period ended August 31, 2021.
Sales of the Debudder product line were substantially reduced due to the focus of the company turning to getting the Colorado and California Cannabis facilities up and running, once these operations are fully up and running the company plans to resume advertising and sales of the product line. Total sales revenue earned during the three month period ended August 31, 2022 in Colorado and California was $43,958.
NOTE 9 – INVENTORY
Inventory consists of the following:
Schedule of inventory
| | | | | |
| | | August 31, 2022 | | May 31, 2022 |
| Debudder products | | $ | 24,753 | | | $ | 24,794 | |
| Raw material - biomass | | | 28,530 | | | | 21,868 | |
| Raw material - distillate | | | 31,203 | | | | 76,916 | |
| Finished goods | | | 399,958 | | | | 73,481 | |
| Total | | $ | 484,444 | | | $ | 197,059 | |
At August 31, 2022 and May 31, 2022, raw material – biomass is on consignment from a third-party company with which the Company has a license agreement. Under the agreement, the Company obtains the third party from which produces the cannabis products. The third party sells the product and reimburses the Company for manufacturing costs. The third party pays the Company 85% of net profits after reimbursement. The Company absorbs all losses from sale of the products. During the three month period ended August 31, 2022, due to the start up nature of the manufacturing, no net revenues have been earned on these products.
NOTE 10 – ACQUISITIONS AND PROPOSED MERGER
Acquisition of License Agreements and Equipment
On July 18, 2022, the Company acquired manufacturing equipment and two cannabis licenses for a cannabis manufacturing and distribution business located in Cathedral City, California. The Company paid $1,000,000 for the acquisition by issuance of an unsecured non-interest bearing note payable in 24 monthly installments. The Company is currently operating the California facility under a management services agreement pending transfer of the licenses into the Company’s name. The purchase price was $902,952 which consisted of a note payable with a $1,000,000 principal balance discounted $97,048. The purchase price was allocated to the equipment for $270,886 and the licenses for $632,066 based on their relative fair value.
Merger with Cannabis Sativa, Inc.
On August 8, 2022, the Company entered into an Agreement of Merger and Plan of Reorganization dated August 8, 2022 with Cannabis Sativa, Inc. (“CBDS”), to be effective on the first business day following approval of the merger by the shareholders of MJHI and CBDS. The merger agreement provides for the merger of MJHI with and into CBDS, with CBDS as the surviving entity. Under the agreement, the Company’s shareholders will receive 2.7 shares of CBDS common stock for each one share of the Company’s common stock held immediately prior to the merger. Following the merger, the shareholders of MJHI will hold approximately 72% of the total outstanding shares of common stock of the surviving company, and the shareholders of CBDS will hold approximately 28% of the total outstanding common shares of the surviving company.
NOTE 11 – LEASES
Colorado Lease: On January 1, 2022, the Company signed a lease for its office and facilities located in Denver, Colorado for a five year term. Monthly lease payments start at $6,000 and escalate to $7,293 in year five. Upon signing the lease, the Company recognized a lease liability and a right of use asset of $308,127 based on the two-year payment stream discounted using an estimated incremental borrowing rate of 10.0%. At August 31, 2022, the remaining lease term is 4.25 years. As of August 31, 2022, total future lease payments are as follows:
Future lease payments
| | | | |
| For the year ended May 31, | |
| Remaining 2023 | | $ | 55,500 | |
| 2024 | | | 77,175 | |
| 2025 | | | 81,033 | |
| 2026 | | | 85,085 | |
| 2027 | | | 51,052 | |
| Total | | | 349,845 | |
| Less imputed interest | | | (66,605 | ) |
| Net lease liability | | | 283,240 | |
| Current portion | | | (48,855 | ) |
| Long-term portion | | $ | 234,385 | |
For the three months ended August 31, 2022, rent expense of $19,715 was recognized for this lease.
California Lease: On July 14, 2022, the Company signed a lease for its office and facilities located in Cathedral City, California for a five year term. Monthly lease payments are $72,917. Upon signing the lease, the Company recognized a lease liability and a right of use asset of $3,505,897 based on the five-year payment stream discounted using an estimated incremental borrowing rate of 10.0%. At August 31, 2022, the remaining lease term is 4.8 years. As of August 31, 2022, total future lease payments are as follows:
| | | | | |
| For the year ended May 31, |
| Remaining 2023 | | $ | 802,087 | |
| 2024 | | | 875,004 | |
| 2025 | | | 875,004 | |
| 2026 | | | 875,004 | |
| 2027 and thereafter | | | 947,921 | |
| Total | | | 4,375,020 | |
| Less imputed interest | | | (986,349 | ) |
| Net lease liability | | | 3,388,671 | |
| Current portion | | | (488,488 | ) |
| Long-term portion | | $ | 2,900,183 | |
For the three months ended August 31, 2022, rent expense of $72,917 was recognized for this lease. The lessor of the property is SMC Cathedral City Holdings, LLC, a company with which the Company has a convertible note payable due (See Note 5).
NOTE 12 – IMPACT OF COVID-19
In March 2020, COVID-19 was 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. As of November 30, 2021 and through the date of filing of this Form 10-Q, the disruption did not materially impact the Company’s financial statements.
The effects of the continued outbreak of COVID-19 and related government responses could include extended disruptions to supply chains and capital markets, reduced labor availability and a prolonged reduction in economic activity. These effects could have a variety of adverse impacts to the Company, including our ability to operate. As of August 31, 2022 there were no material adverse impacts to the Company’s operations due to COVID-19.
The economic disruptions caused by COVID-19 could also adversely impact the impairment risks for certain long-lived assets. Management evaluated these impairment considerations and determined that no such impairments occurred as of August 31, 2022 or through the date of filing this Form 10-Q.
NOTE 13 – COMMITMENTS AND CONTINGENCIES
See Notes 4 and 11 for commitments related to royalties, earn-out provisions, and leases.
The Company and PPK are plaintiffs in lawsuit against Country Cannabis, LLC of Yale, Oklahoma for trademark infringement for the use of the name “Country Cannabis”. The lawsuit was filed with the Payne County, Oklahoma Courts on February 7, 2022. The Company has motioned the Court for summary judgment in this matter and for legal fees. The motion for summary judgement is currently pending before the Court. As of August 31, 2022, management believes it will be successful in the matter however is unable to estimate amounts, if any, they could receive in the final judgment.
F-18
