Form 10-K for CANNABIS SATIVA, INC.
15-Apr-2015
Annual Report
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the Financial Statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions. The Company believes there have been no significant changes during the year ended December 31, 2014.
Our accounting policies are more fully described in Note 1 of the audited financial statements. As discussed in Note 1, the preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about the future events that affect the amounts reported in the financial statements and the accompanying notes. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual differences could differ from these estimates under different assumptions or conditions. The Company believes that the following addresses its most critical accounting policies.
We recognize revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”). Under SAB 104, revenue is recognized at the point of passage to the customer of title and risk of loss, when there is persuasive evidence of an arrangement, the sales price is determinable, and collection of the resulting receivable is reasonably assured.
We account for income taxes in accordance with ASC Topic 740. Under ASC Topic 740, deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets will be reflected on the balance sheet when it is determined that it is more likely than not that the asset will be realized.
Plan of Operation
We are currently engaged in the research, development and licensing of specialized natural cannabis products, including cannabis formulas, edibles, topicals, strains, recipes and delivery systems. We plan to develop, produce and market these products via joint ventures with companies licensed under, and in full compliance with, state regulations applicable to cannabis businesses. We are also developing natural skin care and topical pain management formulas and fulfilling and shipping orders to both wholesale and retail customers. We believe that the natural skin care business is a growing sector and that we can gain increased market share. Subject to the availability of additional capital, we hope to expand in both the cannabis and the skin care markets by increased marketing efforts, specifically vending at major industry trade shows.
Our future success will be dependent on our ability to open new markets. We have been looking for trade shows that fit our parameters and we believe we can obtain sufficient debt financing to promote our products in this manner. Debt financing may require guarantees from current management who have indicated a willingness to continue to provide personal guarantees for initial planned expansion.
As we look to expand operations, we face many challenges including the current economic environment which has made it difficult for companies our size and with our financial position to obtain debt financing from banks. Consumers have been reducing expenditures and although we cannot yet determine if it will significantly affect our current operations, it is likely, if the economy continues in its current state that our business will be negatively affected. It will be important as we look to expand to be able to raise additional capital either through existing shareholders and management or through outside sources. Future capital raises will likely result in significant dilution to current investors and it is uncertain that we will be able to raise any new capital, particularly in light of the current economic conditions. Without additional capital, we will not be able to expand our own line of natural skin care products nor expand operations. This inability to expand will restrict our ability to be profitable and increase revenue.
Results of Continuing Operations
For the year ended December 31, 2014, we had minimal revenues attributable to continuing operations. As such, we incurred minimal costs of revenue for the year ended December 31, 2014.
Increasing the revenue will require additional marketing dollars. Currently, we have not focused on marketing and have relied on contacts and word of mouth.
The Company incurred a loss on impairment of the goodwill recorded as a result of the Kush transaction in the amount of $13,070,346. The impairment loss was calculated as the amount by which the carrying value of the asset exceeds implied fair value. Our test of goodwill impairment includes assessing qualitative factors and the use of judgment in evaluating economic conditions, industry and market conditions, cost factors, and entity-specific events, as well as overall financial performance.
Research and development expense for the year ended December 31, 2014 of $3,712. Research and development expense was related to product development and testing.
The Company had general and administrative expenses of $1,323,415 for the year ended December 31, 2014. General and administrative expenses primarily consisted of professional fees, consulting expenses and payroll expenses.
The Company generated a gain on sale of asset in the amount of $49,512 related to its sale of its hemp silk patent. The Company received proceeds of $50,000 related to the sale and the patent had a carrying value of $488 at the time of the sale.
Interest expense for the year ended December 31, 2014 totaled $26,497. Interest expense was comprised of $25,521 in imputed interest on amounts due to related parties and $975 in finance charges.
Seasonality and Cyclicality
Our natural skin care product line is anticipated to receive steady business throughout the year, but we project our busiest seasons in the winter and summer months. We would anticipate this trend to continue. This could be impacted by vending at major trade shows at other times.
Liquidity and Capital Resources
As of December 31, 2014 we had cash on hand of $25,994 and negative working capital of $2,286,975. Part of the reason for our working capital deficit is we had to borrow funds to cover our start-up costs and operating short-falls. We believe we will be able to meet ongoing expenses from revenues in the future and any short-falls will continue to be covered by management or existing shareholders. We are hopeful in future quarters that our working capital deficit will be reduced further as we continue to pay off debt but will be dependent on the economy improving and consumers starting to spend again.
We have had to rely on short-term funding from management or shareholders in the past and there can be no assurance that such persons will continue to provide funding in the future. During the year ended December 31, 2014, the Company received an aggregate of $324,950 in advances from shareholders’ and related parties. We will have to seek additional capital if we try and expand our operations through private labeling of products or by opening new salons and we may require additional capital in order to continue our operations if we are unable to obtain loans from our management or shareholders. We will probably seek additional equity financing if we seek additional capital but at this time, the exact amounts are unknown. Future expansion will be dependent on additional capital which most likely would cause dilution to current shareholders. As such, we do not anticipate that we have sufficient revenues to fund ongoing operations and that additional capital will be required in order to continue our operations. For the immediate needs of our current operation, we anticipate continuing to fund operations through management and shareholder loans. There can be no assurance that management and shareholders will continue to loan the Company funds.
As we move to expand our operations, we anticipate incurring new debt as we increase our marketing and production. We anticipate it will take approximately two to three years to pay off the debt associated with our opening and the purchase of equipment. Given current economic conditions of the economy in general, our estimates may have to be revised if consumers further reduce discretionary spending. If consumers reduce discretionary spending, we may delay further expansion until the economy is better.
MAPH Enterprises, LLC | (305) 414-0128 | 1501 Venera Ave, Coral Gables, FL 33146 | new@marijuanastocks.com
