The following discussion of our financial condition and results of operations
should be read in conjunction with the financial statements and related notes
included elsewhere in this report and our Annual Report on Form 10-K for the
year ended December 31, 2020. Certain statements in this discussion and
elsewhere in this report constitute forward-looking statements. See "Cautionary
Statement Regarding Forward Looking Information'' elsewhere in this report.
Because this discussion involves risk and uncertainties, our actual results may
differ materially from those anticipated in these forward-looking statements.
Overview
We own and operate CNP Operating, a leading CBD manufacturer vertically
integrated with a 360 degree approach to the processing of high quality CBD
products designed for growers, pharmaceutical, wellness providers, and
retailers' needs, and a cannabis industry focused sponsored content and
marketing business, or the CFN Business. Our ongoing operations currently
consist primarily of CNP Operating and the CFN Business and we will continue to
pursue strategic transactions and opportunities. We are currently in the
process of launching an e-commerce network focused on the sale of general
wellness CBD products.
CNP Operating provides toll processing services which includes extraction,
distillation, remediation, isolation and chromatography. CNP Operating has a
professional, organized and dedicated team with 30 years of combined experience.
CNP Operating's state of the art facility, ISO compliant, has 30,000 square feet
filled with proprietary technology distillation equipment, in house lab testing,
distribution warehouse and white labelling product formulation and design.
The CFN Business generates revenue through sponsored content, including
articles, press releases, videos, podcasts, advertisements and other media,
email advertisements and other marketing campaigns run on behalf of public and
private companies in the cannabis industry, helping them reach accredited,
retail and institutional investors. Most revenue is generated through contracts
involving a monthly cash payment.
The CFN Business' primary expenses come from advertising on platforms like
Twitter and Facebook and from employee salaries and contractor fees. The CFN
Business' content is primarily produced by a team of freelance writers and video
content is produced through various vendors. The CFN Business also incurs
hosting and development costs associated with maintaining and improving its
website, web applications, and mobile applications. The CFN Business operates
several media platforms, including CannabisFN.com, the CannabisFN iOS app, the
CFN Media YouTube channel, the CFN Media podcast, and other venues. These
properties are designed to educate and inform investors interested in the
cannabis industry, as well as provide a platform for the clients of the CFN
Business to reach investors. The CFN Business distributes content across
numerous online platforms, including the CannabisFN.com website, press releases,
financial news syndicates, search engines, YouTube, iTunes, Twitter, Instagram,
Facebook, LinkedIn, and others.
The CFN Business targets the legal cannabis industry. According to Grand View
Research, the global cannabis industry is expected to reach $146.4 billion by
2025, driven by the legalization of medical and adult-use cannabis across a
growing number of jurisdictions. According to the Marijuana Index, there are
approximately 400 public companies involved in the cannabis industry, which
represents the primary target market of the CFN Business. The CFN Business'
services are designed to help private companies prepare to go public and public
companies grow their shareholder base through sponsored content and marketing
outreach. The success of the CFN Business depends on the legal status of
cannabis, investor demand for cannabis investments, and numerous other external
factors.
The CFN Business competes with other public relations firms for clients, as well
as online publishers for investors. Public relations competition includes
investor awareness firms like Stockhouse Publishing, Catalyst Xchange,
Stonebridge Partners and Midan Ventures. Online publisher competition includes
firms like New Cannabis Ventures, Leafly and High Times. The CFN Business is
regulated by rules established by the SEC, FINRA, and certain federal and state
cannabis regulations.
On August 23, 2021, the Company entered into securities purchase agreements with
CNP Operating and the Owners, whereby the Company acquired 100% of CNP Operating
from the Owners in exchange for an aggregate of 354 million shares of the
Company's common stock. On August 25, 2021 the transaction was closed and CNP
Operating became a wholly owned subsidiary of the Company.
Our corporate website is: www.cfnenterprisesinc.com, the contents of which are
not part of this quarterly report.
Our Common Stock is quoted on the OTCQB Marketplace under the symbol "CNFN."
--------------------------------------------------------------------------------
19
--------------------------------------------------------------------------------
Results of Operations for the Three Months Ended September 30, 2021 and 2020
The following are the results of our operations for the three months ended
September 30, 2021 as compared to the three months ended September 30, 2020:
For the Three Months Ended
September 30, September 30,
2021 2020 Change
Net revenues $948,254 $154,369 $837,198
Cost of revenue 730,186 128,885 599,161
Gross profit 218,068 25,484 238,037
Operating expenses:
Selling, general and administrative 847,888 307,069 540,819
Total operating expenses 847,888 307,069 540,819
Loss from operations (629,820) (281,585) (348,235)
Other income (expense):
Loss on extinguishment of debt - (30,069) (30,069)
SBA PPP loan forgiveness 263,000 10,000 253,000
Unrealized gain on investments 23,341 - 5,595
Interest expense (23,055) (13,560) (8,253)
Interest income 2 2 (2)
Total other income (expense) 263,288 (13,027) (296,915)
Net loss before provision for income taxes (366,532) (315,212) (51,320)
Provision for income taxes - - -
Net loss $(366,532) $(315,212) $(51,320)
Net Revenues
The Company's revenues are generated from the sale of promotional service
packages to customers ranging from 3 to 6 months. The Company offers different
packages tailored to the type and stage of the potential customer, such as
public companies looking to increase their shareholder base, as well as private
companies potentially looking to go public and attract capital and publicity.
During the three months ended September 30, 2021, the Company started four new
campaigns, compared with five during the same period in 2020. These campaigns
have a value of $89,500 which will be recognized as revenue over the next three
to six months. In 2020, the cumulative value of campaigns begun during the same
period was $117,500 with much of the revenue recognized during the first quarter
of 2020 attributable to the final stages of campaigns started in previous
quarters.
The Company's subsidiary CNP Operating generated revenue of $780,000 from the
sale of products produced from hemp material and manufactured into CBD
distillate.
Cost of Revenue
The costs of revenue consist primarily of labor, fees paid for production of
content for clients and the costs of placement of the content on various
platforms. In 2021, the contracts required more production services and related
labor than the contracts in 2020. As a result, the cost of revenue in 2021 was
higher as a percentage of the revenue recognized during the quarter.
The Company's cost of revenue for the three months ended September 30, 2021 were
higher than those in the corresponding three months in 2020 due largely to the
acquisition of CNP Operating which represented approximately $635,000 of cost of
revenue which primarily represents the cost of hemp material, manufacturing
material such as solvent, fuel and equipment depreciation.
Operating Expenses
The Company's operating expenses for the three months ended September 30, 2021
were higher than those in the corresponding three months in 2020 due largely to
the acquisition of CNP Operating which represented approximately $500,000 of
additional general and administrative expenses representing wages.
--------------------------------------------------------------------------------
20
--------------------------------------------------------------------------------
Other Income/Expense
Other income increased during the three months ended September 30, 2021 due to
the forgiveness of the SBA PPP loan. In addition, the investments received by
East West for services were marked to market and resulted in an unrealized loss
for the period. The Company did not have a similar loss during the three months
ended September 30, 2020.
Results of Operations for the nine Months Ended September 30, 2021 and 2020
The following are the results of our operations for the nine months ended
September 30, 2021 as compared to the nine months ended September 30, 2020:
For the Nine Months Ended
September 30, September 30,
2021 2020 Change
Net revenues $1,451,230 $349,071 $1,102,159
Cost of revenue 949,170 414,154 535,016
Gross profit (loss) 502,060 (65,083) 567,143
Operating expenses:
Selling, general and administrative 1,551,790 906,739 645,051
Total operating expenses 1551,790 906,739 645,051
Loss from operations (1,049,730) (971,822) (77,908)
Other income (expense):
Loss on extinguishment of debt (172,500) (30,069) (42,431)
Unrealized gain on investments 31,761 - 31,761
SBA PPP loan forgiveness 263,000 10,000 253,000
Interest expense (53,723) (38,055) (15,668)
Interest income 9 17 (8)
Total other income (expense) 68,547 (58,107) 126,654
Net loss before provision for income taxes (981,183) (1,029,929) 48,746
Provision for income taxes - - -
Net loss $(981,183) $(1,029,929) $48,746
Net Revenues
The Company's revenues are generated from the sale of promotional service
packages to customers ranging from 3 to 6 months. The Company offers different
packages tailored to the type and stage of the potential customer, such as
public companies looking to increase their shareholder base, as well as private
companies potentially looking to go public and attract capital and publicity.
During the nine months ended September 30, 2021, the Company started twenty-five
new campaigns, compared with eight during the same period in 2020. These
campaigns have a value of $651,000 which will be recognized as revenue over the
next three to six months. In 2020, the cumulative value of campaigns begun in
the first nine months was $167,500 with much of the revenue recognized during
the first quarter of 2020 attributable to the final stages of campaigns started
in previous quarters.
The Company's subsidiary CNP Operating generated revenue of $780,000 from the
sale of products produced from hemp material and manufactured into CBD
distillate.
Cost of Revenue
The costs of revenue consist primarily of labor, fees paid for production of
content for clients and the costs of placement of the content on various
platforms. In 2020, the contracts required more production services and related
labor than the contracts in 2021. As a result, the cost of revenue in 2021 was
lower as a percentage of the revenue recognized during the quarter.
The Company's cost of revenue for the nine months ended September 30, 2021 were
higher than those in the corresponding three months in 2020 due largely to the
acquisition of CNP Operating which represented approximately $635,000 of cost of
revenue which primarily represents the cost of hemp material, manufacturing
material such as solvent, fuel and equipment depreciation.
--------------------------------------------------------------------------------
21
--------------------------------------------------------------------------------
Operating Expenses
The Company's operating expenses for the nine months ended September 30, 2021
were higher than those in the corresponding three months in 2020 due largely to
the acquisition of CNP Operating which represented approximately $500,000 of
additional general and administrative expenses representing wages.
Other Income/Expense
Other expenses increased during the nine months ended September 30, 2021 due to
the loss on extinguishment of debt the Company incurred as it issued common
stock in payment of interest payable and extension of the maturity date on a
note payable. In addition, the investments received by East West for services
were marked to market and resulted in an unrealized gain of approximately
$23,000 and the SBA PPP loan forgiveness of $268,000. The Company did not have a
similar loss during the nine months ended September 30, 2020.
Liquidity, Capital Resources and Going Concern
On May 6, 2020, we received $263,000 in the form of a loan from the PPP, as well
$150,000 in proceeds from a loan with the SBA on June 24, 2020. We also received
a second PPP loan of $263,000 on February 25, 2021. Our plan to continue as a
going concern includes raising additional capital in the form of debt or equity,
growing the business acquired under the Emerging Growth Agreement and managing
and reducing operating and overhead costs. We cannot provide any assurance that
unforeseen circumstances that could occur at any time within the next twelve
months or thereafter will not increase the need for us to raise additional
capital on an immediate basis.
These matters, among others, raise substantial doubt about our ability to
continue as a going concern. These financial statements do not include any
adjustments to the amounts and classification of assets and liabilities that may
be necessary should we be unable to continue as a going concern.
The following is a summary of our cash flows from operating, investing and
financing activities:
Nine Months Ended
September 30, September 30,
2021 2020
Cash flows (used in) operating activities $(255,152) $(326,119)
Cash flows provided (used in) by investing activities $54,879 $(6,633)
Cash flows provided by financing activities
$221,894 $353,000
As of September 30, 2021, we had unrestricted cash of $201,737.
Net cash used in operating activities was $255,152 during the nine months ended
September 30, 2021, compared to cash used in operating activities of $326,119
during the same period in 2020.
Net cash provided by investing activities was $54,879 during the nine months
ended September 30, 2021 primarily from the acquisition of the CNP Operating
assets, compared to cash used in financing activities of $6,633 during the same
period in 2020.
Net cash provided by financing activities during the nine months ended September
30, 2021 of $221,894 was the result of proceeds from a second PPP loan of
$263,000, the sale of common stock for $10,000 and the exercise of $50,000 of
warrants. In 2020 net cash provided from investing activities related of
$353,000 was the result of proceeds from notes payable of $413,000, offset by
the payment of preferred stock interest of $45,000.
Description of Indebtedness
On September 10, 2019, the Company entered into a promissory note payable
whereby the Company borrowed $500,000 bearing interest at 8% per annum. Interest
on the note is payable quarterly on the first business day of December, March,
June and September commencing December 1, 2019. In May 2021, the Company and the
holder of the promissory note reached an agreement to extend the maturity date
of the note from September 30, 2022 to September 30, 2024. In connection with
the extension, the Company issued 2,000,000 shares of its common stock to the
noteholder in lieu of $40,000 of interest accrued and accruing on the promissory
note through December 31, 2021.
In connection with the promissory note on September 10, 2019, the Company issued
warrants to purchase 500,000 shares of the Company's common stock at an exercise
price of $0.10 per share. The warrants were exercised on June 30, 2021 and the
Company received $50,000.
--------------------------------------------------------------------------------
22
--------------------------------------------------------------------------------
The note was discounted by $17,624 allocated from the valuation of the warrants
issued. The discount recorded on the note is being amortized as interest expense
through the maturity date, which amounted to $4,427 and $4,425 for the nine
months ended September 30, 2021 and 2020, respectively. As of September 30,
2021, the net book value of the promissory note amounted to $494,498 including
the principal amount outstanding of $500,000 net of the remaining discount of
$5,502.
On May 6, 2020, the Company entered into a promissory note, or the Note, with
Pacific Western Bank, evidencing an unsecured loan, or the Loan, in the amount
of $263,000 made to the Company under the Paycheck Protection Program, or the
PPP.
The interest rate on the Loan is 1.0% per annum. The Note matures on May 6,
2022. The Company has applied for full forgiveness of the amounts due under the
Note and received forgiveness during the period ending September 30, 2021.
On June 24, 2020, the Company entered into a Loan Authorization and Agreement
with the SBA under which the Company borrowed $150,000 and issued to the SBA a
note and security agreement for the amount borrowed. Outstanding borrowings
accrue interest at a rate of 3.75% per annum, and installment payments,
including principal and interest, of $731 are due monthly and begin 12 months
from the date of the loan agreement. The balance of any remaining principal and
interest is due 30 years from the date of the loan agreement. As collateral for
the borrowing, the Company granted the SBA a security interest in substantially
all assets of the Company.
On February 25, 2021, the Company entered into a secondary promissory note, or
the Second PPP Note, with Pacific Western Bank, evidencing an unsecured loan, or
the Second Loan, in the amount of $263,000 made to the Company under the PPP.
Under the PPP, the proceeds of the Second Loan may be used to pay payroll and
make certain covered interest payments, lease payments and utility payments, or
the Qualifying Expenses. The Company intends to use the entire Second Loan
amount for Qualifying Expenses under the PPP. Under the terms of the CARES Act,
PPP loan recipients can be granted forgiveness for all or a portion of the loan
granted under the PPP, with such forgiveness to be determined, subject to
limitations, based on the use of the loan proceeds for payment of Qualifying
Expenses and the Company maintaining its payroll levels over certain required
thresholds under the PPP. The terms of any forgiveness also may be subject to
further requirements in any regulations and guidelines the SBA may adopt. No
assurance can be provided that the Company will obtain forgiveness of the Second
Loan in whole or in part.
The interest rate on the Second Loan is 1.0% per annum. The Second PPP Note
matures on February 25, 2023. On September 1, 2022 and on the first day of each
month thereafter until February 1, 2024, the Company must make monthly payments
of $14,727 under the Second Loan that is not forgiven in accordance with the
terms of the PPP and related accrued interest thereon. The Second PPP Note
contains events of default and other conditions customary for a note of this
type. As of June 30, 2021, the current portion of the Second Loan due within the
next 12 months amounted to $0. The Company plans to apply for full forgiveness
of the Second PPP Note.
On October 28, 2019, the Company's subsidiary CNP Operating entered into a
promissory note payable with Complete Business Solutions Group, Inc ("CBSG")
whereby the Company borrowed $3,050,000. Full payment of the borrowed amount is
over a three-year period. The first 12 consecutive monthly payments must equal a
minimum of $1 million. Monthly payment ranging month 13 to month 24 must equal a
minimum amount of no less than $1 million dollars. Monthly payments ranging
month 25 to month 36 must equal $1,050,000. The outstanding balance of the note
was $2,840,000 at September 30, 2021.
On September 30, 2019, the Company's subsidiary CNP Operating entered into a
promissory note payable with Eagle Six Consultants, Inc. ("Eagle") whereby the
Company borrowed $550,000 bearing interest at 16% per annum. Interest of $7,334
on the note is payable monthly on the seventh business day of the month
commencing October 7, 2019. A final payment equal to the total amount of
principal, interest, total funded and other charges are due and payable on or
before October 31, 2020. The outstanding balance of the note was $550,000 at
September 30, 2021.
On June 6, 2020, the Company's subsidiary CNP Operating entered into a second
promissory note payable with Eagle whereby the Company borrowed $300,000 bearing
interest at 18% per annum. Interest of $4,500 on the note is payable monthly on
the sixteenth business day of the month commencing July 16, 2020. A final
payment equal to the total amount of principal, interest, total funded and other
charges are due and payable on or before June 16, 2021. The outstanding balance
of the note was $300,000 September 30, 2021.
On May 12, 2021 the Company's subsidiary CNP Operating restructured the CSBG
note payable of $2,957,000, the Eagle #1 note payable of $550,000 and the Eagle
#2 note payable of $300,000 by entering into a payment and indemnification
agreement with the receivers/trustee of CBSG and Eagle. The receiver has agreed
that the balance of the outstanding amounts will be paid over the course of 24
months in equal payments of $158,625. Further, the Company shall pay $20,000 per
month toward the balance and Anthony Zingarelli ("Zingarelli") and Colorado Sky
Industrial Supply LLC ("CSIS"), agree to personally pay the sum of $138,625 per
month. Zingarelli is the only member of CNP Operating that signed a personal
guarantee on the loans and Zingarelli is the sole member of CSIS. Zingarelli and
CSIS has agreed to indemnify and hold the Company harmless from any and all
losses, liabilities and claims. If a loss is incurred by the Company with
respect to any claims, Zingarelli shall reimburse the Company for the amount of
any such loss. The Company has recorded the Zingarelli portion of the entire
obligations as an offset to member's contribution.
On January 10, 2020 the Company's subsidiary CNP Operating purchased a
distillation machine for $248,000. The company paid $108,000 and entered into a
promissory note with company owned by one of the partners. The original value
of the note was $140,000
--------------------------------------------------------------------------------
23
--------------------------------------------------------------------------------
and has no terms such as interest rate, maturity or monthly payments. Imputed
interested was not material. The outstanding balance of the note was $49,331 at
September 30, 2021.
On Nov 19, 2020 the Company's subsidiary CNP Operating purchased equipment for
$58,095 which was financed at zero interest rate. The monthly payments of $968
will be made for the next 60 months and mature on Nov 19, 2025. Imputed
interested was not material. The outstanding balance of the note was $49,331 at
September 30, 2021.
The Company's subsidiary CNP Operating also entered into a note payable during
2020 with the landlord for additional improvements to the facility in
Centennial, Colorado. The outstanding balance of this note was $11,708 at
December 31, 2020 and $29,981 as of September 30, 2021 because additional
improvements were completed during the period.
Obligations Under Preferred Stock
On June 20, 2019, existing debtholders with outstanding principal balances
totaling $500,000 were issued an aggregate of 500 shares of Series A Preferred
Stock, each with a stated value per share of $1,000, as conversion of $500,000
worth of outstanding promissory notes. The Series A Preferred Stock bears
interest at 12% per annum, and is convertible into our common stock at the
election of the holder at a conversion price per share to be mutually agreed
between us and the holder in the future, and be redeemable at our option
following the third year after issuance, without voting rights or a liquidation
preference.
On June 20, 2019, we issued 3,000 shares of Series B Preferred Stock, each with
a stated value of $1,000 per share, to Emerging Growth, LLC as part of the
Emerging Growth Agreement. The aggregate fair value of $687,000 was recorded as
part of the acquisition price of the net assets acquired from Emerging Growth,
LLC. The Series B Preferred Stock bears interest at 6% per annum and is
convertible into our common stock at the election of Emerging Growth, LLC at a
conversion price per share to be mutually agreed between us and Emerging Growth,
LLC in the future, without voting rights or a liquidation preference, except
with respect to accrued penalty interest.
Other outstanding obligations at September 30, 2021
Warrants
As of September 30, 2021, 4,687,500 shares of our common stock are issuable
pursuant to the exercise of warrants.
Options
As of September 30, 2021, 3,160,000 shares of our common stock are issuable
pursuant to the exercise of options.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
COVID-19
The outbreak of a strain of coronavirus (COVID-19) in the U.S. has had an
unfavorable impact on our business operations. Our main customer market
suffered its worst decline, decreasing our revenue. Mandatory closures of
businesses imposed by the federal, state and local governments to control the
spread of the virus disrupted the operations of our management, business and
finance teams. In addition, the COVID-19 outbreak has adversely affected the
U.S. economy and financial markets, which may result in a long-term economic
downturn that could negatively affect future performance. We took steps to
diversify our revenue model by creating our CBD ecommerce business which has
higher margins during the second half of 2020 and to acquire CNP Operating in
August 2021 and to reduce our costs. The extent to which COVID-19 will impact
our business and our consolidated financial results further will depend on
future developments which are highly uncertain and cannot be predicted at this
time, but may result in a material adverse impact on our business, results of
operations and financial condition.
© Edgar Online, source Glimpses