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, 2021. 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 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
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."
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Results of Operations for the Three Months Ended September 30, 2022 and 2021
The following are the results of our operations for the three months ended
September 30, 2022 as compared to the three months ended September 30, 2021:
Three Months Ended
September 30,
2022 2021 Change
Net revenues $840,970 $948,254 $(107,284)
Cost of revenue 1,309,853 730,186 579,667
Gross profit (loss) (468,883) 218,068 (686,951)
Operating expenses:
Selling, general and administrative 513,200 847,888 (334,688)
Total operating expenses 513,200 847,888 (334,688)
Loss from operations (982,083) (629,820) (352,263)
Other income (expense):
Gain on property and equipment - - -
Loss on extinguishment of debt - - -
Unrealized loss on marketable securities (24,750) 23,341 (48,091)
SBA PPP loan forgiveness
- 263,000 (263,000)
Interest expense (115,257) (23,055) (92,202)
Interest income 43 2 41
Other income -
Total other income (expense), net (139,963) 263,288 (403,251)
Provision for income taxes - - -
Net loss $(1,122,046) $(366,532) $(755,514)
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, 2022, the Company realized $109,698
of campaign revenue compared to $168,254 in 2021. The decrease was primarily
due to a shift in efforts in 2022 to the CNP Operating business.
During the three months ended September 30, 2022, the Company's subsidiary CNP
Operating generated revenue of $0.7 million from the sale of products produced
from hemp material and manufactured into CBD distillate, compared to $0.8
million in 2021. The decrease was due to less inventory in 2022.
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 2022, the contracts required less production services and related
labor than the contracts in 2021. As a result, the cost of revenue in 2022 was
lower as a percentage of the revenue recognized during the quarter.
The Company's cost of revenue for the three months ended September 30, 2022 were
higher than those in the corresponding year in 2021 due largely to the
acquisition of CNP Operating which occurred in August 2021. Cost of revenue
related to CNP Operating was $1.3 million in the three months ended September
30, 2022 as compared to $0.6 million in 2021 from the date of its acquisition.
Cost of revenue 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, 2022
were higher than those in the corresponding three months in 2021 due largely to
the acquisition of CNP Operating in August 2021.
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Other Income/Expense
Other expenses during the three months ended September 30, 2022 were primarily
due to interest expense related to notes payable and amortization of debt
discount. The Company recorded a $24,750 unrealized loss on marketable
securities in 2022 an unrealized gain of $23,341 in 2021. In the three months
ended September 30, 2021, the Company recorded PPP forgiveness income of
$263,000.
Results of Operations for the Nine months Ended September 30, 2022 and 2021
The following are the results of our operations for the nine months ended
September 30, 2022 as compared to the nine months ended September 30, 2021:
Nine Months Ended
September 30,
2022 2021 Change
Net revenues $3,828,634 $1,451,230 $2,377,404
Cost of revenue 5,710,701 949,170 4,761,531
Gross profit (loss) (1,882,067) 502,060 (2,384,127)
Operating expenses:
Selling, general and administrative 1,788,872 1,551,790 237,082
Total operating expenses 1,788,872 1,551,790 237,082
Loss from operations (3,670,939) (1,049,730) (2,621,209)
Other income (expense):
Gain on property and equipment 87,933 - 87,933
Loss on extinguishment of debt - (172,500) 172,500
Unrealized loss on marketable securities (44,244) 31,761 (76,005)
SBA PPP loan forgiveness - 263,000 (263,000)
Interest expense (267,644) (53,723) (213,921)
Interest income 52 9 43
Other income 3,772 - 3,772
Total other income (expense), net (220,130) 68,547 (288,677)
Provision for income taxes - - -
Net loss $(3,891,069) $(981,183) $(2,909,886)
Net Revenues
During the nine months ended September 30, 2022, the Company realized $289,344
of campaign revenue compared to $471,230 in 2021. The decrease was primarily due
to a shift in efforts in 2022 to the CNP Operating business.
During the nine months ended September 30, 2022 and 2021, the Company's
subsidiary CNP Operating generated revenue of $3.5 million and $0.8 million,
respectively, 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 2022, the contracts required less production services and related
labor than the contracts in 2021. As a result, the cost of revenue in 2022 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, 2022 were
higher than those in the corresponding year in 2021 due largely to the
acquisition of CNP Operating in August 2021. CNP cost of revenue was
approximately $5.6 million in 2022, which primarily represents the cost of hemp
material, manufacturing material such as solvent, fuel and equipment
depreciation.
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Operating Expenses
The Company's operating expenses for the nine months ended September 30, 2022
were higher than those in the corresponding nine months in 2021 due largely to
the acquisition of CNP Operating in August 2021.
Other Income/Expense
Other expenses during the nine months ended September 30, 2022 were primarily
due to interest expense related to notes payable and amortization of debt
discount. In 2022, the Company recorded a $87,933 gain on the sale of property
and equipment. The Company also recorded a $44,244 unrealized loss on
marketable securities in 2022 an unrealized gain of $31,761 in 2021. In the
nine months ended September 30, 2021, the Company recorded PPP forgiveness
income of $263,000. In the nine months ended September 30, 2021, the Company
recorded a $172,500 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.
Liquidity, Capital Resources and Going Concern
Our plan to continue as a going concern includes raising additional capital in
the form of debt or equity, growing the CNP Operating business and 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 for the nine months ended September 30, 2022 and 2021:
Nine Months Ended
September 30,
2022 2021
Cash flows used in operating activities $(1,387,583) $(255,152)Net cash used in (provided by) investing activities $(127,588) $54,880
Cash flows provided by financing activities
$1,453,950 $221,894
As of September 30, 2022, we had unrestricted cash of $108,741.
Net cash used in operating activities was $1.4 million during the nine months
ended September 30, 2022, compared to cash used in operating activities of $0.3
million during the same period in 2021. The increase in cash used in operating
activities was primarily driven by the Company's higher net loss in 2022,
partially offset by non-cash charges.
Net cash used in investing activities during the nine months ended September 30,
2022 primarily consisted of the purchase of property and equipment. In 2021,
net cash provided by investing activities was due to CNP cash acquired.
Net cash provided by financing activities during the nine months ended September
30, 2022 was $1.4 million, including $1.2 million in proceeds from promissory
notes, proceeds from common stock of $210,000 and net advances from related
parties of $45,443, partially offset by note repayments of $34,493. 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 133,333 shares of its common stock to the
noteholder in lieu of $40,000 of interest accrued and accruing on the promissory
note through September 30, 2022.
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In connection with the promissory note on September 10, 2019, the Company issued
warrants to purchase 33,333 shares of the Company's common stock at an exercise
price of $0.10 per share. The warrants were exercised on September 30, 2021 and
the Company received $50,000.
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 $4,023 and $4,427 for the three
months ended September 30, 2022 and 2021, respectively. As of September 30,
2022, the net book value of the promissory note amounted to $500,000, including
the principal amount of $50,000 which was fully amortized.
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 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. The outstanding balance of the note was
$905,920 at September 30, 2022.
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. The outstanding
balance of the note was $302,489 at September 30, 2022.
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 prior 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 payments,
totaling $1,212,080 in the nine months ended September 30, 2022, as
contributions to additional paid in capital.
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 and has no terms such as interest rate, maturity or
monthly payments. Imputed interested was not material. The outstanding balance
of the note was $20,795 at September 30, 2022.
On November 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 $36,829 at
September 30, 2022.
On October 19, 2021, the Company borrowed $250,000 from a lender and issued a
promissory note for the repayment of the amount borrowed. The promissory note is
unsecured, has a maturity date of December 31, 2024 and all principal is due
upon maturity. The amount borrowed accrues interest at 12% per annum and accrued
interest is payable monthly commencing on December 1, 2021. The promissory note
contains customary events of default permitting acceleration of repayment for
nonpayment of amounts due, a bankruptcy related proceeding, breach of
representations or covenants, sale of substantially all assets, and change of
control.
On April 8, 2022, the Company entered into two promissory notes for aggregate
proceeds of $726,000. The promissory note is unsecured, has a maturity date of
April 30, 2024 and all principal is due upon maturity. The notes bear interest
at 18% per annum and accrued interest is payable monthly commencing on August 1,
2022. In connection with the notes, the Company granted 676,000 warrants to the
lenders with an exercise price of $1.00 per share. The warrants were valued
using the Black-Scholes model and determined a fair value of $302,537, which was
recorded as a debt discount and will be amortized to interest expense over the
life of the notes. During the nine months ended September 30, 2022, $70,400 of
the debt discount was amortized.
On May 11, 2022, the Company's subsidiary, CFN Real Estate II, LLC, entered
into a promissory note with a lender for the repayment of $500,000 in connection
with the $500,000 refinancing of the Company's property located in Wray,
Colorado. The company received the proceeds from the refinancing on May 16,
2022. Accrued interest at the rate of 12% is payable monthly commencing on June
15, 2022, and the principal of the promissory note is payable upon maturity on
June 15, 2024. The lender received a security interest in the property and
equipment contained therein as collateral for the promissory note. The
promissory note contains customary events of default and other conditions.
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Future scheduled maturities of long-term debt are as follows:
Year Ended
December 31,
2022 $1,374,241
2023 224,235
2024 1,249,650
2025 504,480
2026 3,153
Thereafter 140,173
$3,495,932The aggregate current portion of long-term debt as of September 30, 2022
amounted to $1,374,241, which represents the contractual principal payments due
during the remainder of 2022.
Obligations Under Preferred Stock
On June 20, 2019, existing debtholders 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, 2022
Warrants
As of September 30, 2022, 988,500 shares of our common stock are issuable
pursuant to the exercise of warrants.
Options
As of September 30, 2022, 0 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
In March 2020, the outbreak of COVID-19 caused by a novel strain of the
coronavirus was recognized as a pandemic by the World Health Organization, and
the outbreak has become increasingly widespread in the United States, including
each of the areas in which we operate. While to date we have not been required
to stop operating, COVID-19 has had and is expected to continue to have an
adverse effect on the financial condition of us and our customers. The outbreak
of 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 is disrupting 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 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.
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