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, 2019. 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 owned and operated CAKE and getcake.com, a marketing technology company that
provided a proprietary solution for advanced analytics, attribution and campaign
optimization for digital marketers, and we sold this business on June 18, 2019.
We contemporaneously acquired assets from Emerging Growth LLC related to its
cannabis industry focused sponsored content and marketing business, or the CFN
Business. Our initial ongoing operations will consist primarily of the CFN
Business and we will continue to pursue strategic transactions and
opportunities, such as launching an e-commerce network focused on the sale of
general wellness CBD products.
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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 June 30, 2020 and 2019
The following are the results of our operations for the three months ended June
30, 2020 as compared to the three months ended June 30, 2019:
For the Three Months Ended
June 30, June 30,
2020 2019 Change
Net revenues $ 82,435 $ 62,720 $ 19,715
Cost of revenue 61,105 33,449 27,656
Gross profit (loss) 21,330 29,271 (7,941 )
Operating expenses:
Selling, general and administrative 404,689 605,828 (201,139 )
Total operating expenses 404,689 605,828 (201,139 )
Loss from operations (383,359 ) (576,557 ) 193,198
Other income (expense):
Interest expense (13,032 ) - (13,032 )
Interest income 5 56 (51 )
Total other income (expense) (13,027 ) 56 (13,083 )
Net loss before provision for income taxes (396,386 ) (576,501 ) 180,115
Provision for income taxes - - -
Net loss from continuing operations (396,386 ) (576,501 ) 180,115
Gain from discontinued operations, net of tax - 15,194,741 (15,194,741 )
Net income (loss) $ (396,386 ) $ 14,618,240 $ (15,014,626 )
Net Revenues
Subsequent to the closing of the Asset Purchase Agreement with Constellation on
June 18, 2019, which resulted in the sale of our CAKE Business and
discontinuation of our operations previously recorded under this line of
business, our net revenues from continuing operations consists of revenue
generated from customer contracts acquired in the Emerging Growth Agreement
which closed on June 20, 2019. Subsequent to this date, our revenues are
generated from the sale of promotional service packages to customers ranging
from 3 to 6 months. We offer 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. Our revenue for the three months ended June
30, 2020 represents revenue related to this line of business.
Our revenue during the three months ended June 30, 2020 was higher than the same
period in 2019, as 2019 only reflects 10 days of activity subsequent to the
closing of the Emerging Growth Agreement. However, the volume of new contracts
entered into with customers has decreased in 2020 due in-part to COVID-19 and
the impacts on our customers and the industry in which we operate. During the
three months ended June 30, 2020, we had 7 contracts in progress whereas we had
19 contracts during the same period in 2019. We expect these trends to continue
for the foreseeable future.
Costs of Revenue
Our cost of revenue represents costs incurred associated with performing
services under our customer contracts acquired under the Emerging Growth
Agreement. Our cost of revenue for the three months ended June 30, 2020 related
to this line of business. We expect for our cost of revenue to increase
proportionately with increases in revenues recognized in future periods.
Operating Expenses
Our operating expenses for the three months ended June 30, 2020 decreased by
$201,139 as compared to the prior year period due primarily to higher legal and
professional fees in 2019 associated with the Asset Purchase Agreement and the
Emerging Growth Agreement, as well as $60,000 of compensation expense during the
three months ended June 30, 2019 related to our board of directors which did not
re-occur in 2020. Continuing operating expenses presented during the three
months ended June 30, 2020 reflect administrative expenses associated with
payroll, business insurance, legal and accounting fees that we will continue to
incur.
Discontinued Operations
Effective June 18, 2019, we sold substantially all of our assets associated with
the CAKE Business for total proceeds of $20,892,667. Accordingly, we had a gain
from discontinued operations during the three months ended June 30, 2019 of
$15,194,741, which represented the gain on the sale of the net assets of
$19,473,080 offset by the loss from discontinued operations of $1,229,895 as
well as interest expense associated with discontinued operations of $3,048,478.
There was no activity related to discontinued operations during the three months
ended June 30, 2020.
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Results of Operations for the Six Months Ended June 30, 2020 and 2019
The following are the results of our operations for the six months ended June
30, 2020 as compared to the six months ended June 30, 2019:
For the Six Months Ended
June 30, June 30,
2020 2019 Change
Net revenues $ 194,702 $ 62,720 $ 131,982
Cost of revenue 285,269 33,449 251,820
Gross profit (loss) (90,567 ) 29,271 (119,838 )
Operating expenses:
Selling, general and administrative 599,670 894,829 (295,159 )
Total operating expenses 599,670 894,829 (295,159 )
Loss from operations (690,237 ) (865,558 ) 175,321
Other income (expense):
Interest expense (24,495 ) - (24,495 )
Interest income 15 112 (97 )
Total other income (expense) (24,480 ) 112 (24,592 )
Net loss before provision for income taxes (714,717 ) (865,446 ) 150,729
Provision for income taxes
- - -
Net loss from continuing operations (714,717 ) (865,446 ) 150,729
Gain from discontinued operations, net of tax - 14,470,049 (14,470,049 )
Net income (loss) $ (714,717 ) $ 13,604,603 $ (14,319,320 )
Net Revenues
Subsequent to the closing of the Asset Purchase Agreement with Constellation on
June 18, 2019, which resulted in the sale of our CAKE Business and
discontinuation of our operations previously recorded under this line of
business, our net revenues from continuing operations consists of revenue
generated from customer contracts acquired in the Emerging Growth Agreement
which closed on June 20, 2019. Subsequent to this date, our revenues are
generated from the sale of promotional service packages to customers ranging
from 3 to 6 months. We offer 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. Our revenue for the six months ended June 30,
2020 represents revenue related to this line of business.
Our revenue during the six months ended June 30, 2020 was higher than the same
period in 2019, as 2019 only reflects 10 days of activity subsequent to the
closing of the Emerging Growth Agreement. However, the volume of new contracts
entered into with customers has decreased in 2020 due in-part to COVID-19 and
the impacts on our customers and the industry in which we operate. During the
six months ended June 30, 2020, we had 14 contracts in progress, whereas we had
19 contracts during the same period in 2019. We expect these trends to continue
for the foreseeable future.
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Costs of Revenue
Our cost of revenue represents costs incurred associated with performing
services under our customer contracts acquired under the Emerging Growth
Agreement. Our cost of revenue for the six months ended June 30, 2020 related to
this line of business. We expect for our cost of revenue to increase
proportionately with increases in revenues recognized in future periods.
Operating Expenses
Our operating expenses for the six months ended June 30, 2020 decreased by
$295,159 as compared to the prior year period due primarily to higher legal and
professional fees in 2019 associated with the Asset Purchase Agreement and the
Emerging Growth Agreement, as well as $120,000 of compensation expense during
the six months ended June 30, 2019 related to our board of directors which did
not re-occur in 2020. Continuing operating expenses presented during the six
months ended June 30, 2020 reflect administrative expenses associated with
payroll, business insurance, legal and accounting fees that we will continue to
incur.
Discontinued Operations
Effective June 18, 2019, we sold substantially all of our assets associated with
the CAKE Business for total proceeds of $20,892,667. Accordingly, we had a gain
from discontinued operations during the six months ended June 30, 2019 of
$14,470,049, which represented the gain on the sale of the net assets of
$19,473,080 offset by the loss from discontinued operations of $1,229,414 as
well as interest expense associated with discontinued operations of $3,773,651.
There was no activity related to discontinued operations during the six months
ended June 30, 2020.
Liquidity and Capital Resources
On May 15, 2019, we entered into the Asset Purchase Agreement to sell
substantially all of our assets related to the CAKE Business. Concurrent with
this agreement, we also entered into the Emerging Growth Agreement where we
acquired certain assets from Emerging Growth, LLC related to its sponsored
content and marketing business for purchase price consideration consisting in
part of $420,000 in cash. In September 2019, we received proceeds of $500,000
from a note payable. 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. 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 for the six months ended June 30, 2020 and 2019.
Six Months Ended
June 30, June 30,
2020 2019
Cash flows provided by (used in) operating activities $ (138,298 ) $ (5,375,806 )
Cash flows provided by investing activities
$ - $ 20,470,916Cash flows provided by (used in) financing activities $ 368,000 $ (13,872,514 )
As of June 30, 2020, we had unrestricted cash of $315,668.
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Net cash used in operating activities was $138,298 during the six months ended
June 30, 2020, compared to cash used in operating activities of $5,375,806
during the same period in 2019. The cash used in operating activities in 2020
was primarily the result of the net loss during the period, offset by an
increase in accounts payable and accrued expenses. During the six months ended
June 30, 2019, our net cash used in operations was primarily the result of the
payment of a large number of accounts payable and other operating liabilities at
the time of closing of the Asset Purchase Agreement on June 18, 2019.
Net cash provided by investing activities during the six months ended 2019
consisted primarily of proceeds from the sale of the CAKE Business of
approximately $20.9 million, offset by cash used of $420,000 for the acquisition
of assets pursuant to the Emerging Growth Agreement. We had no cash flows from
investing activities during the six months ended June 30, 2020.
Net cash provided by financing activities during the six months ended June 30,
2020 of $368,000 was the result of proceeds from notes payable of $413,000,
offset by the payment of preferred stock interest of $45,000. Net cash used in
financing activities during the six months ended June 30, 2019 consisted of
payments of approximately $11.8 million to repay the principal amounts
outstanding under our credit facilities, repayment of promissory notes of $2.7
million and repayment of related party notes of $300,000. These repayments
occurred at the time of closing of the Asset Purchase Agreement on June 18, 2019
for the sale of the CAKE Business. These cash used in financing activities in
2019 was offset by proceeds of $900,000 from borrowings made under our previous
credit facility.
Description of Indebtedness
As of June 18, 2019, upon the closing of the Asset Purchase Agreement for the
sale of the CAKE Business, all existing debt at the time was either paid off or
settled through the exchange of outstanding principal into Series A Preferred
Stock.
On September 10, 2019, we entered into a promissory note payable whereby we
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. Outstanding principal on the note is due
in full on September 30, 2022.
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 expire on September 10, 2024 and are
fully vested upon issuance. 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
$1,463 and $2,926 for the three and six months ended June 30, 2020. As of June
30, 2020, the net book value of the promissory note amounted to $487,103
including the principal amount outstanding of $500,000 net of the remaining
discount of $12,897.
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 PPP is a program of the U.S. Small Business Administration, or SBA,
established under the Coronavirus Aid, Relief, and Economic Security Act, or the
CARES Act. Under the PPP, the proceeds of the 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 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 Note
in whole or in part.
The interest rate on the Loan is 1.0% per annum. The Note matures on May 6,
2022. On December 1, 2020 and on the first day of each month thereafter until
May 1, 2022, the Company must make monthly payments of $14,727 under the Loan
that is not forgiven in accordance with the terms of the PPP and related accrued
interest thereon. The Note contains events of default and other conditions
customary for a Note of this type. As of June 30, 2020, the current portion of
the Loan due within the next 12 months amounted to $100,519.
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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.
Future scheduled maturities of long-term debt are as follows.
Year Ended
December 31,
2020 (remainder of) $ 13,221
2021 175,028
2022 574,751
2023 2,262
2024 3,285
2025 3,416
Thereafter 141,037
Total $ 913,000Obligations 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 June 30, 2020
Warrants
As of June 30, 2020, 7,543,944 shares of our common stock are issuable pursuant
to the exercise of warrants.
Options
As of June 30, 2020, 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
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. While it is
unknown how long these conditions will last and what the complete financial
effect will be, it is expected to have a significant adverse impact to our
revenue and ability to obtain financing.
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