CFN ENTERPRISES INC. 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 endedDecember 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 onJune 18, 2019 . We contemporaneously acquired assets fromEmerging 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. We are currently in the process of launching an e-commerce network focused on the sale of general wellness CBD products. 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 toGrand View Research , the global cannabis industry is expected to reach$146.4 billion by 2025, driven by the legalization of medical and adult-use cannabis across a growing number of jurisdictions. According to the Marijuana Index, there are approximately 400 public companies involved in the cannabis industry, which represents the primary target market of the CFN Business. The CFN Business' services are designed to help private companies prepare to go public and public companies grow their shareholder base through sponsored content and marketing outreach. The success of the CFN Business depends on the legal status of cannabis, investor demand for cannabis investments, and numerous other external factors. The CFN Business competes with other public relations firms for clients, as well as online publishers for investors. Public relations competition includes investor awareness firms likeStockhouse Publishing , Catalyst Xchange,Stonebridge Partners andMidan Ventures . Online publisher competition includes firms likeNew Cannabis Ventures ,Leafly and High Times. The CFN Business is regulated by rules established by theSEC ,FINRA , and certain federal and state cannabis regulations.
Our corporate website is: www.cfnenterprisesinc.com, the contents of which are not part of this quarterly report.
Our Common Stock is quoted on the
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Results of Operations for the Three Months Ended
The following are the results of our operations for the three months endedSeptember 30, 2020 as compared to the three months endedSeptember 30, 2019 : For the Three Months Ended September 30, September 30, 2020 2019 Change Net revenues$ 154,369 $ 568,992 $ (414,623 ) Cost of revenue 128,885 381,277 (252,392 ) Gross profit (loss) 25,484 187,715 (162,231 ) Operating expenses: Selling, general and administrative 307,069 600,663 (293,594 ) Total operating expenses 307,069 600,663 (293,594 ) Loss from operations (281,585 ) (412,948 ) 131,363 Other income (expense): Interest expense (13,560 ) (2,514 ) (11,046 ) Loss on extinguishment of debt (30,069 ) - (30,069 ) Other income 10,000 - 10,000 Interest income 2 19 (17 ) Total other income (expense) (33,627 )
(2,495 ) (31,132 )
Net loss before provision for income taxes (315,212 ) (415,443 ) 100,231 Provision for income taxes - - - Net loss from continuing operations (315,212 ) (415,443 ) 100,231 Gain (loss) from discontinued operations, net of tax (80,422 ) 1,113 (81,535 ) Net loss$ (395,634 ) $ (414,330 ) $ 18,696 Net Revenues Subsequent to the closing of the Asset Purchase Agreement with Constellation onJune 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 onJune 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 endedSeptember 30, 2020 and 2019 represents revenue related to this line of business. Our revenue during the three months endedSeptember 30, 2020 were lower than the same period in 2019 primarily due to the volume of new contracts entered into with customers has decreasing due in-part to COVID-19 and the impacts on our customers and the industry in which we operate. During the three months endedSeptember 30, 2020 , we had 10 contracts in progress whereas we had 31 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 endedSeptember 30, 2020 related to this line of business. Our cost of revenue decreased due primarily to the decrease in revenues during the three months endedSeptember 30, 2020 as compared to the same period in 2019. We expect for our cost of revenue to change proportionately with changes in revenues recognized in future periods. 17 --------------------------------------------------------------------------------
Operating Expenses Our operating expenses for the three months endedSeptember 30, 2020 decreased by$293,594 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$90,000 of transition expenses paid pursuant to the Emerging Growth Agreement which did not re-occur in 2020. Continuing operating expenses presented during the three months endedSeptember 30, 2020 and 2019 reflect administrative expenses associated with payroll, business insurance, legal and accounting fees that we expect will continue to incur.
Discontinued Operations
EffectiveJune 18, 2019 , we sold substantially all of our assets associated with the CAKE Business for total proceeds of$20,892,667 . During the three months endedSeptember 30, 2020 , we had a loss on discontinued operations resulting primarily from the loss on foreign currency translation associated with dissolving our Subsidiary in theUK . During the three months endedSeptember 30, 2019 , we had a small gain from discontinued operations of$1,113 due to adjustments made to certain accrued liabilities associated with theUK Subsidiary.
Results of Operations for the Nine Months Ended
The following are the results of our operations for the nine months ended
For the Nine Months Ended
September 30, September 30,
2020 2019 Change
Net revenues $ 349,071 $ 631,712 $ (282,641 )
Cost of revenue 414,154 414,726 (572 )
Gross profit (loss) (65,083 ) 216,986 (282,069 )
Operating expenses:
Selling, general and administrative 906,739 1,495,492 (588,753 )
Total operating expenses 906,739 1,495,492 (588,753 )
Loss from operations (971,822 )
(1,278,506 ) 306,684
Other income (expense): Interest expense (38,055 ) (2,514 ) (35,541 ) Loss on extinguishment of debt (30,069 ) - (30,069 ) Other income 10,000 - 10,000 Interest income 17 131 (114 ) Total other income (expense) (58,107 )
(2,383 ) (55,724 )
Net loss before provision for income taxes (1,029,929 ) (1,280,889 ) 250,960 Provision for income taxes
- - -
Net loss from continuing operations (1,029,929 ) (1,280,889 ) 250,960
Gain from discontinued operations, net of tax (80,422 ) 14,471,162 (14,551,584 )
Net income (loss) $ (1,110,351 ) $
13,190,273
Net Revenues Subsequent to the closing of the Asset Purchase Agreement with Constellation onJune 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 onJune 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 nine months endedSeptember 30, 2020 and 2019 represents revenue related to this line of business. Our revenue during the nine months endedSeptember 30, 2020 was lower than the same period in 2019, as 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 nine months endedSeptember 30, 2020 , we had 22 contracts in progress, whereas we had 31 contracts during the same period in 2019. We expect these trends to continue for the foreseeable future. 18
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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 nine months endedSeptember 30, 2020 related to this line of business. Our cost of revenue decreased due primarily to the decrease in revenues during the nine months endedSeptember 30, 2020 as compared to the same period in 2019. We expect for our cost of revenue to change proportionately with changes in revenues recognized in future periods. Operating Expenses Our operating expenses for the nine months endedSeptember 30, 2020 decreased by$588,753 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 nine months endedSeptember 30, 2019 related to our board of directors which did not re-occur in 2020. We also had higher transition expenses paid pursuant to the Emerging Growth Agreement of$60,00 during 2019 as compared to 2020. Continuing operating expenses presented during the nine months endedSeptember 30, 2020 and 2019 reflect administrative expenses associated with payroll, business insurance, legal and accounting fees that we expect will continue to incur.
Discontinued Operations
EffectiveJune 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 nine months endedSeptember 30, 2019 of$14,471,162 , which includes the gain on sale of the CAKE Business of$19,473,080 offset by losses from the CAKE business throughJune 18, 2019 . During the nine months endedSeptember 30, 2020 , we had a loss on discontinued operations resulting primarily from the loss on foreign currency translation associated with dissolving our Subsidiary in theUK .
Liquidity and Capital Resources
OnMay 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 fromEmerging Growth, LLC related to its sponsored content and marketing business for purchase price consideration consisting in part of$420,000 in cash. InSeptember 2019 , we received proceeds of$500,000 from a note payable. OnMay 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 onJune 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 nine months ended
Nine Months Ended
September 30 , September 30,
2020 2019
Cash flows provided by (used in) operating activities
$ (6,633 )
As of
Net cash used in operating activities was$326,119 during the nine months endedSeptember 30, 2020 , compared to cash used in operating activities of$6,153,982 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 nine months endedSeptember 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 onJune 18, 2019 . Net cash provided by investing activities during the nine 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. Our cash flows used in investing activities during the nine months endedSeptember 30, 2020 was$6,633 from the acquisition of property and equipment. 19 -------------------------------------------------------------------------------- Net cash provided by financing activities during the nine months endedSeptember 30, 2020 of$353,000 was the result of proceeds from notes payable of$413,000 , offset by the payment of preferred stock interest of$60,000 . Net cash used in financing activities in 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 onJune 18, 2019 for the sale of the CAKE Business. The cash used in financing activities in 2019 was offset by proceeds from credit facility borrowings of$900,000 , as well as proceeds of$500,000 from a note payable inSeptember 2019 . Description of Indebtedness As ofJune 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
In connection with the promissory note onSeptember 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 onSeptember 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$1,479 and$4,405 for the three and nine months endedSeptember 30, 2020 . As ofSeptember 30, 2020 , the net book value of the promissory note amounted to$488,582 including the principal amount outstanding of$500,000 net of the remaining discount of$11,418 . OnMay 6, 2020 , the Company entered into a promissory note, or the Note, withPacific 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 theU.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 onMay 6, 2022 . OnDecember 1, 2020 and on the first day of each month thereafter untilMay 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 ofSeptember 30, 2020 , the current portion of the Loan due within the next 12 months amounted to$144,327 . OnJune 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 $ 913,000
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Obligations Under Preferred Stock
OnJune 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. OnJune 20, 2019 , we issued 3,000 shares of Series B Preferred Stock, each with a stated value of$1,000 per share, toEmerging 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 fromEmerging Growth, LLC . The Series B Preferred Stock bears interest at 6% per annum and is convertible into our common stock at the election ofEmerging Growth, LLC at a conversion price per share to be mutually agreed between us andEmerging Growth, LLC in the future, without voting rights or a liquidation preference, except with respect to accrued penalty interest.
Other outstanding obligations at
Warrants
As of
Options
As of
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
COVID-19 InMarch 2020 , the outbreak of COVID-19 caused by a novel strain of the coronavirus was recognized as a pandemic by theWorld Health Organization , and the outbreak has become increasingly widespread inthe 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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