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.
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Overview
We own and operate a cannabis industry focused sponsored content and marketing
business, or the CFN Business. Our ongoing operations currently 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 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 March 31, 2021 and 2020
The following are the results of our operations for the three months ended March
31, 2021 as compared to the three months ended March 31, 2020:
For the Three Months Ended
March 31, March 31,
2021 2020 Change
Net revenues $207,632 $112,267 $95,375
Cost of revenue 127,627 224,164 (96,537)
Gross profit (loss) 80,015 (111,897) 191,912
Operating expenses:
Selling, general and administrative 330,031 194,981 135,050
Total operating expenses 330,031 194,981 135,050
Loss from operations (250,016) (306,878) 56,892
Other income (expense):
Loss on extinguishment of debt (52,500) - (52,500)
Interest expense (14,190) (11,463) (2,727)
Interest income 2 10 (8)
Total other income (expense) (66,687) (11,453) (55,234)
Net loss before provision for income taxes (316,703) (318,331) 1,628
Provision for income taxes
- - -
Net loss $(316,703) $(318,331) $1,628--------------------------------------------------------------------------------
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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 March 31, 2021, the Company started fourteen new
campaigns, compared with five during the same period in 2020. These campaigns
have a value of $432,500 which will be recognized as revenue over the next three
to six months. In 2020, the cumulative value of campaigns begun in the first
three months 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.
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.
Operating Expenses
Our operating expenses for the three months ended March 31, 2021 were higher
than those in the corresponding three months in 2020 due largely to professional
service fees related to the audit and filing of our Form 10-K for the year ended
December 31, 2020. For the year ended December 31, 2019, we did not incur these
fees until the second quarter of 2020.
Other Income/Expense
Other expenses increased during the first three months of 2021 due to the loss
on extinguishment of debt we incurred as we issued common stock in payment of
interest payable to our Preferred stockholders. We did not have a similar loss
during the three months ended March 31, 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 for the three months ended March 31, 2021 and 2020.
Three Months Ended
March 31, March 31,
2021 2020
Cash flows used in operating activities $(230,160) $(27,992)Cash flows provided by (used in) investing activities $(35,000) $-
Cash flows provided by (used in) financing activities $273,000 $(30,000)
As of March 31, 2021, we had unrestricted cash of $167,956.
Net cash used in operating activities was $230,160 during the three months ended
March 31, 2021, compared to cash used in operating activities of $27,992 during
the same period in 2020. The cash used in operating activities in 2021 was
primarily the result of the net loss during the period, after adding back the
noncash loss on extinguishment of debt. During the three months ended March 31,
2020, the cash expended in the net loss of $318,331 was offset by allowing the
payables to age longer and collecting the receivables faster.
Net cash used in investing activities during the three months ended March 31,
2020 was due to a new investment in a marketing startup.
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Net cash provided by financing activities during the three months ended March
31, 2021 of $273,000 was the result of proceeds from a second PPP loan of
$263,000 and the sale of common stock for $10,000. The cash used in financing
activities in 2020 was due to an interest payment to Preferred shareholders.
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. 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
$1,469 and $1,463 for the three months ended March 31, 2021 and 2020,
respectively. As of March 31, 2021, the net book value of the promissory note
amounted to $491,530 including the principal amount outstanding of $500,000 net
of the remaining discount of $8,470.
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 Loan
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 March 31, 2021, the current portion of
the Loan due within the next 12 months amounted to $188,249. The Company has
applied for full forgiveness of the amounts due under the Note.
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, 2021 and on the first day of each
month thereafter until February 1, 2023, 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 March 31, 2021, the current portion of the Second Loan due within
the next 12 months amounted to $100,676. The Company plans to apply for full
forgiveness of the Second PPP Note.
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Future scheduled maturities of long-term debt are as follows.
Year Ending
December 31,
2021 $232,001
2022 750,217
2023 32,822
2024 3,285
2025 3,416
Thereafter 145,789
Total $1,167,530The aggregate current portion of long-term debt as of March 31, 2021 amounted to
$232,001, which represents the contractual principal payments due during the
remainder of 2021.
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 March 31, 2021
Warrants
As of March 31, 2021, 5,187,500 shares of our common stock are issuable pursuant
to the exercise of warrants.
Options
As of March 31, 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 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 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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CFN ENTERPRISES INC. 
