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 March 31, 2022 and 2021
The following are the results of our operations for the three months ended March
31, 2022 as compared to the three months ended March 31, 2021:
For the Three Months Ended
March 31, March 31,
2022 2021 Change
Net revenues $1,519,291 $207,632 $1,311,649
Cost of revenue 2,283,683 127,627 2,156,056
Gross profit (loss) (764,392) 80,015 (844,407)
Operating expenses:
Selling, general and administrative 491,498 330,031 161,467
Total operating expenses 491,498 330,031 161,467
Loss from operations (1,255,890) (250,016) (1,005,874)
Other income (expense):
Loss on extinguishment of debt - (52,500) 52,500
Interest expense (46,316) (14,190) (32,126)
Interest income 2 2 -
Total other income (expense) (46,314) (66,688) 20,374
Net loss before provision for income taxes (1,302,204) (316,704) (985,500)
Provision for income taxes - - -
Net loss $(1,302,204) $(316,704) $(985,500)
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, 2022 the Company realized $102,226 of
campaign revenue compared to $194,834 for the same period in the prior year.
The Company's subsidiary CNP Operating generated revenue of $1.4 million from
the sale of products produced from hemp material and manufactured into CBD
distillate.
The Company's revenue as of March 31, 2022 also included $17,065 relating to
sales of product from its e-commerce network focused on the sale of general
wellness CBD products.
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 March 31, 2022 were
higher than those in the corresponding year in 2021 due largely to the
acquisition of CNP Operating which represented approximately $2.2 million 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 March 31, 2022 were
higher than those in the corresponding three months in 2021 due largely to the
acquisition of CNP Operating.
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Other Income/Expense
Other expenses during the first three months of 2022 was primarily interest
expense related to notes payable.
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 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 three months ended March 31, 2022 and 2021.
Three Months Ended
March 31, March 31,
2022 2021
Cash flows used in operating activities $(38,096) $(230,159)Cash flows provided by (used in) investing activities $(14,054) $(35,000)
Cash flows provided by (used in) financing activities $(7,603) $273,000
As of March 31, 2022, we had unrestricted cash of $110,260
Net cash used in operating activities was $38,096 during the three months ended
March 31, 2022, compared to cash used in operating activities of $230,159 during
the same period in 2021.
Net cash used in investing activities during the three months ended March 31,
2021 was the purchase of fixed assets compared to the prior year which was due
to a new investment in a marketing startup.
Net cash provided by financing activities during the three months ended March
31, 2022 was the payment of promissory notes compared to the prior year for the
same period 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.
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 December 31, 2021.
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 June 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 $1,479 and $1,468 for the three
months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, the
net book value of the promissory note amounted to $497,456 including the
principal amount outstanding of $500,000 net of the remaining discount of
$2,544.
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.
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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
$1,802,125 at March 31, 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 March 31, 2022.
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. The outstanding balance of the note was $20,000
December 31, 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 payments during the
period 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 $25,806 at March 31, 2022.
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 $42,603 at
March 31, 2022.
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 $42,603 as of March 31, 2022 because additional
improvements were completed during the period.
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.
Future scheduled maturities of long-term debt are as follows.
Year Ending
December 31,
2022 $2,219,882
2023 224,235
2024 23,650
2025 504,480
2026 3,153
Thereafter 140,173
Total $3,115,574The aggregate current portion of long-term debt as of March 31, 2022 amounted to
$2,219,882, which represents the contractual principal payments due during the
remainder of 2022.
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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 December 31, 2022
Warrants
As of March 31, 2022, 312,500 shares of our common stock are issuable pursuant
to the exercise of warrants.
Options
As of March 31, 2022, 210,667 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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CFN ENTERPRISES INC. 
