The following information should be read in conjunction with our financial
statements and accompanying notes included in this Annual Report on Form 10-K.
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.
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Results of Operations
The following are the results of our operations for the year ended December 31,
2021 as compared to the year ended December 31, 2020:
For the Year Ended
December 31, December 31,
2021 2020 Change
Net revenues $ 3,157,783 $ 506,490 $ 2,217,929
Cost of revenue 3,539,636 536,738 3,025,445
Gross loss (381,853 ) (30,248 ) (807,516 )
Operating expenses:
Impairment charge 9,355,657
Selling, general and administrative 2,691,258 1,199,410 10,287,973
Total operating expenses 12,046,915 1,199,410 10,287,973
Loss from operations (12,428,768 ) (1,229,658 ) 11,095,488
Other income (expense):
Loss on extinguishment of debt (172,500 ) (172,500 )
Unrealized gain (loss) on investments (45,658 ) (40,180 )
Forgiveness of SBA Loan 526,000 10,000 516,000
Interest expense (93,170 ) (51,615 ) (41,555 )
Interest income 10,001 19 9,992
Total other income (expense) 224,683 (41,596 ) (271,127 )
Net loss from continuing operations (12,204,085 ) (1,271,254 ) 10,824,361
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 twelve months ended December 31, 2021, the Company realized $684,000
of campaign revenue compared to $497,000 for the same period in the prior year.
The Company's subsidiary CNP Operating generated revenue of $3.0 million from
the sale of products produced from hemp material and manufactured into CBD
distillate.
Our revenue for 2021 also included $58,629 relating to sales of product from our
e-commerce network focused on the sale of general wellness CBD products. This
network was launched during the fourth quarter of 2020 with revenue of $9,000.
Costs 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 2021, the contracts required more production services and related
labor than the contracts in 2020. As a result, the cost of revenue in 2021 was
higher as a percentage of the revenue recognized during the year.
The Company's cost of revenue for the year ended December 31, 2021 were higher
than those in the corresponding year in 2020 due largely to the acquisition of
CNP Operating which represented approximately $3.1 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 year ended December 31, 2021 were
higher than those in the corresponding year in 2020 due largely to the
acquisition of CNP Operating which represented approximately $2.6 million of
additional general and administrative expenses representing wages. In addition,
the Company wrote off goodwill of $9.3 million as an impairment to a long lived
asset.
Other income increased during the year ended December 31, 2021, due to the
forgiveness of $526,000 for the SBA PPP loan. In addition, the investments
received by East West for services were marked to market and resulted in an
unrealized loss of $45,658 for the year and a $172,500 loss on extinguishment of
debt incurred as it issued common stock in payment of interest payable and
extension of the maturity date on a note payable. The Company did not have a
similar loss during the year ended December 31, 2020.
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Liquidity and Capital Resources
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 year ended December 31, 2021 and 2020.
Year Ended
December 31, December 31,
2021 2020
Cash flows used in operating activities $ (344,214 ) $ (483,522 )
Cash flows provided by (used in) investing
activities $ 22,885 $ (206,634 )
Cash flows provided by (used in) financing
activities $ 331,243 $ 763,000
As of December 31, 2021, we had unrestricted cash of $170,015.
Net cash used in operating activities was $344,214 during the year ended
December 31, 2021, compared to $483,522 during the same period in 2020.
Net cash provided by investing activities $22,885 during the year ended December
31, 2021, compared with cash provided used in investing activities of 206,634
during the same period in 2020.
Net cash provided by financing activities was $331,243 for the year ended
December 31, 2021 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 $763,000 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 2,000,000 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 500,000 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 $4,427 and $4,425 for the nine
months ended September 30, 2021 and 2020, respectively. As of September 30,
2021, the net book value of the promissory note amounted to $494,498 including
the principal amount outstanding of $500,000 net of the remaining discount of
$5,502.
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 interest rate on the Loan is 1.0% per annum. The Note matures on May 6,
2022. The Company has applied for full forgiveness of the amounts due under the
Note and received forgiveness during the period ending September 30, 2021.
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.
The interest rate on the Loan is 1.0% per annum. The Note matures on May 6,
2022. The Company applied for full forgiveness of the amounts due under the Note
and received forgiveness in February 2022 therefore the company has recorded the
forgiveness as of December 31, 2021.
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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
$2,218,000 at December 31, 2021.
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 $300,000 at December 31, 2021.
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 $42,252 at December 31, 2021.
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 $45,508 at
December 31, 2021.
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 $43,261 as of December 31, 2021 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 Ended
December 31,
2022 $ 2,219,882
2022 657,621
2023 26,047
2024 509,163
2025 3,153
Thereafter 121,706
Total $ 3,537,573
The aggregate current portion of long-term debt as of December 31, 2021 amounted
to $2,219,882, which represents the contractual principal payments due in the
next 12 months period.
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.
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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, 2021
Warrants
As of December 31, 2021, 312,500 shares of our common stock are issuable
pursuant to the exercise of warrants.
Options
As of December 31, 2021, 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 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.
Climate Change
Our opinion is that neither climate change, nor governmental regulations related
to climate change, have had, or are expected to have, any material effect on our
operations.
Critical Accounting Policies
Accounts Receivable
The Company's account receivables are due from customers relating to contracts
to provide investor relation services. Collateral is currently not required. The
Company also maintains allowances for doubtful accounts for estimated losses
resulting from the inability of the Company's customers to make payments. The
Company periodically reviews these estimated allowances, including an analysis
of the customers' payment history and creditworthiness, the age of the trade
receivable balances and current economic conditions that may affect a customer's
ability to make payments as well as historical collection trends for its
customers as a whole. Based on this review, the Company specifically reserves
for those accounts deemed uncollectible or likely to become uncollectible. When
receivables are determined to be uncollectible, principal amounts of such
receivables outstanding are deducted from the allowance. The allowance for
doubtful accounts as of December 31, 2021 and 2020 amounted to $337,192 and
$183,750, respectively.
Revenue Recognition
The Company recognizes revenue in accordance with Accounting Standards
Codification, or ASC, 606, the core principle of which is that an entity should
recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity
expects to be entitled to receive in exchange for those goods or services. To
achieve this core principle, five basic criteria must be met before revenue can
be recognized: (1) identify the contract with a customer; (2) identify the
performance obligations in the contract; (3) determine the transaction price;
(4) allocate the transaction price to performance obligations in the contract;
and (5) recognize revenue when or as the Company satisfies a performance
obligation.
Subsequent to the closing of the Emerging Growth Agreement on June 20, 2019, the
Company's revenue is generated from the sale of promotional service packages to
its 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.
The services provided by the Company include advertising, publishing of
interviews and articles across its network and featuring of client content on
its newsletters and social media. The packages all have fixed prices that are
billed monthly over the terms of the agreement in even amounts. The Company
recognizes revenue for its performance obligation associated with its contracts
with customers over time as work is performed, which is deemed to occur evenly
throughout the duration of the contract. This also reflects the pattern in which
costs are incurred on performing the contracts. To the extent revenue recognized
on contracts at each period end exceeds collections, the amounts are reflected
as accounts receivable. To the extent collections on contracts at each period
end exceeds revenue recognized, the amounts are reflected as deferred revenue.
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Income Taxes
Income taxes are accounted for in accordance with the provisions of ASC Topic
740, Accounting for Income Taxes. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. Valuation
allowances are established, when necessary, to reduce deferred tax assets to the
amounts expected to be realized, but no less than quarterly.
Property and Equipment
Property and equipment are recorded at cost and are depreciated on a
straight-line basis over their estimated useful lives of five years. Maintenance
and repairs are charged to expense as incurred. Significant renewals and
betterments are capitalized.
Goodwill
The Company's goodwill represents the excess of purchase price over tangible and
intangible assets acquired, less liabilities assumed arising from business
acquisitions. Goodwill is not amortized, but is reviewed for potential
impairment on an annual basis at the reporting unit level. There was an
impairment charge of $9,355,657 during the year ended December 31, 2021 related
to the impairment of goodwill acquired from the CNP Operating Agreement.
Investment
On December 24, 2020, the Company acquired a 9.8% interest in the outstanding
stock of a privately held company. As the stock has no readily determinable
fair value, the Company accounts for this stock received using the cost method,
less adjustments for impairment. At each reporting period, management reviews
the status of the investment to determine if any indicators of impairment have
occurred. There were no impairment charges recorded related to investments
during the year ended December 31, 2021 or 2020.
Long-Lived Assets
In accordance with ASC 360-10, the Company evaluates long-lived assets for
impairment whenever events or changes in circumstances indicate that their net
book value may not be recoverable. When such factors and circumstances exist,
the Company compares the projected undiscounted future cash flows associated
with the related asset or group of assets over their estimated useful lives
against their respective carrying amount. Impairment, if any, is based on the
excess of the carrying amount over the fair value, based on market value when
available, or discounted expected cash flows, of those assets and is recorded in
the period in which the determination is made. There was an impairment charge of
$9,355,657 during the year ended December 31, 2021 related to the impairment of
marketing-related intangible assets acquired from the CNP Operating acquisition.
Basic and Diluted Earnings Per Share
Basic earnings per share are calculated by dividing income available to
stockholders by the weighted-average number of common shares outstanding during
each period. Diluted earnings per share are computed using the weighted average
number of common and dilutive common share equivalents outstanding during the
period. Dilutive common share equivalents consist of shares issuable upon the
exercise of stock options, warrants and preferred stock (calculated using the
modified-treasury stock method). As of December 31, 2021, the Company had
210,667 outstanding stock options and 311,112 outstanding warrants and 3,500
preferred stock which were excluded from the calculation of diluted earnings per
share because their effects were anti-dilutive. As of December 31, 2020, the
Company had 210,667 outstanding stock options, 350,463 outstanding warrants and
3,500 preferred stock which were excluded from the calculation of diluted
earnings per share because their effects were anti-dilutive. As a result, the
basic and diluted earnings per share are the same for each of the periods
presented.
Share-Based Payment
The Company accounts for stock-based compensation in accordance with ASC Topic
718, Compensation-Stock Compensation, or ASC 718. Under the fair value
recognition provisions of this topic, stock-based compensation cost is measured
at the grant date based on the fair value of the award and is recognized as an
expense on a straight-line basis over the requisite service period, which is the
vesting period.
The Company has elected to use the Black-Scholes option-pricing model to
estimate the fair value of its options, which incorporates various subjective
assumptions including volatility, risk-free interest rate, expected life, and
dividend yield to calculate the fair value of stock option awards. Compensation
expense recognized in the statements of operations is based on awards ultimately
expected to vest and reflects estimated forfeitures. ASC 718 requires
forfeitures to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates.
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Common stock awards
The Company has granted common stock awards to non-employees in exchange for
services provided. The Company measures the fair value of these awards using the
fair value of the services provided or the fair value of the awards granted. The
fair value of the awards is recognized on a straight-line basis as services are
rendered. The share-based payments related to common stock awards for the
settlement of services provided by non-employees is recorded on the consolidated
statement of comprehensive loss in the same manner and charged to the same
account as if such settlements had been made in cash.
Warrants
In connection with certain financing, consulting and collaboration arrangements,
the Company has issued warrants to purchase shares of its common stock. The
outstanding warrants are standalone instruments that are not puttable or
mandatorily redeemable by the holder and are classified as equity awards. The
Company measures the fair value of the awards using the Black-Scholes option
pricing model as of the measurement date. Warrants are recorded at fair value as
expense over the requisite service period or at the date of issuance, if there
is not a service period.
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