CNFN 10-Q
CFN Enterprises Inc. (CNFN)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT |
For the transition period from ________ to ________
Commission File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip code)
(
(Registrant’s Telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ |
Smaller reporting company | |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The number of shares outstanding of the registrant’s Common Stock, $
When used in this quarterly report, the terms “CFN Enterprises,” “the Company,” “we,” “our,” and “us” refer to CFN Enterprises Inc., a Delaware corporation.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
This quarterly report on Form 10-Q contains certain forward-looking statements. Forward-looking statements may include our statements regarding our goals, beliefs, strategies, objectives, plans, including product and service developments, future financial conditions, results or projections or current expectations. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," the negative of such terms, or other comparable terminology. For example, when we discuss our expectations for 2021, our expectations for revenue sources, costs of revenue and expenses going forward, and that we will continue to pursue strategic transactions and opportunities, we are using forward-looking statements. These statements are subject to known and unknown risks, uncertainties, assumptions and other factors that may cause actual results to be materially different from those contemplated by the forward-looking statements. These factors include, but are not limited to, our ability to implement our strategic initiatives, economic, political and market conditions and fluctuations, government and industry regulation, interest rate risk, U.S. and global competition, and other factors. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. The business and operations of CFN Enterprises Inc. are subject to substantial risks, which increase the uncertainty inherent in the forward-looking statements contained in this report. Except as required by law, we undertake no obligation to release publicly the result of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Further information on potential factors that could affect our business is described under “Item 1A. Risk Factors” contained in our annual report on Form 10-K as filed with the Securities and Exchange Commission, or the SEC, on March 31, 2021. Readers are also urged to carefully review and consider the various disclosures we have made in this report and in our annual report on Form 10-K.
CFN ENTERPRISES INC.
INDEX
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Item 1. Condensed Consolidated Financial Statements (Unaudited) | 1 |
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Item 2. Management’s Discussion and Analysis of Financial Position and Results of Operations | 18 |
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CFN ENTERPRISES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, |
| December 31, | |
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Assets |
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Current assets |
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Cash |
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Restricted cash |
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Accounts receivable, net |
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Inventory |
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Marketable Securities |
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Prepaid expenses and other current assets |
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Total current assets |
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Other assets |
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Investments, at cost |
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Property and equipment |
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Goodwill |
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Right of Use Asset |
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Other Assets |
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Total other assets |
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Total assets |
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Liabilities and Stockholders' Equity (Deficit) |
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Current liabilities |
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Accounts payable |
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Accrued expenses |
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Deferred revenues |
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Current portion of notes payable |
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Current portion of right of use liability |
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Current liabilities of discontinued operations |
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Total current liabilities |
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Right of Use Liability |
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Long-term note payable, net of current portion and discounts |
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Total liabilities |
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Commitments and contingencies |
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Stockholders' equity (deficit) |
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Series A Preferred stock, $ |
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Series B Preferred stock, $ |
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Common stock, $ |
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Common stock issuable |
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Additional paid-in capital |
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Accumulated deficit |
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Total stockholders' equity (deficit) |
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Non-controlling interest |
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Total stockholders’ equity (deficit) |
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Total liabilities and stockholders' equity (deficit) |
| $ |
| $ |
See accompanying notes to the unaudited condensed financial statements
1
CFN ENTERPRISES INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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| For the Three Months Ended | For the Nine Months Ended | |||
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| September 30, | September 30, | September 30, |
| September 30, |
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Net revenues |
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Cost of revenue |
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Gross profit (loss) |
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Operating expenses: |
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Selling, general and administrative |
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Total operating expenses |
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Loss from operations |
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Other (income) expense: |
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Loss on extinguishment of debt |
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Unrealized gain (loss) on marketable securities |
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SBA PPP loan forgiveness |
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Interest expense |
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Interest income |
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Total other (income) expense |
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Net loss from continued operations |
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Gain (Loss) from discontinued operations, net of tax |
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Net loss |
| $( | $( | $( |
| $( |
Preferred stock interest |
| ( | ( | ( |
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Net loss after preferred stock interest |
| $( | $( | $( |
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Net income attributable to non-controlling interest |
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Net loss available to common shareholders |
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Net loss per share, basic and diluted |
| $( | $( | $( |
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Weighted average number of common |
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See accompanying notes to the unaudited condensed financial statements
2
CFN ENTERPRISES INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
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| Series A Preferred Stock |
| Series B Preferred Stock |
| Common Stock |
| Common Stock | Additional Paid-in |
| Accumulated |
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| Non-controlling | Accumulated Other Comprehensive |
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| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Issuable | Capital |
| Deficit |
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| Interest | Income | ` | Total | ||
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Balance, December 31, 2019 |
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Preferred stock interest |
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Net loss |
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Foreign currency translation |
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Balance, March 31, 2020 |
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Share based compensation |
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Preferred stock interest |
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Net loss |
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Balance June 30, 2020 |
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Share based compensation |
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Shares issued as payment of accounts payable and accrued interest |
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Preferred stock interest |
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Net loss |
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Foreign currency translation |
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Balance, September 30, 2020 |
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Balance, December 31, 2020 |
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Issuance of common stock |
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Shares issued as payment for accrued interest |
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Non-controlling interest contribution |
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Preferred stock interest |
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Net loss |
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Balance, March 31, 2021 |
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Issuance of common stock for interest |
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Shares issued as exercise of warrant |
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Preferred stock interest |
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Net Loss |
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Balance June 30, 2021 |
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Issuance of common stock |
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Shares issued as for exercise of warrant |
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Preferred stock interest |
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Net loss |
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Balance, September 30, 2021 |
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See accompanying notes to the unaudited condensed financial statements
3
CFN ENTERPRISES INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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| For the Nine Months Ended | ||
| September 30, |
| September 30, | |
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Cash flows from operating activities |
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Net loss |
| $( |
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Gain (Loss) from discontinued operations |
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Net loss from continuing operations |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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Share based compensation |
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Forgiveness of SBA PPP loan |
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Loss on extinguishment of debt |
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Amortization of deferred financing cost |
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Provision for doubtful accounts |
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Unrealized (gain) on marketable securities |
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Amortization of right of use asset |
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Non-controlling interest |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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Inventory |
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Prepaid expenses and other current assets |
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Accounts payable and accrued expenses |
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Right of use liability |
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Deferred revenue |
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Net cash used in operating activities of continuing operations |
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Net cash used in operating activities of discontinued operations |
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Net cash used in operating activities |
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Cash flows from investing activities |
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Purchase of property and equipment |
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Cash acquired in acquisition of CNP operating, LLC. |
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Net cash provided by investing activities |
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Cash flows from financing activities |
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Proceeds from sale of common stock |
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Proceeds from promissory note |
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Proceeds from warrant exercised |
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Payment of notes payable |
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Payment of interest for preferred stock |
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Net cash provided by financing activities |
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Effect of exchange rate fluctuations on cash |
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Net change in cash and restricted cash |
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Cash and restricted cash, beginning of the period |
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Cash and restricted cash, end of the period |
| $ |
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Supplemental disclosure of cash flow information: |
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Interest paid |
| $ |
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Income taxes paid |
| $ |
| $ |
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Supplemental disclosure of non-cash investing and financing information: |
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Accrual of preferred stock interest |
| $ |
| $ |
Issuance of common stock sold in previous year |
| $ |
| $ |
Addition of Right of Use Asset |
| $ |
| $ |
Investments received for services |
| $ |
| $ |
Issuance of common stock for payment of accrued interest and Note extension |
| $ |
| $ |
Issuance of common stock for payment of accounts payable and accrued expenses |
| $ |
| $ |
Issuance common stock for acquisition of CNP Operating, LLC |
| $ |
| $ |
See accompanying notes to the unaudited condensed financial statements
4
CFN ENTERPRISES INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION, GOING CONCERN AND BASIS OF PRESENTATION
Organization
CFN Enterprises Inc., formerly known as Accelerize Inc., or the Company, is a Delaware corporation incorporated on November 22, 2005. Effective October 22, 2019, the Company filed a certificate of amendment to its certificate of incorporation with the Secretary of State of the State of Delaware to change its corporate name to CFN Enterprises Inc.
On May 15, 2019, the Company entered into an asset purchase agreement or the Emerging Growth Agreement with Emerging Growth, LLC, or the Seller or Emerging Growth, pursuant to which the Company acquired certain assets from the Seller related to its sponsored content and marketing business for a purchase price consideration consisting of $
The Company’s operations consist of the sponsored content and marketing business from the assets acquired pursuant to the Emerging Growth Agreement.
On January 22, 2021, the Company invested $35,000 in a new joint venture focused on sponsored content and marketing called East West Asset Management or East West. East West was formed as a Limited Liability Company in the State of Nevada on November 13, 2020. CFN owns 50% of the entity and one of its officers holds the title of Member Manager in East West. The Company has concluded that East West is a variable interest entity in accordance with applicable accounting standards and guidance. As such, the accounts and results of East West have been included in the Company’s condensed consolidated financial statements.
On August 23, 2021, the Company entered into securities purchase agreements with CNP Operating, LLC, a Colorado limited liability company, or CNP Operating, and the owners of all of the equity interests of CNP Operating, or the Owners, whereby the Company acquired 100% of CNP Operating from the Owners in exchange for an aggregate of 354 million shares of the Company’s common stock. The securities were issued pursuant to an exemption under Section 4(a)(2) of the Securities Act of 1933, as amended. On August 25, 2021 the transaction was closed and CNP Operating became a wholly owned subsidiary of the Company.
CNP Operating is a leading cannabidiol, or 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. CNP Operating provide 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, ISO compliant, has 30,000 square feet filled with proprietary technology distillation equipment, in house lab testing, distribution warehouse and white labelling product formulation and design.
Going Concern
The accompanying consolidated financial statements have been prepared on a going concern basis which implies the Company will continue to meet its obligations for the next 12 months as of the date these financial statements are issued.
The Company had a working capital deficit of $
Management’s plan to continue as a going concern includes raising capital in the form of debt or equity, growing the CNP Operating business and its existing business acquired under the Emerging Growth Agreement, managing and reducing operating and overhead costs and continuing to pursue strategic transactions and opportunities including launching an e-commerce network focused on the sale of general wellness CBD, products
These matters, among others, raise substantial doubt about the ability of the Company 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 the Company be unable to continue as a going concern.
5
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 disrupted 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 2021and to 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.
Basis of Presentation and principles of consolidation
These unaudited condensed financial statements reflect all adjustments including normal recurring adjustments, which, in the opinion of management, are necessary to present fairly the financial position, results of operations, and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America, or GAAP. These unaudited condensed consolidated financial statements and notes included herein should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the years ended December 31, 2020 and 2019, which are included in the Company’s December 31, 2020 Annual Report on Form 10-K filed with the United States Securities and Exchange Commission on March 31, 2021. The Company assumes that the users of the interim financial information herein have read, or have access to, the audited consolidated financial statements for the preceding period, and that the adequacy of additional disclosure needed for a fair presentation of these may be determined in that context. The results of operations for the period ended September 30, 2021 are not necessarily indicative of results for the entire year ending December 31, 2021.
During the period, the Company concluded that East West is a variable interest entity in accordance with applicable accounting standards and guidance. As such, the accounts and results of East West have been included in the Company’s condensed consolidated financial statements.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reporting amounts of revenues and expenses during the reported period. Actual results will differ from those estimates. Included in these estimates are assumptions about collection of accounts receivable, useful life of fixed assets and intangible assets, borrowing rate considered for operating lease right-of-use asset and related operating lease liability, and assumptions used in Black-Scholes valuation methods, such as expected volatility, risk-free interest rate, and expected dividend rate.
Financial Statement Reclassification
Certain account balances from prior periods have been reclassified in these consolidated financial statements to conform to current period classifications.
Segment Reporting
The Company’s sponsored content and marketing business acquired from Emerging Growth in June 2019 has historically been its one reportable segment. In late 2020, the Company launched an e-commerce network focused on the sale of general wellness CBD products. As of September 30, 2021, sales of these products and the operating activities associated with the e-commerce business have not been significant. However, management expects this e-commerce business to eventually become a reportable segment under GAAP as the business grows and the activity becomes more significant. The Company’s acquisition of CNP Operating in August 2021 results in an additional reporting segment that will be provided in future periods.
Cash and Cash Equivalents
The Company considers all highly liquid temporary cash investments with an original maturity of three months or less when purchased, to be cash equivalents. The Company has restricted cash as a result of its corporate card program through its bank, which requires collateral placed in a money market account. At September 30, 2021, the Company had a restricted cash balance of $
6
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 September 30, 2021 and December 31, 2020 amounted to $
Inventory
The Company’s inventory consists of finished goods acquired for its e-commerce network business it is currently in the process of launching and for its CBD manufacturing business, CNP Operating. The inventory is valued at the lower of cost (first-in, first-out) or estimated net realizable value.
Concentration of Credit Risks
The Company is subject to concentrations of credit risk primarily from cash and cash equivalents and accounts receivable.
The Company’s cash and restricted cash accounts are held at a financial institution and are insured by the Federal Deposit Insurance Corporation, or the FDIC, up to $
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.
The Company accounts for revenues when both parties to the contract have approved the contract, the rights and obligations of the parties are identified, payment terms are identified, and collectability of consideration is probable. Payment terms vary by client and the services offered.
During the first quarter of 2021, the Company began offering customers of its East West Venture who purchase services the option to pay the contract price in securities issued by the Customer which could be a common stock, preferred stock or convertible debentures. In accordance with ASC 606 - Revenue Recognition, the Company will value the shares received at the fair market value of the date the contract is executed.
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.
The Company accounts for its CNP Operating revenues when both parties to the contract have approved the contract, the rights and obligations of the parties are identified, payment terms are identified, and collectability of consideration is probable. Payment terms vary by client and the services offered.
7
Shipping and Handling Fees and Costs
Amounts billed to customers for shipping and handling fees are presented in revenue. Costs incurred for shipping and handling are included in cost of revenue.
Fair Value of Financial Instruments
The Company accounts for assets and liabilities measured at fair value on a recurring basis in accordance with ASC Topic 820, Fair Value Measurements and Disclosures, or ASC 820. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements.
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
Level 1: | Observable inputs such as quoted market prices in active markets for identical assets or liabilities. |
|
|
Level 2: | Observable market-based inputs or unobservable inputs that are corroborated by market data. |
|
|
Level 3: | Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions. |
Additional Disclosures Regarding Fair Value Measurements
The carrying value of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and lines of credit approximate their fair value due to the short-term maturity of these items. The Company’s notes payable approximate their fair value due to the market rate of interest on the notes.
Advertising
The Company expenses advertising costs as incurred. Advertising expenses for the three months ended September 30, 2021 and 2020 amounted to $
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.
For interim periods, the Company uses the effective income tax rate method resulting in zero income tax for the nine months ended September 30, 2021 and 2020.
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.
Investments
On December 24, 2020, the Company acquired a
There were no impairment charges recorded related to investments during the six months ended September 30, 2021.
8
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.
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 and warrants (calculated using the modified-treasury stock method). As of September 30, 2021, the Company had
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.
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. Warrants granted in connection with ongoing arrangements are more fully described in Note 6, Stockholders’ Equity (Deficit).
Leases
The Company adopted Accounting Standards Update No. 2016-02, Leases (“Topic 842”) using the modified retrospective method. This accounting standard requires a lessee to recognize an asset and liability for most leases on its balance sheet. Upon adoption, right-of-use (ROU) assets and lease liabilities for operating leases were recorded in the amount of $181,134 and $181,134, respectively
The Company elected the practical expedient method permitted under the transition guidance, which allows a carryforward of historical lease classification, the assessment on whether a contract was or contains a lease, and the initial direct costs for any leases that existed prior to July 1, 2019. The Company also elected to recognize the associated lease payments in the consolidated statements of operations on a straight-line basis over the lease term.
9
Under Topic 842, the Company determines if an arrangement is a lease at inception. ROU assets and lease liabilities are recognized at commencement date based on the present value of remaining lease payments over the lease term. For this purpose, the Company considers only payments that are fixed and determinable at the time of commencement and leases with an initial term of 12 months or less are not included in lease liabilities or ROU asset. As most leases do not provide an implicit rate, a rate which approximates the Company’s incremental borrowing rate is used, based on the information available at commencement date, in determining the present value of lease payments. The ROU asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives received. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options. Lease agreements may contain variable costs such as common area maintenance, insurance, real estate taxes or other costs. Variable lease costs are expensed as incurred. Lease agreements generally do not contain residual value guarantees or restrictive covenants. Over the lease term, the Company uses the effective interest rate method to account for the lease liability as lease payments are made and the ROU asset is amortized in a manner that results in straight-line expense recognition.
NOTE 3: PROPERTY AND EQUIPMENT
The Company’s property and equipment relating to continuing operations consisted of the following:
| September 30, |
| December 31, | |
Machinery & Equipment |
| $ |
| $ |
Furniture, equipment and leasehold improvements |
|
| ||
|
| |||
Less: accumulated depreciation and amortization |
| ( |
| ( |
| $ |
| $ |
Depreciation and amortization expense for the nine months ended September 30, 2021 and 2020 amounted to $
NOTE 4: MARKETABLE SECURITIES
During the first quarter of 2021, the Company began offering customers of its East West Venture who purchase services the option to pay the contract price in securities issued by the Customer which could be a common stock, preferred stock or convertible debentures. In accordance with ASC 606 - Revenue Recognition, the Company will value the shares received at the fair market value of the date the contract is executed. The shares received will be accounted for in accordance with ASC 320 – Investments – Debt and Equity Securities, as such the shares will be classified as available-for-sale securities and will be measured at each reporting period at fair value with the unrealized gain or (loss) as a component of other income (expense). Upon the sale of the shares, the Company will record the gain or (loss) in the consolidated statement of operations as a component of net income (loss).
| September 30, | Common Stock |
|
Balances at beginning of year | $ | $ |
|
Additions | | |
|
Sale of marketable securities | | |
|
Change in fair value | | |
|
Balances at period end | $ | $ |
|
The Company accounts for its investments in equity securities in accordance with ASC 321-10 Investments - Equity Securities. The equity securities may be classified into two categories and accounted for as follows:
·Equity securities with a readily determinable fair value are reported at fair value, with unrealized gains and losses included in earnings. Any dividends received are recorded in interest income, the fair value of equity investments with fair values is primarily obtained from third-party pricing services.
·Equity securities without a readily determinable fair value are reported at their cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer and their impact on fair value. Any dividends received are recorded in interest income. For equity investments without readily determinable fair values, when an orderly transaction for the identical or similar investment of the same issuer is identified, we use the valuation techniques permitted under ASC 820 Fair Value Measurement to evaluate the observed transaction(s) and adjust the fair value of the equity investment
10
NOTE 5: FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of certain financial instruments, including cash and cash equivalents, restricted cash and accounts payable and accrued expenses, approximate their respective fair values due to the short-term nature of such instruments.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level in which to classify them for each reporting period. This determination requires significant judgments to be made. The Company considers marketable securities quoted on the NASDAQ, Canadian Stock Exchange and OTC Pink sheets and then discounts the value after considering Rule 144 restrictions and market liquidity to be fair valued with Level 1 inputs. The Company had the following financial assets of September 30, 2021:
|
|
| Balance as of September 30, 2021 | Significant Unobservable Inputs | Significant Unobservable Inputs | Significant Unobservable Inputs |
Marketable Securities |
|
| $ | $ | $ | $ |
Total Assets |
|
| $123,936 | $123,936 | $- | $- |
NOTE 6: NOTES PAYABLE
On September 10, 2019, the Company entered into a promissory note payable whereby the Company borrowed $
In connection with the promissory note on September 10, 2019, the Company issued warrants to purchase
The note was discounted by $
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 $
The interest rate on the Loan is
On June 24, 2020, the Company entered into a Loan Authorization and Agreement with the SBA under which the Company borrowed $
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 $
11
The interest rate on the Second Loan is
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 $
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 $
On June 6, 2020, the Company’s subsidiary CNP Operating entered into a second promissory note payable with Eagle whereby the Company borrowed $
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 portion of the entire obligations as an offset to member’s contribution.
On January 10, 2020 the Company’s subsidiary CNP Operating purchased a distillation machine for $
On Nov 19, 2020 the Company’s subsidiary CNP Operating purchased equipment for $
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 $
Future scheduled maturities of long-term debt are as follows.
|
| Year Ending |
|
|
|
2021 | (3 months) | $ |
2022 |
| |
2023 |
| |
2024 |
| |
2025 |
| |
Thereafter |
| |
Total |
| $ |
The aggregate current portion of long-term debt as of September 30, 2021 amounted to $
12
NOTE 7: STOCKHOLDERS’ EQUITY (DEFICIT)
Common Stock
Effective April 3, 2020, the Company granted
Effective August 6, 2020, the Company and Emerging Growth reached an agreement whereby the Company issued
Effective October 13, 2020, the Company and the holder of its $
In December 2020, the Company received $
In January 2021, the Company issued
In March 2021, the Company issued
In May 2021, in connection with the maturity extension of the $500,000 promissory note (Note 4), the Company issued
In June 2021, the Company received $
On August 23, 2021, the Company entered into securities purchase agreements with CNP Operating, whereby the Company acquired
Preferred Stock
The Company is authorized to issue
On June 20, 2019, the Company issued to certain of its promissory noteholders an aggregate of
13
On June 20, 2019, the Company issued
For the nine months ended September 30, 2021 and 2020, the Company incurred $
Warrants
The following summarizes the Company’s warrant activity for the nine months ended September 30, 2021.
|
| Warrants |
| Weighted- |
| Weighted- |
|
|
|
|
|
|
|
Outstanding at December 31, 2020 |
| |
| $ |
| 3.56 |
Forfeited |
| ( |
|
|
| |
Exercised |
| ( |
|
|
| |
Outstanding at September 30, 2021 |
| |
| $ |
| 3.36 |
|
|
|
|
|
|
|
Vested and expected to vest |
|
|
|
|
|
|
at September 30, 2021 |
| |
| $ |
| 3.36 |
|
|
|
|
|
|
|
Exercisable at September 30, 2020 |
| |
| $ |
| 3.36 |
As of September 30, 2021, all outstanding warrants were fully vested and there was no remaining unrecorded compensation expense.
Options
The Company had a Stock Option Plan, or the Plan, under which the total number of shares of capital stock of the Company that may be subject to options under the Plan was 22,500,000 shares of Common Stock from either authorized but unissued shares or treasury shares. The Plan expired on December 14, 2016.
The following summarizes the Company’s stock option activity for the nine months ended September 30, 2021.
|
| Options |
| Weighted- |
| Weighted- |
|
|
|
|
|
|
|
Outstanding at December 31, 2020 |
| |
| $ |
| 1.44 |
Granted/forfeited/cancelled |
| |
|
|
|
|
Outstanding at September 30, 2021 |
| |
| $ |
| .94 |
|
|
|
|
|
|
|
Vested and expected to vest |
|
|
|
|
|
|
14
at September 30, 2021 |
| |
| $ |
| .94 |
|
|
|
|
|
|
|
Exercisable at September 30, 2021 |
| |
| $ |
| .94 |
As of September 30, 2021, all outstanding options were fully vested and there is no remaining unrecorded compensation expense.
15
NOTE 8: COMMITMENTS AND CONTINGENCIES
Legal Proceedings
From time to time, the Company may become involved in legal proceedings arising in the ordinary course of business. The Company is not presently a party to any legal proceedings that it currently believes, if determined adversely to the Company, would individually or taken together have a material adverse effect on the Company’s business, operating results, financial condition or cash flows.
NOTE 9: LEASES
On June 20, 2019, the Company entered into a Lease Agreement with Emerging Growth for the lease of office space in Whitefish, Montana, for a period of one year at a rate of $
On March 30, 2021, the Company entered into a new lease with Emerging Growth, which took the place of the old lease effective April 1, 2021. The lease provides for payments of $
On June 4, 2019, the Company’s subsidiary CNP Operating entered into a Lease Agreement with Blair Investments, LLC for the lease of office space in Centennial Colorado, for a period of 3 year at a rate of $
On October 26, 2020 the Company’s subsidiary CNP Operating entered into an amendment to the previous agreement to extend the lease to June 30, 2024, adjust the monthly rent schedule, the landlord agreed to install additional HVAC equipment and the Company agreed to reimburse the landlord $40,000 over a 4-year period with a monthly payment amount of $
The following is a summary of future minimum lease payments and related liabilities for all non-cancelable operating leases maturing as of September 30:
| Operating |
2021 | $ |
2022 | |
2023 | |
2024 | |
Thereafter | |
Total minimum lease payments including interest | |
Less: Amounts representing interest | ( |
Present value of minimum lease payments | |
Less: Current portion of lease liabilities | ( |
Non-current portion of lease liabilities | $ |
|
|
Cash payments on lease liabilities | $ |
Weighted average remaining lease term | |
Weighted average discount rate | |
16
NOTE 10: ACQUISITION OF CNP OPERATING
On August 25, 2021, the Company acquired CNP Operating for a purchase price consideration consisting of
Also, during 2019, CNP Operating acquired certain inventory from CSIS and a portion of that inventory became damaged or obsolete. CNP Operating assumed the obligation for the debt with CBSG for $
The purchase price allocation at fair value is below. The business combination accounting is not yet complete and the amounts assigned to the net assets acquired are provisional. Therefore, the final purchase price allocation may vary based on final appraisals, valuations and analyses of the fair value of the net assets acquired.
| August 25, 2021 | |
|
| Unaudited |
Assets |
|
|
|
|
|
Current assets |
|
|
Cash |
| $ |
Accounts receivable, net |
| |
Inventory |
| |
Current portion of note receivable |
| |
Total current assets |
| |
|
|
|
Other assets |
|
|
Right of Use Asset |
| |
Property and equipment, net of accumulated depreciation |
| |
Goodwill |
| |
Other Assets |
| |
Total other assets |
| |
Total assets |
| $ |
|
|
|
Liabilities |
|
|
|
|
|
Current liabilities |
|
|
Accounts payable and accrued expenses |
| $ |
Due to CSIS |
| |
Current portion of lease obligation |
| |
Current portion of notes payable |
| |
Total current liabilities |
| |
|
|
|
Lease obligation, less current portion |
| |
Long-term note payable, net of current portion and discounts |
| |
Total liabilities |
| |
|
|
|
Total Purchase Price Consideration |
| $ |
The purchase price was 354,000,000 shares of common stock at $0.03 per share totaling $10,620,000.
17
The historical operations of CNP Operating were as follows:
|
| Six Months Ended |
| Twelve months ended |
|
| Unaudited |
| Audited |
Net revenues |
| $ |
| $ |
Cost of revenue |
|
| ||
Gross profit (loss) |
|
| ||
|
|
|
|
|
Operating expenses: |
|
|
|
|
Selling, general and administrative |
|
| ||
Total operating expenses |
|
| ||
|
|
|
|
|
Loss from operations |
| ( |
| ( |
|
|
|
|
|
Total other expense |
| ( |
| ( |
|
|
|
|
|
Net loss |
| $( |
| $( |
11. Subsequent Events
On October 19, 2021, the Company borrowed $
18
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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.
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, ISO compliant, 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.
On August 23, 2021, the Company entered into securities purchase agreements with CNP Operating and the Owners, whereby the Company acquired 100% of CNP Operating from the Owners in exchange for an aggregate of 354 million shares of the Company’s common stock. On August 25, 2021 the transaction was closed and CNP Operating became a wholly owned subsidiary of the Company.
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."
19
Results of Operations for the Three Months Ended September 30, 2021 and 2020
The following are the results of our operations for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020:
|
| For the Three Months Ended |
|
| ||
|
| September 30, |
| September 30, |
| Change |
|
|
|
|
|
|
|
Net revenues |
| $948,254 |
| $154,369 |
| $837,198 |
Cost of revenue |
| 730,186 |
| 128,885 |
| 599,161 |
Gross profit |
| 218,068 |
| 25,484 |
| 238,037 |
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
Selling, general and administrative |
| 847,888 |
| 307,069 |
| 540,819 |
Total operating expenses |
| 847,888 |
| 307,069 |
| 540,819 |
|
|
|
|
|
|
|
Loss from operations |
| (629,820) |
| (281,585) |
| (348,235) |
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
Loss on extinguishment of debt |
| - |
| (30,069) |
| (30,069) |
SBA PPP loan forgiveness |
| 263,000 |
| 10,000 |
| 253,000 |
Unrealized gain on investments |
| 23,341 |
| - |
| 5,595 |
Interest expense |
| (23,055) |
| (13,560) |
| (8,253) |
Interest income |
| 2 |
| 2 |
| (2) |
Total other income (expense) |
| 263,288 |
| (13,027) |
| (296,915) |
|
|
|
|
|
|
|
Net loss before provision for income taxes |
| (366,532) |
| (315,212) |
| (51,320) |
Provision for income taxes |
| - |
| - |
| - |
Net loss |
| $(366,532) |
| $(315,212) |
| $(51,320) |
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 September 30, 2021, the Company started four new campaigns, compared with five during the same period in 2020. These campaigns have a value of $89,500 which will be recognized as revenue over the next three to six months. In 2020, the cumulative value of campaigns begun during the same period 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.
The Company’s subsidiary CNP Operating generated revenue of $780,000 from the sale of products produced from hemp material and manufactured into CBD distillate.
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 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 quarter.
The Company’s cost of revenue for the three months ended September 30, 2021 were higher than those in the corresponding three months in 2020 due largely to the acquisition of CNP Operating which represented approximately $635,000 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 September 30, 2021 were higher than those in the corresponding three months in 2020 due largely to the acquisition of CNP Operating which represented approximately $500,000 of additional general and administrative expenses representing wages.
20
Other Income/Expense
Other income increased during the three months ended September 30, 2021 due to the forgiveness of the SBA PPP loan. In addition, the investments received by East West for services were marked to market and resulted in an unrealized loss for the period. The Company did not have a similar loss during the three months ended September 30, 2020.
Results of Operations for the nine Months Ended September 30, 2021 and 2020
The following are the results of our operations for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020:
|
| For the Nine Months Ended |
|
| ||
|
| September 30, |
| September 30, |
| Change |
|
|
|
|
|
|
|
Net revenues |
| $1,451,230 |
| $349,071 |
| $1,102,159 |
Cost of revenue |
| 949,170 |
| 414,154 |
| 535,016 |
Gross profit (loss) |
| 502,060 |
| (65,083) |
| 567,143 |
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
Selling, general and administrative |
| 1,551,790 |
| 906,739 |
| 645,051 |
Total operating expenses |
| 1551,790 |
| 906,739 |
| 645,051 |
|
|
|
|
|
|
|
Loss from operations |
| (1,049,730) |
| (971,822) |
| (77,908) |
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
Loss on extinguishment of debt |
| (172,500) |
| (30,069) |
| (42,431) |
Unrealized gain on investments |
| 31,761 |
| - |
| 31,761 |
SBA PPP loan forgiveness |
| 263,000 |
| 10,000 |
| 253,000 |
Interest expense |
| (53,723) |
| (38,055) |
| (15,668) |
Interest income |
| 9 |
| 17 |
| (8) |
Total other income (expense) |
| 68,547 |
| (58,107) |
| 126,654 |
|
|
|
|
|
|
|
Net loss before provision for income taxes |
| (981,183) |
| (1,029,929) |
| 48,746 |
Provision for income taxes |
| - |
| - |
| - |
Net loss |
| $(981,183) |
| $(1,029,929) |
| $48,746 |
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 nine months ended September 30, 2021, the Company started twenty-five new campaigns, compared with eight during the same period in 2020. These campaigns have a value of $651,000 which will be recognized as revenue over the next three to six months. In 2020, the cumulative value of campaigns begun in the first nine months was $167,500 with much of the revenue recognized during the first quarter of 2020 attributable to the final stages of campaigns started in previous quarters.
The Company’s subsidiary CNP Operating generated revenue of $780,000 from the sale of products produced from hemp material and manufactured into CBD distillate.
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.
The Company’s cost of revenue for the nine months ended September 30, 2021 were higher than those in the corresponding three months in 2020 due largely to the acquisition of CNP Operating which represented approximately $635,000 of cost of revenue which primarily represents the cost of hemp material, manufacturing material such as solvent, fuel and equipment depreciation.
21
Operating Expenses
The Company’s operating expenses for the nine months ended September 30, 2021 were higher than those in the corresponding three months in 2020 due largely to the acquisition of CNP Operating which represented approximately $500,000 of additional general and administrative expenses representing wages.
Other Income/Expense
Other expenses increased during the nine months ended September 30, 2021 due to the loss on extinguishment of debt the Company incurred as it issued common stock in payment of interest payable and extension of the maturity date on a note payable. In addition, the investments received by East West for services were marked to market and resulted in an unrealized gain of approximately $23,000 and the SBA PPP loan forgiveness of $268,000. The Company did not have a similar loss during the nine months ended September 30, 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:
|
| Nine Months Ended | ||
|
| September 30, |
| September 30, |
Cash flows (used in) operating activities |
| $(255,152) |
| $(326,119) |
Cash flows provided (used in) by investing activities |
| $54,879 |
| $(6,633) |
Cash flows provided by financing activities |
| $221,894 |
| $353,000 |
As of September 30, 2021, we had unrestricted cash of $201,737.
Net cash used in operating activities was $255,152 during the nine months ended September 30, 2021, compared to cash used in operating activities of $326,119 during the same period in 2020.
Net cash provided by investing activities was $54,879 during the nine months ended September 30, 2021 primarily from the acquisition of the CNP Operating assets, compared to cash used in financing activities of $6,633 during the same period in 2020.
Net cash provided by financing activities during the nine months ended September 30, 2021 of $221,894 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 $353,000 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.
22
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. 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, 2022 and on the first day of each month thereafter until February 1, 2024, 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 June 30, 2021, the current portion of the Second Loan due within the next 12 months amounted to $0. The Company plans to apply for full forgiveness of the Second PPP Note.
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. Full payment of the borrowed amount is over a three-year period. The first 12 consecutive monthly payments must equal a minimum of $1 million. Monthly payment ranging month 13 to month 24 must equal a minimum amount of no less than $1 million dollars. Monthly payments ranging month 25 to month 36 must equal $1,050,000. The outstanding balance of the note was $2,840,000 at September 30, 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. Interest of $7,334 on the note is payable monthly on the seventh business day of the month commencing October 7, 2019. A final payment equal to the total amount of principal, interest, total funded and other charges are due and payable on or before October 31, 2020. The outstanding balance of the note was $550,000 at September 30, 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. Interest of $4,500 on the note is payable monthly on the sixteenth business day of the month commencing July 16, 2020. A final payment equal to the total amount of principal, interest, total funded and other charges are due and payable on or before June 16, 2021. The outstanding balance of the note was $300,000 September 30, 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 portion of the entire obligations as an offset to member’s contribution.
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
23
and has no terms such as interest rate, maturity or monthly payments. Imputed interested was not material. The outstanding balance of the note was $49,331 at September 30, 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 $49,331 at September 30, 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 $29,981 as of September 30, 2021 because additional improvements were completed during the period.
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 September 30, 2021
Warrants
As of September 30, 2021, 4,687,500 shares of our common stock are issuable pursuant to the exercise of warrants.
Options
As of September 30, 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 disrupted 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 to 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.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer, who is our principal executive officer and our principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our principal executive officer and principal financial officer concluded that as of September 30, 2021, our disclosure controls and procedures were not effective.
24
Changes in Internal Control Over Financial Reporting
During 2019, in order to remediate the segregation of duties and other deficiencies initially created by the departure of our accounting department in June 2019, we hired accounting consultants to perform our account reconciliations and other day-to-day accounting requirements. The internal control structure was also documented and assessed in the areas of financial reporting and disclosure controls as it relates to our continuing operations. In addition, we revised and improved the use of our systems for getting appropriate approvals for purchases and other activities that require authorization. However, our ability to file timely reports is heavily dependent on having the necessary financial resources to pay consultants and other outside service providers involved with performing key elements of our disclosure and financial reporting controls. Our current financial condition, brought on in-part by COVID-19, has temporarily hindered our ability to file timely reports for this reason. As a result, we have assessed our disclosure controls and controls over financial reporting as not effective.
PART II - OTHER INFORMATION
Item 6. Exhibits
2.1 |
| Form of Securities Purchase Agreement, dated August 23, 2021 (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on August 23, 2021). | |
2.2 |
| Form of Securities Purchase Agreement, dated August 23, 2021(incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on August 23, 2021). | |
10.1 |
| Employment Agreement between CFN Enterprises Inc. and Brian Ross, dated August 25, 2021(incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on August 23, 2021). | |
10.2 |
| Employment Agreement between CFN Enterprises Inc. and Mario Marsillo Jr., dated August 25, 2021(incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on August 23, 2021). | |
10.3 |
| Employment Agreement between CFN Enterprises Inc. and Vince Kandis, dated August 25, 2021(incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on August 23, 2021). | |
10.4 |
| Employment Agreement between CFN Enterprises Inc. and Spiro Kandis, dated August 25, 2021(incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on August 23, 2021). | |
10.5 |
| Employment Agreement between CFN Enterprises Inc. and John Rand, dated August 25, 2021(incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on August 23, 2021). | |
10.6 | Form of Promissory Note, dated October 19, 2021 (incorporated by reference to the Company’s Current Report on Form 8-K filed on October 22, 2021). | ||
31.1 | |||
32.1 | |||
101. | The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in XBRL (eXtensible Business Reporting Language): (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Comprehensive Loss, (iv) the Statements of Changes in Stockholders’ Deficit, (v) the Statements of Cash Flows, and (vi) related notes to these financial statements.* | ||
*Filed herewith.
**Furnished herewith.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| CFN ENTERPRISES INC. | |
|
|
|
Dated: November 22, 2021
|
By: |
/s/ Brian Ross |
|
| Brian Ross President and Chief Executive Officer (Principal Executive Officer and Principal Financial Officer) |
26