FMHS 10-Q
Farmhouse, Inc. /Nv (FMHS)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended: | |
or | |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from: _____________ to _____________ | |
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FARMHOUSE, INC.
(Exact name of registrant as specified in its charter)
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NEVADA ( | ||
(State or Other Jurisdiction | (Commission | (I.R.S. Employer |
of Incorporation) | File Number) | Identification No.) |
(Address of Principal Executive Office) (Zip Code)
(
(
N/A
(Former name, former address and former fiscal year, if changed since last report)
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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.
[X]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
[X]
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.
1
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer [ ] |
| Accelerated filer [ ] |
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| Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act),
The number of shares of the issuer’s Common Stock outstanding as of August 9, 2023 is
2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements and information included in this Quarterly Report on Form 10-Q for the six months ended June 30, 2023 (this “Report”) contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. These statements are based upon beliefs of, and information currently available to management as well as estimates and assumptions made by management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used herein, the words “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “future,” “intend,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue” or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks relating to our business, industry, and our operations and results of operations. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
CERTAIN TERMS USED IN THIS REPORT
“We,” “us,” “our,” the “Registrant,” the “Company,” and “Farmhouse” are synonymous with Farmhouse, Inc., unless otherwise indicated. WeedClub®, Friends in High Places®, WeedClub Select® and @420® are registered Trademarks of the Company were used throughout this Report.
3
FARMHOUSE, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
June 30, 2023
INDEX
PART I – FINANCIAL INFORMATION5
Item 1.Interim condensed consolidated financial statements5
Item 2.Management’s Discussion and Analysis of Financial Condition
and Results of Operations19
Item 3.Quantitative and Qualitative Disclosures about Market Risk28
Item 4.Controls and Procedures28
PART II – OTHER INFORMATION29
Item 1.Legal Proceedings29
Item 1A.Risk Factors30
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds30
Item 3.Defaults Upon Senior Securities30
Item 4.Mine Safety Disclosures30
Item 5.Other Information30
Item 6.Exhibits31
SIGNATURE32
CERTIFICATIONS33
4
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FARMHOUSE, INC. AND SUBSIDIARIES | |||||
CONSENSED CONSOLIDATED BALANCE SHEETS | |||||
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| June 30, |
| December 31, | ||
2023 |
| 2022 | |||
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ASSETS |
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Current assets: |
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Cash and cash equivalents | $ | |
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Accounts receivable |
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Prepaid expenses |
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Total current assets |
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Total assets | $ | |
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LIABILITIES AND STOCKHOLDERS’ DEFICIT |
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Current liabilities: |
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Accounts payable | $ | |
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Accrued legal fees |
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Accrued payroll and payroll taxes |
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Accrued liabilities |
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Accrued interest payable |
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Convertible notes payable |
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Notes payable |
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Due to related parties |
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Total current liabilities |
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Long-term liabilities |
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Convertible notes payable, long-term |
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Total long-term liabilities |
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Total liabilities |
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Stockholders’ deficit: |
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Preferred stock; $ |
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Common stock; $ |
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Additional paid-in capital |
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Accumulated deficit |
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Total stockholders’ deficit |
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Total liabilities and stockholders’ deficit | $ | |
| $ | |
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The accompanying notes are an integral part of these condensed consolidated financial statements | |||||
5
FARMHOUSE, INC. AND SUBSIDIARIES | |||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | |||||||||||
(unaudited) | |||||||||||
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| For the three months ended June 30, |
| For the six months ended June 30, | ||||||||
2023 |
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| 2022 | |||||
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REVENUES |
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Revenues | $ | |
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Costs of revenues |
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Gross margin |
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OPERATING EXPENSES |
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General and administrative |
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Professional fees |
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Depreciation and amortization |
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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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Interest expense |
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Total other income (expense) |
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NET LOSS | $ | ( |
| $ | ( |
| $ | ( |
| $ | ( |
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BASIC AND DILUTED NET LOSS PER SHARE | $ | ( |
| $ | ( |
| $ | ( |
| $ | ( |
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BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF SHARES |
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The accompanying notes are an integral part of these condensed consolidated financial statements | |||||||||||
6
FARMHOUSE, INC. AND SUBSIDIARIES | |||||||||||||
CONSENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT | |||||||||||||
For the three and six months ended June 30, 2023 | |||||||||||||
(unaudited) | |||||||||||||
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| Common Stock |
| Accumulated |
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Shares |
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| Paid-in Capital |
| Deficit |
| Total | |||||
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Balance at December 31, 2022 | |
| $ | |
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| $ | ( |
| $ | ( |
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Stock-based compensation on RSA's vested | |
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Net loss | |
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Balance at March 31, 2023 | |
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Stock-based compensation on RSA's vested | |
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Net loss | |
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Balance at June 30, 2023 | |
| $ | |
| $ | |
| $ | ( |
| $ | ( |
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The accompanying notes are an integral part of these condensed consolidated financial statements | |||||||||||||
7
FARMHOUSE, INC. AND SUBSIDIARIES | |||||||||||||
CONSENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT | |||||||||||||
For the three and six months ended June 30, 2022 | |||||||||||||
(unaudited) | |||||||||||||
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| Common Stock |
| Accumulated |
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Shares |
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| Deficit |
| Total | |||||
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Balance at December 31, 2021 | |
| $ | |
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| $ | ( |
| $ | ( |
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Common stock sold | |
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Common stock issued for services | |
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Stock-based compensation on RSA's vested | |
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Net loss | |
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Balance at March 31, 2022 | |
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Common stock sold | |
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Common stock issued for services | |
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Stock-based compensation on RSA's vested |
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Net loss | |
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Balance at June 30, 2022 | |
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The accompanying notes are an integral part of these condensed consolidated financial statements | |||||||||||||
8
FARMHOUSE, INC. AND SUBSIDIARIES | |||||
CONSENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||
For the six months ended June 30, | |||||
(unaudited) | |||||
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2023 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net loss | $ | ( |
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Adjustments to reconcile net income (loss) to net cash used by operating activities: |
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Depreciation and amortization |
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Stock issued for services |
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Stock-based compensation on RSA's vested |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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Prepaid expenses |
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Accounts payable |
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Accrued legal fees |
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Accrued payroll and payroll taxes |
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Accrued liabilities |
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Accrued interest payable |
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Net cash used in operating activities |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Net cash used in 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 borrowings on note payable |
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Proceeds from borrowings on convertible note payable, long-term |
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Repayment of related party debt and short-term advances |
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Net cash provided by financing activities |
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NET CHANGE IN CASH |
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CASH AT BEGINNING OF PERIOD |
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CASH AT END OF PERIOD | $ | |
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW |
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Interest | $ | |
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Income taxes | $ | |
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The accompanying notes are an integral part of these condensed consolidated financial statements | |||||
9
FARMHOUSE, INC. AND SUBSIDIARIES
NOTES TO QUARTERLY CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023
(Unaudited)
NOTE 1 – ORGANIZATION AND OPERATIONS
Organization
The Company was incorporated in June 2013 as Somerset Transition Corporation under the Oklahoma General Corporation Act. The Company was formed to complete a reorganization under Section 1088(g) of the Oklahoma Act, whereby the Company became successor to Transnational Financial Network, Inc., which was originally incorporated in California in 1985. In September 2013, the Company was redomesticated in Maryland and changed its name to Somerset Property, Inc. In July 2017, the Company was redomesticated in Nevada and changed its name to Revival, Inc. In June 2019, the Company changed its name to Farmhouse, Inc. to reflect its new business endeavors.
In August 2019, the Company acquired Farmhouse, Inc., a Washington corporation (“Farmhouse Washington”) as its wholly owned subsidiary (the “Acquisition”). Farmhouse Washington was formed in January 2014 and has developed a social network platform, “The WeedClub® Platform”. At the closing of the Acquisition, all of the issued and outstanding shares of common stock of Farmhouse Washington were exchanged for shares of common stock of the Company on a one-for-one basis. The financial statements of the Company are the continuation of Farmhouse Washington with the adjustment to reflect the capital structure of the Company.
Prior to the Acquisition, in August 2017, Farmhouse Washington formed Farmhouse DTLA, Inc. (“DTLA”) in California as a wholly owned subsidiary. In April 2021, DTLA was awarded a 49% equity interest in a Los Angeles based multi-licensed cannabis retail dispensary, grow, manufacturer and distributor called Los Angeles Farmers, Inc. (“LAFI”). Although ownership percentages over 20% would typically be accounted for using the equity method, the Company is accounting for this investment as an investment in equity securities due to the Company not having significant influence over LAFI. The cost of this investment was expensed during the fiscal year ended December 31, 2017 and, due to uncertainties surrounding the value of LAFI and determining any award of back profits and interest, as well as the pending litigation, no value has been reflected in our unaudited interim condensed consolidated financial statements as of June 30, 2023. See Note 9.
Current Operations
The Company is a technology company with multiple cannabis related divisions and IP, including the WeedClub® Platform, the @420 Twitter handle and a Web3 division. The WeedClub® Platform is a cannabis social network platform that enables industry professionals to connect, discover products and services and scale their businesses. Within the WeedClub® Platform, members utilize an increasing set of technology-based tools for discovering professional connections and information. The Company’s @420 Twitter handle serves as a public platform to engage with cannabis enthusiasts. The Company’s Web3 division, launched in December 2021, facilitates licensing opportunities between established cannabis brands and influential digital collectible holders to launch digital collectible branded products and accessories.
Going Concern and Management’s Plans
The accompanying unaudited interim condensed consolidated financial statements have been presented on the basis that the Company is a going concern which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. For the six months ended June 30, 2023, the Company had a net loss from operations of $
10
FARMHOUSE, INC. AND SUBSIDIARIES
NOTES TO QUARTERLY CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023
(Unaudited)
stockholders’ deficit of $
The Company has financed its activities principally from the sale of its common stock and loans from Company officers. The Company intends to finance its future working capital needs from these sources until such time that funds provided by operations are sufficient to fund working capital requirements. Management believes that the current cash on hand, loans from Company officers and funds raised from the sale of its common stock allow the Company sufficient capital for operations and to continue as a going concern.
On May 31, 2023, the board of directors (“Board”) authorized an offering of up to $1,000,000 of mandatorily convertible notes, designated Series 2023 10% Mandatorily Convertible Notes (the “Series 2023 Notes”) to fund its Web3 product development activities and for sales, marketing, and administrative expenses. For the six months ended June 30, 2023, the Company raised $
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist the reader in understanding and evaluating the Company’s unaudited interim condensed consolidated financial statements. These accounting policies conform to Generally Accepted Accounting Principles (“GAAP”) and have been consistently applied in the preparation of these unaudited interim condensed consolidated financial statements.
Principals of Consolidation
The unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries Farmhouse Washington and DTLA (together the “Company”). All material intercompany accounts, transactions, and earnings have been eliminated in the accompanying unaudited interim condensed consolidated financial statements.
Financial Statement Reclassification
Certain amounts from the prior year’s financial statements have been reclassified in these unaudited interim condensed consolidated financial statements to conform to the current year’s classifications.
Cash and Cash Equivalents
Cash and cash equivalents as of June 30, 2023 included cash in banks. The Company considers all highly liquid instruments with maturity dates within 90 days at the time of issuance to be cash equivalents.
Basis of presentation
The accompanying unaudited interim condensed consolidated financial statements contained in this Report have been prepared in accordance with U.S. GAAP and the rules of the Securities and Exchange
11
FARMHOUSE, INC. AND SUBSIDIARIES
NOTES TO QUARTERLY CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023
(Unaudited)
Commission (“SEC”) for interim financial information and do not include all of the information or disclosures required by U.S. GAAP for annual financial statements. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2022 filed with the Securities and Exchange Commission on April 20, 2023. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein.
Use of Estimates
Operating results for interim periods are not necessarily indicative of the results to be expected for the full year. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Significant estimates include the carrying value of property and equipment, grant date fair value of options, deferred tax assets and any related valuation allowance and related disclosure of contingent assets and liabilities. The Company evaluates its estimates based on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. Actual results could materially differ from these estimates.
Accounts receivable
Accounts receivable represent amounts due from customers in the ordinary course of business and are recorded at the invoiced amount and do not bear interest. Receivables are presented net of the allowance for doubtful accounts in the accompanying unaudited interim condensed consolidated balance sheets. We evaluate the collectability of our accounts receivable and determine the appropriate allowance for doubtful accounts based on a combination of factors. When we become aware of a customer’s inability to meet its financial obligation, a specific allowance for doubtful accounts is recorded, reducing the receivable to the net amount we reasonably expect to collect.
Revenue Recognition
In accordance with ASC No. 606, Revenue Recognition, the Company recognizes revenue from product sales or services rendered when the following five revenue recognition criteria are met: identify the contract with the client, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to performance obligations in the contract and recognize revenues when or as the Company satisfies a performance obligation.
The Company generates revenue from the following sources:
(1)Subscription fees. Subscription fees related to the WeedClub portal are received at the time of purchase. The Company’s performance obligation is to provide services over a fixed subscription period; accordingly, the Company recognizes revenue ratably over the subscription period and deferred revenue is recorded for the portion of the subscription period subsequent to each reporting date.
(2)License revenues. The Company generates revenue from license fees in connection with NFT Art License Agreements, whereby the licensee is granted a limited license from the Company to use one of its licensed NFT’s for the purpose of creating, marketing, and selling branded cannabis and hemp
12
FARMHOUSE, INC. AND SUBSIDIARIES
NOTES TO QUARTERLY CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023
(Unaudited)
products and accessories. The Company’s performance obligation is met over the term of the license agreement; accordingly, the Company recognizes revenue ratably over the term of the license agreement.
Revenues generated for the three and six months ended June 30 were as follows:
| Three months ended June 30, |
| Six months ended June 30, | ||||||||
2023 |
| 2022 |
| 2023 |
| 2022 | |||||
| (Unaudited) |
| (Unaudited) |
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Subscription fees | $ |
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License revenues |
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Costs of revenues |
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Net revenues | $ |
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Earnings (Loss) per Common Share
Net income (loss) per common share is computed pursuant to ASC 260-10-45, Earnings per Share – Overall – Other Presentation Matters. Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock and potentially outstanding shares of common stock during the period. The weighted average number of common shares outstanding and potentially outstanding common shares assumes that we incorporated as of the beginning of the first period presented.
All dilutive common stock equivalents are reflected in our net income (loss) per share calculations. Anti-dilutive common stock equivalents are not included in our loss per share calculations. The Company’s convertible note payable for $45,000 as of June 30, 2023 and December 31, 2022 (see Note 3) and the Company’s Series 2023 Note for $
Recently Issued Accounting Pronouncements
There are no recently issued accounting pronouncements that the Company has not yet adopted that they believe are applicable or would have a material impact on the financial statements of the Company.
NOTE 3 – CONVERTIBLE NOTES PAYABLE
The Convertible note payable is comprised of a promissory note to an unrelated individual in the amount of $
13
FARMHOUSE, INC. AND SUBSIDIARIES
NOTES TO QUARTERLY CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023
(Unaudited)
accounted for under derivative accounting guidance because the settlement amount is not determinable by an underlying conversion price. Therefore, no derivative was recorded in these unaudited interim condensed consolidated financial statements as of June 30, 2023 and December 31, 2022.
NOTE 4 – NOTES PAYABLE
In June 2021, the Company entered into a loan agreement, not to exceed $75,000, with an unaffiliated individual (“Lender”) and borrowed $
NOTE 5 – CONVERTIBLE NOTES PAYABLE – LONG-TERM
On May 31, 2023, the Board authorized an offering of up to $1,000,000 of mandatorily convertible notes, designated Series 2023 10% Mandatorily Convertible Notes (the “Series 2023 Notes”) to fund its Web3 product development activities and for sales, marketing, and administrative expenses. For the six months ended June 30, 2022, the Company raised $
The Series 2023 Notes are mandatorily convertible 30 calendar days after the first to occur: (i) the Company’s common stock has a closing price of greater than $1.00 for ten consecutive days (the “Market Forced Conversion”), or (ii) the Company closes on an offering of its common stock for no less than $1,000,000 (“Offering Forced Conversion”). The Series 2023 Notes shall be automatically converted into shares of common stock at a conversion price equal to 75.8% of (i) the closing price of the Company’s common stock on the tenth trading day, for a Market Forced Conversion, or (ii) the offering price of the Company’s common stock, for an Offering Forced Conversion.
The conversion price shall equal the sum of the principal amount of the Series 2023 Notes, plus the accrued and unpaid interest on such notes, plus default interest, if any, on the notes. The conversion price is subject to equitable adjustments for stock splits, stock dividends or rights offerings by the Company, combinations, recapitalization, reclassifications, extraordinary distributions, and similar events.
NOTE 6 – DUE TO RELATED PARTIES
Due to Related Parties totaled $
14
FARMHOUSE, INC. AND SUBSIDIARIES
NOTES TO QUARTERLY CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023
(Unaudited)
NOTE 7 – STOCKHOLDERS’ DEFICIT
Authorized Capital
The Company’s authorized capital consists of
Designation of Series A Preferred stock
The Board has designated 500,000 shares of the Company’s authorized preferred stock as Series A 10% Cumulative Convertible Participating Preferred Stock (the “Series A Preferred”). No shares of Series A Preferred have been issued.
The Series A Preferred bears a 10% cumulative dividend and has a per share liquidation preference equal to $1.00 plus any unpaid dividends (“Liquidation Preference”). Dividends must be declared by the Board to become payable. If cash dividends were to be paid, the Series A Preferred would have preference in payment of dividends over the common stock and any other series of preferred stock later designated. Each dollar of Series A Preferred and any accumulated dividends are initially convertible into five shares of the Company’s common stock, or $.20 per share (the “Conversion Price”). The Conversion Price will be adjusted if there are dilutive issuances. Shares may be converted at any time at the election of the holders. There are no mandatory conversion provisions of the Series A Preferred. Starting one year after issuance, the Series A Preferred may be redeemed by the Company upon 30 days’ notice, subject to prior conversion at any time.
Other attributes of the Series A Preferred are priority of class, anti-dilution protection, right of first refusal to the holders and voting rights on an as converted basis. The Series A Preferred is senior to all other classes of stock of the Company. In the event of liquidation, after the Preference Amount plus accrued dividends have been paid on all outstanding Series A Preferred, any remaining funds and assets of the Company legally available for distribution to the Shareholders will be distributed ratably among the Shareholders in accordance with their holdings on an as converted basis. The Series A Preferred is protected from a dilutive issuance of additional shares of stock at a per share less than the conversion price at the date of such new issuance. The Series A Preferred votes with the shares of common stock on an as-converted basis as a single class on all matters except for matters that affect the rights of the Series A Preferred, in which case the Series A Preferred votes separately as a single class. Holders of Series A Preferred vote as a class to elect a single director out of a maximum of five directors.
Common stock transactions
The Company has
·The Company sold
15
FARMHOUSE, INC. AND SUBSIDIARIES
NOTES TO QUARTERLY CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023
(Unaudited)
·The Company issued
As a result of these transactions, the Company has
Shares Reserved
The Company is required to reserve and keep available of its authorized but unissued shares of common stock an amount sufficient to affect shares that could be issued in connection with the conversion of the convertible note payable or the Series 2023 Notes. See Notes 3 and 5. The convertible note payable is convertible at a conversion price the note holder and the Company agree on and the Series 2023 Notes are mandatorily convertible upon future events. Therefore, the number of shares these convertible securities are convertible into are not determinable and, accordingly, no shares of common stock are reserved for future issuance as of June 30, 2023 and December 31, 2022.
NOTE 8 – STOCK-BASED COMPENSATION
2021 Omnibus Incentive Plan
In May 2021, the Board approved the Farmhouse, Inc. Omnibus Incentive Plan (the “2021 OIP”). The 2021 OIP permits the granting of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Shares, Performance Units, Other Stock-Based Awards and Cash-Based Awards. The maximum number of shares of common stock that may be issued pursuant to Awards under the 2021 OIP is 3,000,000. Stockholders holding a majority of the Company’s common stock outstanding ratified the 2021 OIP by written consent.
Any options to be granted under the 2021 OIP may be either “incentive stock options,” as defined in Section 422A of the Internal Revenue Code, or “non-statutory stock options,” subject to Section 83 of the Internal Revenue Code, at the discretion of the Board and as reflected in the terms of the written option agreement. The option price shall not be less than 100% of the fair market value of the optioned common stock on the date the option is granted. The option price shall not be less than 110% of the fair market value of the optioned common stock for an optionee holding at the time of grant, more than 10% of the total combined voting power of all classes of stock of the Company. Options become exercisable based on the discretion of the Board and must be exercised within ten years from the date of grant (five years from date of grant for Company employees and directors).
Any restricted stock awards to be granted under the 2021 OIP are issued and measured at fair market value on the date of grant and become vested in various monthly or quarterly installments from the date of grant, subject to the recipient remaining in the Company’s service on specified vesting dates. Vesting of restricted stock awards is based solely on time vesting. Stock-based compensation expense is recognized as the shares vest with a corresponding offset credited to additional paid-in-capital.
16
FARMHOUSE, INC. AND SUBSIDIARIES
NOTES TO QUARTERLY CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023
(Unaudited)
Restricted Stock Awards
A summary of the Company’s non-vested restricted stock awards as of June 30, 2023 and changes for the six months then ended is presented below:
| Restricted Stock Awards |
| Weighted Average Grant Date Fair Value | ||
|
|
|
|
|
|
Non-vested restricted stock awards, Dec. 31, 2022 |
|
| $ | ||
Awarded |
|
|
| ||
Vested |
| ( |
|
| |
Forfeited |
| - |
|
| - |
Non-vested restricted stock awards, June 30, 2023 |
|
| $ | ||
RSA shares are measured at fair market value on the date of grant and stock-based compensation expense is recognized as the shares vest with a corresponding offset credited to additional paid-in-capital. For the six months ended June 30, 2023 and 2022, the Company recognized stock-based compensation expense of $
NOTE 9 – LITIGATION
In August 2017, the Company’s subsidiary, DTLA, entered into a Strategic Consulting Agreement (the “SCA”) with Absolute Herbal Pain Solutions, Inc., a medical marijuana growing, and retail company based in Los Angeles that now goes by the name Los Angeles Farmers, Inc. (“LAFI”). The SCA provided for DTLA to invest substantial sums of money into LAFI and also to provide management services for LAFI going forward. In exchange, LAFI agreed to provide DTLA with a share in any future profits and a 49% equity stake in LAFI. Following the SCA, in excess of $700,000 was spent by DTLA to stabilize LAFI’s finances and pay critical bills. In addition, DTLA brought in an outside management company with expertise in running grow and retail operations. Subsequent to DTLA providing funding and management resources to LAFI, DTLA and its management team were locked out of the LAFI facility in late October 2017.
In October 2017, DTLA commenced litigation in Los Angeles County Superior Court (Case #BC681251) against LAFI and David and Irina Vayntrub, who were the sole officers, directors, and members of LAFI, seeking to enforce its contract rights under the SCA. In March 2018, the litigation was stayed so that the parties could pursue the claims by way of arbitration at Judicate West. In January 2020, following more than a year of discovery, DTLA entered into a confidential settlement with the Vayntrubs, however, the case continued against LAFI.
In February 2021, a four-day arbitration hearing was held at Judicate West. In April 2021, the Arbitrator overseeing the arbitration hearing issued a judgment in favor of DTLA and against LAFI (the “DLTA Judgment”). The DLTA Judgment awarded 49% of LAFI to DTLA as of the change of control in November 2017, along with a share of any profits from November 2017 to the present and going forward, accrued interest on those profits, and costs of bringing the litigation. The DLTA Judgment also appointed
17
FARMHOUSE, INC. AND SUBSIDIARIES
NOTES TO QUARTERLY CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023
(Unaudited)
a Monitor, to be supervised by the Arbitrator, to determine how much in past profits and interest DTLA is entitled to be awarded and that DTLA is treated fairly by LAFI on a going forward basis.
Between July and December 2021, the Monitor undertook a detailed process to determine the value of the 49% of profits and proceeds from 2017 to the present that DTLA is entitled to, in addition to the 10% prejudgment interest. The Monitor’s report was completed in January 2022. Based on the information in the Monitor’s report, DTLA has requested that the Arbitrator issue an award of back profits and interest and order the sale of LAFI to an independent third party in order to allow any judgment to be paid to DTLA. Due to uncertainties, the impact of the DLTA Judgment has not been reflected in the accompanying interim condensed consolidated financial statements as of June 30, 2023.
In August 2022, a receiver was appointed by the Los Angeles County Superior Court to assume control of LAFI. As of August 9, 2023, the date of these unaudited interim condensed consolidated financial statements, the receiver is in the process of selling LAFI. It is not known at this time whether the sale of LAFI, if consummated and approved by the Superior Court, will result in any proceeds of the sale being paid to satisfy the DLTA Judgment.
NOTE 10 – RELATED PARTIES
As discussed in Note 6, cash advances are provided to the Company for operating expenses by Company officers, who were owed $
NOTE 11 – COMMITMENTS AND CONTINGENCIES
In the normal course of its business, the Company may be subject to certain contractual obligations and litigation. In the management’s opinion, upon consultation with legal counsel, there are no contractual obligations or current litigation that will materially affect the Company’s unaudited interim condensed consolidated financial position or results of operations.
Indemnification Agreements
The Company has agreed to indemnify its officers and directors for certain events or occurrences arising from the officer or director serving in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company believes the estimated fair value of these indemnification agreements is minimal and no liability has been recorded as of June 30, 2023 and December 31, 2022.
NOTE 12 – SUBSEQUENT EVENTS
As of August 9, 2023, the date of these unaudited interim condensed consolidated financial statements, there are no subsequent events that are required to be recorded or disclosed in the accompanying unaudited interim condensed consolidated financial statements.
18
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The following discussion should be read in conjunction with our interim condensed consolidated financial statements and related notes contained elsewhere in this Report, as well as our Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the Securities and Exchange Commission (the “SEC”) on April 19, 2023. Certain statements made in this discussion are “forward-looking statements” within the meaning of 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are based upon beliefs of, and information currently available to management as well as estimates and assumptions made by management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used herein, the words “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “future,” “intend,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue” or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks relating to our business, industry, and our operations and results of operations. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
Our interim condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of these interim condensed consolidated financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our interim condensed consolidated financial statements would be affected to the extent there are material differences between these estimates and actual results. The following discussion should be read in conjunction with our interim condensed consolidated financial statements and notes thereto appearing elsewhere in this Report.
Unless otherwise indicated or the context requires otherwise, the words “we,” “us,” “our,” the “Company,” “our Company” or “Farmhouse” refer to Farmhouse Inc., a Nevada corporation, and our wholly owned subsidiaries, Farmhouse, Inc., a Washington corporation (“Farmhouse Washington”) and Farmhouse DTLA, Inc. (“DTLA”), a California corporation.
Corporate Overview
We are a holding company with multiple divisions dedicated to connecting professionals and brands in the legal cannabis industry. We are built on two core competencies–trust and connection. Our divisions provide solutions that leverage our trusted brand and facilitate valuable connections across the cannabis industry. We connect the industry through multiple divisions including the @420 brand and @420 Twitter, and the WeedClub® Platform. Our @420 brand and @420 Twitter serve as trusted, influential properties that enable the Company to connect, promote and advocate for the industry. We will continue
19
to serve as a leading cannabis connection platform and branch its well-known brand into the budding web3 and metaverse.
2023 Business Developments
We began exploring potential acquisitions of ancillary cannabis companies to expand our physical footprint in the industry. Acquisitions would improve our ability to leverage our WeedClub® Platform and our @420 Twitter handle to connect with consumers.
In 2023, we expanded our Web3 division dedicated to connecting the metaverse with cannabis brands. We established the Web3 division in December 2021 to bring Non-Fungible Tokens (“NFTs”) to cannabis brands to create a symbiotic relationship between two fast-growing industries. Our Web3 division connects cannabis brands with licensing opportunities with influential digital collectible holders and communities to develop new brands that appeal to digitally native consumers. It is a natural expansion of our brand and bridges the gap between physical cannabis brands and digital assets.
Farmhouse Divisions
Each of our divisions solves a unique problem within an industry navigating state-by-state regulations and an uncertain federal regulatory landscape. This environment has created a fragmented cannabis market that emphasizes the importance of a trusted facilitator to make value-added connections across the supply chain in our industry.
·@420. Our consumer-facing brand and Twitter handle (with over 100,000 followers) serve as an influential brand that connects us with the greater public. Our Twitter handle enables the NFT division to forge valuable connections in the cannabis space and work with established projects.
·WeedClub®. Weedclub is one of the first social networks for cannabis professionals with over 5,000 members, generating thousands of valuable connections. WeedClub is an established presence in the cannabis industry that people trust to make valuable connections. WeedClub members benefit from the added potential connections.
·Web3 division: Our newest division that connects cannabis brands with licensing opportunities with influential digital collectible holders and communities to develop new brands that appeal to digitally native consumers.
Future Plan of Operations
The COVID-19 pandemic catalyzed a behavioral shift to digital connection and verifiable trust. This shift thrust blockchain technology and digital collectibles to the forefront as virtual groups transformed into supportive, thriving communities centered around digital collectible brands. We positioned the Company to leverage our core competencies to drive value for the digital collectible community and our shareholders. Our web3 division connects cannabis companies to intellectual property (IP) licensing opportunities from digital collectible holders to launch digitally native cannabis brands. Since our launch of our web3 division in December 2021, we have developed relationships with six digital collectible holders to seed our NFT “vault” with over 25 blue-chip NFTs. These NFTs include Bored Ape Yacht Club, Mutant Ape Yacht Club, Bored Ape Kennel Club, CryptoPunks, CrypToadz, Doodles, Meebits, and Gutter Cat Gang.
Our most notable licensed NFT is Mutant Ape Yacht Club #30000, “Mega Robot”, one of twelve Mega Mutants, the rarest NFTs in the Bored Ape Yacht Club (BAYC) universe. Mega Mutants have sold for over $1,000,000 with the Mega Serum previously selling for $5.8 million.
20
In July 2022, we launched our first cannabis activation with Oro Blanco (BAYC #2186) and Urbana to debut a branded cannabis strain across three retail stores in San Francisco. The initial results generated encouraging monthly and quarterly sell-through rates and sales which informed us of our decision to further build out our Web3 division. To better understand web3 culture and the overall market, we developed an advisory board of web3-native experts. Our advisory board helps guide our strategy and decision-making across social media, community, art and branding, and product development. Each advisor has built a personal brand and is well-known across the community.
In August 2022, we began developing the concept for a Mega Robot cannabis line with Bronx Extracts. This brand builds on our key learnings from the Oro Blanco launch which highlighted the need for standout packaging paired with curated cannabis. This collaboration pairs the premium IP of Mega Robot with premium cannabis sourced and developed by Bronx Extracts to create a brand that appeals to everyday consumers. The Mega Robot x Bronx Extracts cannabis line launched in February 2023, and we recognized $5,203 of licensing revenues during the six months ended June 30, 2023. The Mega Robot brand will demonstrate the power of our cannabis network combined with our advisory board to launch a brand that appeals to all consumers, including digitally native ones.
Liquidity and Capital Resources
Until such time we can raise additional capital or generate positive cash flow from operations, we will continue to be funded through short-term advances from the Company officers, borrowings under promissory notes and sales of restricted common stock under various offerings. We estimate we will need $2,500,000 in capital, after satisfying our debt obligations, to cover our ongoing expenses and to successfully market and expand our product offerings. This is only an estimate and may change as we receive feedback from customers and have a better feel for the demand and revenues from our new products. Both factors may change, and we may not be able to raise the necessary capital and if we are able to, that it may not be at favorable rates. We intend to meet our cash requirements for the next 12 months with equity financing, debt financing, or other sources, which may result in further dilution in the equity ownership of our shares.
For the six months ended June 30, 2023 and 2022, we generated revenues of $5,203 and $2,649, respectively, and we reported net losses of $324,392 and $490,296, respectively. We had negative cash flow from operating activities of $56,947 and $68,404, respectively. As of June 30, 2023, we had an accumulated deficit of $6,069,091 and total shareholders’ deficit of $1,791,790.
Our auditors have raised substantial doubt regarding our ability to continue as a going concern as a result of our historical recurring losses and negative cash flows from operations as well as our dependence on private equity and financing. We anticipate that we will continue to report losses and negative cash flow. To date, we have financed our activities principally from the sale of common stock and loans from Company officers. We intend to finance our future working capital needs from these sources until such a time that funds provided by our operations are sufficient to fund our working capital requirements. We believe that the current cash on hand, loans from Company officers and funds raised from the sale of our common stock allow us sufficient capital for operations and to continue as a going concern.
On May 31, 2023, the board of directors (“Board”) authorized an offering of up to $1,000,000 of mandatorily convertible notes, designated Series 2023 10% Mandatorily Convertible Notes (the “Series 2023 Notes”) to fund our Web3 activities and for sales, marketing, and administrative expenses. For the six months ended June 30, 2023, we raised $25,000 of Series 2023 Notes.
21
Related party matters
The terms of any transaction determined to be with related parties are presented to the board of directors (other than any interested director) for approval and documented in the corporate minutes. Cash advances are commonly provided by our officers for operating expenses and direct payment of Company expenses. Company officers were owed $22,580 and $44,882 as of June 30, 2023 and December 31, 2022, respectively, and is comprised of cash advances provided to the Company for operating expenses and direct payment of Company expenses by Company officers. For the six months ended June 30, 2023, Company officers made cash advances of zero and were repaid $22,302. For the six months ended June 30, 2022, Company officers made cash advances of zero and were repaid $2,411. The cash advances are non-interest bearing and are unsecured.
Company officers own approximately 43.8% of the Company as of June 30, 2023. We have agreed to indemnify Company officers for certain events or occurrences arising from the officer or director serving in such a capacity. Other than the foregoing, none of the directors or executive officers of the Company, nor any person who owned of record or was known to own beneficially more than 5% of our outstanding shares of common stock has any material interest, direct or indirect, in any transaction that has occurred during the past fiscal year.
Litigation developments
In August 2022, a receiver was appointed by the Los Angeles County Superior Court to assume control of LAFI. As of August 9, 2023, the date of these unaudited interim condensed consolidated financial statements, the receiver is in the process of selling LAFI. It is not known at this time whether the sale of LAFI, if consummated and approved by the Superior Court, will result in any proceeds of the sale being paid to satisfy the DLTA Judgment. See Part II, Item 1. Legal Proceedings in this Report.
Results of Operations
We generate revenues from the following sources:
(1)Subscription fees. Subscription fees related to our WeedClub portal are received at the time of purchase. Our performance obligation is to provide services over a fixed subscription period; accordingly, we recognize revenue ratably over the subscription period and deferred revenue is recorded for the portion of the subscription period subsequent to each reporting date.
(2)License revenues. License revenues are generated in connection with NFT Art License Agreements, whereby a licensee is granted a limited license from the Company to use one of our licensed NFTs for the purpose of creating, marketing, and selling branded cannabis and hemp products and accessories. Our performance obligation is met over the term of the license agreement; accordingly, we recognize revenue ratably over the term of the license agreement.
22
Six months ended June 30, 2023, compared to the six months ended June 30, 2022 (Unaudited)
Revenues generated for the six months ended June 30, 2023 and 2022 were as follows:
| Six months ended June 30, | ||||
| 2023 |
| 2022 | ||
|
|
|
|
|
|
Subscription fees | $ | - |
| $ | 149 |
License revenues |
| 5,203 |
|
| 2,500 |
| $ | 5,203 |
| $ | 2,649 |
Operating expenses for the six months ended June 30, 2023 and 2022 were as follows:
| Six months ended June 30, | ||||
| 2023 |
| 2022 | ||
|
|
|
|
|
|
General and administrative | $ | 169,347 |
| $ | 213,914 |
Professional fees |
| 132,675 |
|
| 253,793 |
Depreciation and amortization |
| - |
|
| 94 |
| $ | 302,022 |
| $ | 467,801 |
For the six months ended June 30, 2023 and 2022, general and administrative expenses were $169,347 and $213,914, respectively, a decrease of approximately $44,600. Contributing factors to this increase were:
·Outside consulting fees decreased overall by approximately $24,500. We have contracted with two advisors with experience in mergers and acquisitions and two advisors to assist in expanding our NFT licensing reach to licensees and California dispensaries. Together their non-cash, stock-based fees were approximately $20,900 for the six months ended June 30, 2023, compared to approximately $50,100 for the six months ended June 30, 2022. In addition, consulting fees include $4,750 of non-cash, stock-based fees to our independent director for vesting of a restricted stock award (“RSA”) for the six months ended June 30, 2023.
·Labor-related expenses decreased by approximately $17,400, due to consultant who stopped working for the Company in May 2022. Labor-related expenses included recognizing $19,000 in stock-based fees for the six months ended June 30, 2023, compared to $36,390 for the six months ended June 30, 2022.
·Public company-related costs, including OTC filing fees, press releases and transfer agent costs decreased by approximately $1,200.
·Overall other general and administrative expenses, including website development, dues and subscriptions, rent and office expenses and travel and entertainment decreased by approximately $1,500 for the current six-month period.
For the six months ended June 30, 2023 and 2022, professional fees were $132,675 and $253,793, respectively, a decrease of approximately $121,100. Our professional fees for the six months ended June 30, 2023 and 2022 were comprised of the following:
| Six months ended June 30, | ||||
| 2023 |
| 2022 | ||
|
|
|
|
|
|
Legal | $ | 4,237 |
| $ | 33,210 |
Accounting and audit |
| 115,038 |
|
| 116,473 |
Other professional fees |
| 13,400 |
|
| 104,110 |
| $ | 132,675 |
| $ | 253,793 |
23
Legal. Legal expenses decreased by approximately $29,000 for the six months ended June 30, 2023, compared to the six months ended June 30, 2022. Of the decrease, $28,000 is attributable to fees incurred by the Monitor and Judicate West to advance our litigation against LAFI as we no longer incur costs for these services. See Part II, Item 1. Legal Proceedings in this Report. The additional decrease of $1,000 is due to reduced patent and general counsel services for the six months ended June 30, 2023.
Accounting and audit. Accounting and audit expenses decreased by approximately $1,400 for the six months ended June 30, 2023, compared to the six months ended June 30, 2022. Contributing factors to this increase were:
·Audit and accounting fees to our independent public accounting firm increased by approximately $4,100 due to the timing of invoicing audit fees related to our annual fiscal year audit. Overall, our audit costs remained consistent between the periods.
·Accounting fees for our contracted CFO services decreased a net $6,500. CFO services totaled $84,500 in the six months ended June 30, 2023, which included $60,500 of stock-based fees, compared to $91,000 in the six months ended June 30, 2022, which included $51,000 in stock-based fees. Not including stock-based fees, our CFO costs decreased by $16,000 as our CFO reduced his monthly fee in 2023 to $4,000. All fees to our CFO are accrued and have not been paid.
·Accounting fees for our outside bookkeeping services increased by approximately $1,000.
Other professional fees. Other professional fees decreased by approximately $90,700 for the six months ended June 30, 2023, compared to the six months ended June 30, 2022 due to a decrease in fees to our contracted software engineers and developers of our software technology platforms. Professional fees included $11,400 of stock-based fees in the six months ended June 30, 2023, compared to $103,110 in the six months ended June 30, 2022.
Interest expense. Interest expense decreased by approximately $200 for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.
Overall, for the six months ended June 30, 2023, we reported a net loss of $324,392 compared to a net loss of $490,296 for the six months ended June 30, 2022.
Non-GAAP Adjusted Net Loss
The following table reflects the reconciliation of net loss to Adjusted Net Loss for the six months ended June 30, 2023 and 2022. This is a non-GAAP measurement of earnings and considers the stock-related compensation expense for services rendered by consultants and professionals for the comparable years. Management considers this non-GAAP measurement of earnings important to investors and other interested parties to evaluate our performance on a comparable basis.
| Six months ended June 30, | ||||
| 2023 |
| 2022 | ||
|
|
|
|
|
|
Net loss as reported | $ | 324,392 |
| $ | 490,296 |
Less: Stock-based fees |
| (116,518) |
|
| (240,582) |
Adjusted Net Loss | $ | 207,874 |
| $ | 249,714 |
Adjusted Net Loss should only be viewed in conjunction with our reported financial results or other financial information prepared in accordance with accounting principles generally accepted in the United States, or “GAAP.”
24
Three months ended June 30, 2023, compared to the three months ended June 30, 2022 (Unaudited)
Revenues generated for the three months ended June 30, 2023 and 2022 were as follows:
| Three months ended June 30, | ||||
| 2023 |
| 2022 | ||
|
|
|
|
|
|
Subscription fees | $ | - |
| $ | 149 |
License revenues |
| 4,134 |
|
| 2,500 |
| $ | 4,134 |
| $ | 2,649 |
Operating expenses for the three months ended June 30, 2023 and 2022 were as follows:
| Three months ended June 30, | ||||
| 2023 |
| 2022 | ||
|
|
|
|
|
|
General and administrative | $ | 84,668 |
| $ | 121,328 |
Professional fees |
| 58,025 |
|
| 128,064 |
Depreciation and amortization |
| - |
|
| - |
| $ | 142,693 |
| $ | 249,392 |
For the three months ended June 30, 2023 and 2022, general and administrative expenses were $84,668 and $121,328, respectively, a decrease of approximately $36,700. Contributing factors to this increase were:
·Outside consulting fees decreased overall by approximately $19,700. We have contracted with two advisors with experience in mergers and acquisitions and two advisors to assist in expanding our NFT licensing reach to licensees and California dispensaries. Together their non-cash, stock-based fees were approximately $10,400 for the three months ended June 30, 2023, compared to approximately $32,500 for the three months ended June 30, 2022. In addition, consulting fees include $2,375 of non-cash, stock-based fees to our independent director for vesting of a RSA for the three months ended June 30, 2023.
·Labor-related expenses decreased by approximately $11,400 due to consultant who stopped working for the Company in May 2022. Labor-related expenses included recognizing $9,500 in stock-based fees for the three months ended June 30, 2023, compared to $20,850 for the three months ended June 30, 2022.
·Public company-related costs, including OTC filing fees, press releases and transfer agent costs decreased by approximately $2,200.
·Overall other general and administrative expenses, including website development, dues and subscriptions, rent and office expenses and travel and entertainment decreased by approximately $3,600 for the current three-month period.
For the three months ended June 30, 2023 and 2022, professional fees were $58,025 and $128,064, respectively, a decrease of approximately $70,000. Our professional fees for the three months ended June 30, 2023 and 2022 were comprised of the following:
| Three months ended June 30, | ||||
| 2023 |
| 2022 | ||
|
|
|
|
|
|
Legal | $ | 935 |
| $ | 6,680 |
Accounting and audit |
| 49,390 |
|
| 54,534 |
Other professional fees |
| 7,700 |
|
| 66,850 |
| $ | 58,025 |
| $ | 128,064 |
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Legal. Legal expenses decreased by approximately $5,700 for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. Of the decrease, $4,700 is attributable to fees incurred by the Monitor and Judicate West to advance our litigation against LAFI as we no longer incur costs for these services. See Part II, Item 1. Legal Proceedings in this Report. The additional decrease of $1,000 is due to reduced patent and general counsel services for the three months ended June 30, 2023.
Accounting and audit. Accounting and audit expenses decreased by approximately $5,100 for the three months ended June 30, 2023, compared to the three months ended June 30, 2022. Contributing factors to this increase were:
·Audit and accounting fees to our independent public accounting firm decreased by approximately $5,900 due to the timing of invoicing audit fees related to our annual fiscal year audit. Overall, our audit costs remained consistent between the periods.
·Accounting fees for our contracted CFO services increased a net $700. CFO services totaled $42,250 in the three months ended June 30, 2023, which included $30,250 of stock-based fees, compared to $41,500 in the three months ended June 30, 2022, which included $25,500 in stock-based fees. Not including stock-based fees, our CFO costs decreased by $4,000 as our CFO reduced his monthly fee in 2023 to $4,000. All fees to our CFO are accrued and have not paid.
·Accounting fees for our outside bookkeeping services are $1,000 per month and were unchanged for the comparable three-month periods.
Other professional fees. Other professional fees decreased by approximately $59,100 for the three months ended June 30, 2023, compared to the three months ended June 30, 2022 due to a decrease in fees to our contracted software engineers and developers of our software technology platforms. Professional fees included $5,700 of stock-based fees in the three months ended June 30, 2023, compared to $66,700 in the three months ended June 30, 2022
Interest expense. Interest expense increased by approximately $3,100 for the three months ended June 30, 2023 compared to the three months ended June 30, 2022 due mostly to interest on our unpaid liability to our predecessor law firm in the aforementioned litigation.
Overall, for the three months ended June 30, 2023, we reported a net loss of $153,077 compared to a net loss of $256,079 for the three months ended June 30, 2022.
Non-GAAP Adjusted Net Loss
The following table reflects the reconciliation of net loss to Adjusted Net Loss for the three months ended June 30, 2023 and 2022. This is a non-GAAP measurement of earnings and considers the stock-related compensation expense for services rendered by consultants and professionals for the comparable years. Management considers this non-GAAP measurement of earnings important to investors and other interested parties to evaluate our performance on a comparable basis.
| Three months ended June 30, | ||||
| 2023 |
| 2022 | ||
|
|
|
|
|
|
Net loss as reported | $ | 153,077 |
| $ | 256,079 |
Less: Stock-based fees |
| (58,259) |
|
| (145,670) |
Adjusted Net Loss | $ | 94,818 |
| $ | 110,409 |
Adjusted Net Loss should only be viewed in conjunction with our reported financial results or other financial information prepared in accordance with accounting principles generally accepted in the United States, or “GAAP.”
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Cash Flows (unaudited)
The following table summarizes the sources and uses of cash for the six months ended June 30, 2023 and 2022, respectively:
| Six months ended June 30, | ||||
| 2023 |
| 2022 | ||
|
|
|
|
|
|
Net cash used in operating activities | $ | (56,947) |
| $ | (68,404) |
Net cash provided by (used in) investing activities |
| - |
|
| - |
Net cash provided by financing activities |
| 2,698 |
|
| 64,624 |
Net change in cash | $ | (54,249) |
| $ | (3,780) |
Six months ended June 30, 2023
Operating activities used $56,947 of cash, primarily resulting from our net loss for the six months ended June 30, 2023 of $324,392, offset by non-cash stock-based compensation for vested restricted stock awards of $116,518. Other uses of cash from operating activities were primarily from increases in accounts payable of $14,331, accrued legal fees of $20,198, accrued payroll and payroll taxes of $92,072, accrued liabilities of $24,000 and accrued interest payable of $5,709, offset by an increase in accounts receivable of $5,203 and prepaid expenses of $180. Financing activities provided $2,698 of cash for the six months ended June 30, 2023, consisting of $25,000 in proceeds from the sale of Series 2023 Notes, offset by repayments of $22,302 of advances from officers.
Six months ended June 30, 2022
Operating activities used $68,404 of cash, primarily resulting from our net loss for the six months ended June 30, 2022 of $490,296, offset by non-cash stock-based compensation expense recorded for services rendered of $189,582, non-cash stock-based compensation expense recorded for vested restricted stock awards of $51,000, and increases in liabilities across most categories: accrued legal fees, accrued payroll and other accrued liabilities. There was no use of cash for investing activities for the six months ended June 30, 2022. Financing activities provided $64,624 of cash for the six months ended June 30, 2022, consisting of $59,415 in proceeds from the sale of common stock, $7,620 of borrowings from an unrelated lender, offset by repayments of $2,411 of advances from officers.
Contractual Obligations
We qualify as a smaller reporting company, as defined by Item 10 of Regulation S-K and, thus, are not required to provide the information required by this Item.
Off Balance Sheet Arrangements
We are not currently a party to, or otherwise involved with, any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Cash and Cash Equivalents
We consider all highly liquid investments with an original maturity of six months or less when purchased to be cash equivalents. Cash and cash equivalents were $7,814 and $62,063 as of June 30, 2023 and December 31, 2022, respectively.
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Critical Accounting Policies and Estimates
The preparation of our interim condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States requires us 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 these interim condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Our accounting policies that are critical or most important to understanding our financial condition and results of operations and that require management to make the most difficult judgments are described in our Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the SEC on April 20, 2023. There have been no material changes in these critical accounting policies.
Recently Adopted Accounting Pronouncements
Reference is made to Note 2, Summary of Significant Accounting Policies, to the interim condensed consolidated financial statements included under Item 1 in this Report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management carried out an evaluation under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were not effective as of June 30, 2023.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting subsequent to June 30, 2023, which were identified in connection with our management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations of the Effectiveness of Disclosure Controls and Internal Controls
Our management, including our Principal Executive Officer and Principal Financial Officer, does not expect that our disclosure controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their
28
costs. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.
The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
PART II – OTHER INFORMATION
None.
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may become subject to various legal proceedings that are incidental to the ordinary conduct of business. Although we cannot accurately predict the amount of any liability that may ultimately arise with respect to any of these matters, it makes provision for potential liabilities when it deems them probable and reasonably estimable. These provisions are based on current information and legal advice and may be adjusted from time to time according to developments.
We are a party to legal proceedings by our Farmhouse DTLA.
In August 2017, the Company’s subsidiary, DTLA. entered into a Strategic Consulting Agreement (the “SCA”) with Absolute Herbal Pain Solutions, Inc., a medical marijuana growing, and retail company based in Los Angeles that now goes by the name Los Angeles Farmers, Inc. (“LAFI”). The SCA provided for DTLA to invest substantial sums of money into LAFI and also to provide management services for LAFI going forward. In exchange, LAFI agreed to provide DTLA with a share in any future profits and a 49% equity stake in LAFI. Following the SCA, in excess of $700,000 was spent by DTLA to stabilize LAFI’s finances and pay critical bills. In addition, DTLA brought in an outside management company with expertise in running grow and retail operations. Subsequent to DTLA providing funding and management resources to LAFI, DTLA and its management team were locked out of the LAFI facility in late October 2017.
In October 2017, DTLA commenced litigation in Los Angeles County Superior Court (Case #BC681251) against LAFI and David and Irina Vayntrub, who were the sole officers, directors, and members of LAFI, seeking to enforce its contract rights under the SCA. In March 2018, the litigation was stayed so that the parties could pursue the claims by way of arbitration at Judicate West. In January 2020, following more than a year of discovery, DTLA entered into a confidential settlement with the Vayntrubs, however, the case continued against LAFI.
In February 2021, a four-day arbitration hearing was held at Judicate West. In April 2021, the Arbitrator overseeing the arbitration hearing issued a judgment in favor of DTLA and against LAFI (the “DLTA Judgment”). The DLTA Judgment awarded 49% of LAFI to DTLA as of the change of control in November 2017, along with a share of any profits from November 2017 to the present and going forward, accrued interest on those profits, and costs of bringing the litigation. The DLTA Judgment also appointed a Monitor, to be supervised by the Arbitrator, to determine how much in past profits and interest DTLA is entitled to be awarded and that DTLA is treated fairly by LAFI on a going forward basis.
29
Between July and December 2021, the Monitor undertook a detailed process to determine the value of the 49% of profits and proceeds from 2017 to the present that DTLA is entitled to, in addition to the 10% prejudgment interest. The Monitor’s report was completed in January 2022. Based on the information in the Monitor’s report, DTLA has requested that the Arbitrator issue an award of back profits and interest and order the sale of LAFI to an independent third party in order to allow any judgment to be paid to DTLA. Due to uncertainties, the impact of the DLTA Judgment has not been reflected in the accompanying interim condensed consolidated financial statements as of June 30, 2023.
In August 2022, a receiver was appointed by the Los Angeles County Superior Court to assume control of LAFI. As of August 9, 2023, the date of these unaudited interim condensed consolidated financial statements, the receiver is in the process of selling LAFI. It is not known at this time whether the sale of LAFI, if consummated and approved by the Superior Court, will result in any proceeds of the sale being paid to satisfy the DLTA Judgment.
ITEM 1A. RISK FACTORS
We qualify as a smaller reporting company, as defined by Item 10 of Regulation S-K and, thus, are not required to provide the information required by this Item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Common Stock Issuances
The Company has 17,075,950 shares of common stock outstanding as of June 30, 2023. There were no common stock transactions for the six months ended June 30, 2023. A summary of the Company’s common stock transactions for the six months ended June 30, 2022 is as follows:
·The Company sold 69,900 shares of common stock for cash proceeds of $59,415.
·The Company issued 193,500 shares of common stock for services rendered. The Company recorded an expense of $189,582 for the six months ended June 30, 2022 based on the closing price of the Company’s common stock on the OTCQB market.
As a result of these transactions, the Company has 15,957,950 shares of common stock outstanding as of June 30, 2022
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
There have been no events which are required to be reported under this item.
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.OTHER INFORMATION
None.
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ITEM 6.EXHIBITS
The exhibits required to be filed herewith by Item 601 of Regulation S-K, as described in the following index of exhibits, are attached hereto unless otherwise indicated as being incorporated by reference, as follows:
Exhibit Number |
|
Description |
|
|
|
31.1 |
| |
|
|
|
31.2 |
| |
|
|
|
32.1 |
| |
|
|
|
* Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, City of San Francisco, State of California, on August 9, 2023.
By: | /s/ Evan Horowitz |
| EVAN HOROWITZ |
| Chief Executive Officer, Director |
Pursuant to the requirements of the Securities Act of 1933, this registrant statement has been signed by the following persons in the capacities and on the dates indicated.
By: | /s/ Evan Horowitz |
| EVAN HOROWITZ |
| Chief Executive Officer, Director |
|
|
By: | /s/ Lanny R. Lang |
| LANNY R. LANG |
| Chief Financial Officer, Chief Accounting Officer |
| (Principal Financial and Accounting Officer) |
|
|
By: | /s/ Michael Landau |
| MICHAEL LANDAU |
| Chief Technology Officer, Treasurer, Director |
|
|
By: | /s/ Scott Bostick |
| SCOTT BOSTICK |
| Director |
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