NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021 and 2020
NOTE 1: ORGANIZATION 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 $420,000 in cash, 30,000,000 shares of the Company’s common stock, and 3,000 shares of Series B preferred stock with a total stated value of $3,000,000 which bears interest at 6% per annum and is convertible into the Company’s common stock at a conversion price to be mutually agreed in the future, without voting rights or a liquidation preference except with respect to default interest. The securities were issued pursuant to an exemption under Section 4(a)(2) of the Securities Act of 1933, as amended. The closing of the purchase of the assets pursuant to the Emerging Growth Agreement occurred on June 20, 2019.
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 $6,644,429 and an accumulated deficit of $48,833,880 as of December 31, 2021. The Company also had a net loss of $12,449,678 for the year ended December 31, 2021.
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.
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
The accompanying consolidated financial statements include the results of operations of the Company and Cake Marketing UK Ltd., or the Subsidiary. The Company discontinued its operations associated with its CAKE Business and the operations of its Subsidiary in May 2019. The Subsidiary was officially dissolved in August 2020. These accounts have been presented as discontinued operations in the accompanying consolidated financial statements. Continuing operations presented in periods prior reflect administrative expenses associated with business insurance, legal and accounting fees that the Company will continue to incur. All intercompany accounts and transactions between the Company and its Subsidiary have been eliminated in consolidation.
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 accounting principles generally accepted in the United States of America, or 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 December 31, 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. During the year ended December 31, 2021 and 2020, the Company had restricted cash balances of $20,014 and $20,000, respectively, included as a component of total cash and restricted cash as presented on the accompanying consolidated statement of cash flows.
Accounts Receivable
The Company’s account receivables are due from customers relating to contracts to provide investor relation services. Collateral is currently not required. The Company also maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make payments. The Company periodically reviews these estimated allowances, including an analysis of the customers’ payment history and creditworthiness, the age of the trade receivable balances and current economic conditions that may affect a customer’s ability to make payments as well as historical collection trends for its customers as a whole. Based on this review, the Company specifically reserves for those accounts deemed uncollectible or likely to become uncollectible. When receivables are determined to be uncollectible, principal amounts of such receivables outstanding are deducted from the allowance. The allowance for doubtful accounts as of December 31, 2021 and 2020 amounted to $337,192 and $183,750, respectively.
Inventory
The Company’s inventory consists of finished goods acquired for its e-commerce network business it is currently in the process of launching. 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 cash equivalents accounts are held at a financial institution and are insured by the Federal Deposit Insurance Corporation, or the FDIC, up to $250,000. From time-to-time, the Company’s bank balances exceed the FDIC insurance limit. To reduce its risk associated with the failure of such financial institutions, the Company periodically evaluates the credit quality of the financial institution in which it holds deposits.
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.
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.
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. |
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Level 2: | Observable market-based inputs or unobservable inputs that are corroborated by market data. |
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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.
Advertising
The Company expenses advertising costs as incurred. Advertising expenses relating to continuing operations for the year ended December 31, 2021 and 2020 amounted to $69,725 and $128,981, respectively.
Income Taxes
Income taxes are accounted for in accordance with the provisions of ASC Topic 740, Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized, but no less than quarterly.
Property and Equipment
Property and equipment are recorded at cost and are depreciated on a straight-line basis over their estimated useful lives of five years. Maintenance and repairs are charged to expense as incurred. Significant renewals and betterments are capitalized.
Goodwill
The Company’s goodwill represents the excess of purchase price over tangible and intangible assets acquired, less liabilities assumed arising from business acquisitions. Goodwill is not amortized, but is reviewed for potential impairment on an annual basis at the reporting unit level. There was an impairment charge of $9,355,657 during the year ended December 31, 2021 related to the impairment of goodwill acquired from the CNP Operating Agreement.
Investment
On December 24, 2020, the Company acquired a 9.8% interest in the outstanding stock of a privately held company for $200,000. As the stock has no readily determinable fair value, the Company accounts for this stock received using the cost method, less adjustments for impairment. At each reporting period, management reviews the status of the investment to determine if any indicators of impairment have occurred.
There were no impairment charges recorded related to investments during the year ended December 31, 2021 or 2020.
Long-Lived Assets
In accordance with ASC 360-10, the Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made.
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 December 31, 2021, the Company had 210,667 outstanding stock options, 311,112 outstanding warrants and 3,500 shares of preferred stock which were excluded from the calculation of diluted earnings per share because their effects were anti-dilutive. As of December 31, 2020, the Company had 210,667 outstanding stock options and 350,463 outstanding warrants and 3,500 shares of preferred stock which were excluded from the calculation of diluted earnings per share because their effects were anti-dilutive. As a result, the basic and diluted earnings per share are the same for each of the periods presented.
Share-Based Payment
The Company accounts for stock-based compensation in accordance with ASC Topic 718, Compensation-Stock Compensation, or ASC 718. Under the fair value recognition provisions of this topic, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense on a straight-line basis over the requisite service period, which is the vesting period.
The Company has elected to use the Black-Scholes option-pricing model to estimate the fair value of its options, which incorporates various subjective assumptions including volatility, risk-free interest rate, expected life, and dividend yield to calculate the fair value of stock option awards. Compensation expense recognized in the statements of operations is based on awards ultimately expected to vest and reflects estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
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’ 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.
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 consist of the following:
| | December 31, | | | December 31, | |
| | 2021 | | | 2020 | |
| | | | | | |
Machinery & equipment | | $ | 7,732,643 | | | $ | 12,546 | |
Furniture and equipment and leasehold improvements | | | 411,294 | | | | 2,227 | |
| | | 8,143,937 | | | | 14,773 | |
| | | | | | | | |
Less: accumulated depreciation | | | (3,007,941 | ) | | | (6,928 | ) |
| | | | | | | | |
| | $ | 5,135,996 | | | $ | 7,845 | |
Depreciation expense from continuing operations for the year ended December 31, 2021 and 2020 amounted to $483,920 and $1,809, respectively.
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).
| | December 31, 2021 | |
Balances at beginning of year | | $ | - | |
Additions | | | 92,175 | |
Sale of marketable securities | | | - | |
Change in fair value | | | (45,659 | ) |
Balances at period end | | $ | 46,516 | |
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. |
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· | 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 |
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 December 31, 2021:
| | Balance as of December 31, 2021 | | | Significant Unobservable Inputs (Level 1) | | | Significant Unobservable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Marketable Securities | | $ | 46,516 | | | $ | 46,516 | | | $ | - | | | $ | - | |
Total Assets | | $ | 46,516 | | | $ | 46,516 | | | $ | - | | | $ | - | |
NOTE 6: NOTE PAYABLE
On September 10, 2019, the Company entered into a promissory note payable whereby the Company borrowed $500,000 bearing interest at 8% per annum. Interest on the note is payable quarterly on the first business day of December, March, June and September commencing December 1, 2019. In May 2021, the Company and the holder of the promissory note reached an agreement to extend the maturity date of the note from September 30, 2022 to September 30, 2024. In connection with the extension, the Company issued 133,333 shares of its common stock to the noteholder in lieu of $40,000 of interest accrued and accruing on the promissory note through December 31, 2021.
In connection with the promissory note on September 10, 2019, the Company issued warrants to purchase 33,333 shares of the Company’s common stock at an exercise price of $0.10 per share. The warrants were exercised on June 30, 2021 and the Company received $50,000.
The note was discounted by $17,624 allocated from the valuation of the warrants issued. The discount recorded on the note is being amortized as interest expense through the maturity date, which amounted to $4,427 and $4,425 for the nine months ended September 30, 2021 and 2020, respectively. As of December 31, 2021, the net book value of the promissory note amounted to $494,498 including the principal amount outstanding of $500,000 net of the remaining discount of $5,502.
On May 6, 2020, the Company entered into a promissory note, or the Note, with Pacific Western Bank, evidencing an unsecured loan, or the Loan, in the amount of $263,000 made to the Company under the Paycheck Protection Program, or the PPP. The interest rate on the Loan is 1.0% per annum. The Note matures on May 6, 2022. The Company has applied for full forgiveness of the amounts due under the Note and received forgiveness during the period ending September 30, 2021.
On June 24, 2020, the Company entered into a Loan Authorization and Agreement with the SBA under which the Company borrowed $150,000 and issued to the SBA a note and security agreement for the amount borrowed. Outstanding borrowings accrue interest at a rate of 3.75% per annum, and installment payments, including principal and interest, of $731 are due monthly and begin 12 months from the date of the loan agreement. The balance of any remaining principal and interest is due 30 years from the date of the loan agreement. As collateral for the borrowing, the Company granted the SBA a security interest in substantially all assets of the Company.
On February 25, 2021, the Company entered into a secondary promissory note, or the Second PPP Note, with Pacific Western Bank, evidencing an unsecured loan, or the Second Loan, in the amount of $263,000 made to the Company under the PPP. The interest rate on the Loan is 1.0% per annum. The Note matures on May 6, 2022. The Company applied for full forgiveness of the amounts due under the Note and received forgiveness in February 2022 therefore the company has recorded the forgiveness as of December 31, 2021.
On October 28, 2019, the Company’s subsidiary CNP Operating entered into a promissory note payable with Complete Business Solutions Group, Inc (“CBSG”) whereby the Company borrowed $3,050,000. The outstanding balance of the note was $2,218,000 at December 31, 2021.
On September 30, 2019, the Company’s subsidiary CNP Operating entered into a promissory note payable with Eagle Six Consultants, Inc. (“Eagle”) whereby the Company borrowed $550,000 bearing interest at 16% per annum. The outstanding balance of the note was $300,000 at December 31, 2021.
On June 6, 2020, the Company’s subsidiary CNP Operating entered into a second promissory note payable with Eagle whereby the Company borrowed $300,000 bearing interest at 18% per annum. The outstanding balance of the note was $20,000 December 31, 2021.
On May 12, 2021 the Company’s subsidiary CNP Operating restructured the CSBG note payable of $2,957,000, the Eagle #1 note payable of $550,000 and the Eagle #2 note payable of $300,000 by entering into a payment and indemnification agreement with the receivers/trustee of CBSG and Eagle. The receiver has agreed that the balance of the outstanding amounts will be paid over the course of 24 months in equal payments of $158,625. Further, the Company shall pay $20,000 per month toward the balance and Anthony Zingarelli (“Zingarelli”) and Colorado Sky Industrial Supply LLC (“CSIS”), agree to personally pay the sum of $138,625 per month. Zingarelli is the only member of CNP Operating that signed a personal guarantee on the loans and Zingarelli is the sole member of CSIS. Zingarelli and CSIS has agreed to indemnify and hold the Company harmless from any and all losses, liabilities and claims. If a loss is incurred by the Company with respect to any claims, Zingarelli shall reimburse the Company for the amount of any such loss. The Company has recorded the Zingarelli payments during the period as contributions to additional paid in capital.
On January 10, 2020 the Company’s subsidiary CNP Operating purchased a distillation machine for $248,000. The company paid $108,000 and entered into a promissory note with company owned by one of the partners. The original value of the note was $140,000 and has no terms such as interest rate, maturity or monthly payments. Imputed interested was not material. The outstanding balance of the note was $42,252 at December 31, 2021.
On Nov 19, 2020 the Company’s subsidiary CNP Operating purchased equipment for $58,095 which was financed at zero interest rate. The monthly payments of $968 will be made for the next 60 months and mature on Nov 19, 2025. Imputed interested was not material. The outstanding balance of the note was $45,508 at December 31, 2021.
The Company’s subsidiary CNP Operating also entered into a note payable during 2020 with the landlord for additional improvements to the facility in Centennial, Colorado. The outstanding balance of this note was $11,708 at December 31, 2020 and $43,261 as of December 31, 2021 because additional improvements were completed during the period.
On October 19, 2021, the Company borrowed $250,000 from a lender and issued a promissory note for the repayment of the amount borrowed. The promissory note is unsecured, has a maturity date of December 31, 2024 and all principal is due upon maturity. The amount borrowed accrues interest at 12% per annum and accrued interest is payable monthly commencing on December 1, 2021. The promissory note contains customary events of default permitting acceleration of repayment for nonpayment of amounts due, a bankruptcy related proceeding, breach of representations or covenants, sale of substantially all assets, and change of control.
Future scheduled maturities of long-term debt are as follows.
| | Year Ended | |
| | December 31, | |
| | | |
2022 | | $ | 2,219,882 | |
2022 | | | 657,621 | |
2023 | | | 26,047 | |
2024 | | | 509,163 | |
2025 | | | 3,153 | |
Thereafter | | | 121,706 | |
Total | | $ | 3,537,573 | |
The aggregate current portion of long-term debt as of December 31, 2021 amounted to $2,219,882, which represents the contractual principal payments due in the next 12 months period.
NOTE 7: STOCKHOLDERS’ DEFICIT
Common Stock
On December 6, 2021, the Company effected a reverse split of its outstanding common stock in the ratio of 1-for-15.
Effective April 3, 2020, the Company granted 33,333 of restricted shares of its common stock to a consultant for services as an advisory board member, with 16,667 shares vesting immediately and the remainder vesting in four equal quarterly installments commencing on July 1, 2020. During 2020, the Company recorded $15,625 of share-based compensation expense. The arrangement was terminated on July 17, 2020, and the unvested portion of the restricted stock grant of 12,500 shares were forfeited.
Effective August 6, 2020, the Company and Emerging Growth reached an agreement whereby the Company issued 320,000 shares of its common stock with a value of $240,000 to Emerging Growth as payment for outstanding liabilities due to Emerging Growth totaling $209,931. The outstanding liabilities due to Emerging Growth included $104,931 in outstanding accrued interest on the Series B Preferred Stock through August 31, 2020, as well as $105,000 of outstanding payables. The additional $30,069 was recorded as loss on extinguishment of debt during 2020.
Effective October 13, 2020, the Company and the holder of its $500,000 promissory note payable issued on September 10, 2019 (see Note 5) reached an agreement whereby the Company agreed to issue 110,000 shares of its common stock with a value of $82,500 to the noteholder as payment of $41,192 of accrued interest on the promissory note. This resulted in a loss on extinguishment of debt of $41,308 in 2020. The common shares were issued on January 2, 2021 and are reflected as common shares issuable as of December 31 2020.
In December 2020, the Company received $410,000 in cash in respect of a sale of an aggregate total of 700,000 shares of its common stock for proceeds of $420,000. The Company received the remaining $10,000 for the sale in January 2021 and the common shares were issued in January 2021. The Company has reflected the $410,000 received in common shares issuable in the statement of shareholders equity.
In January 2021, the Company issued 810,000 shares of common stock, of which 793,333 were issuable on December 31, 2020 and 16,667 were sold in 2021 for $10,000.
In March 2021, the Company issued 116,667 shares of common stock in exchange for $105,000 of interest accrued to Emerging Growth as a result of holding the Series B Preferred stock. The fair value of the shares was $157,500 and the Company recognized a loss on extinguishment of debt in the amount of $52,500.
In May 2021, in connection with the maturity extension of the $500,000 promissory note (Note 4), the Company issued 133,333 shares of its common stock to the noteholder in lieu of $40,000 of interest accrued and accruing on the promissory note through December 31, 2021. The fair value of the shares was $160,000 and the Company recognized a loss on extinguishment of debt in the amount of $120,000.
In June 2021, the Company received $50,000 in cash in respect to an exercise of warrants by a Note holder. The Company has reflected the $50,000 received in common shares issuable in the statement of stockholder’s equity as the Company issued 33,333 shares of common stock on July 7, 2021.
On August 23, 2021, the Company entered into securities purchase agreements with CNP Operating, whereby the Company acquired 100% of CNP Operating from the Owners in exchange for an aggregate of 23,600,000 shares of Company common stock. The securities were issued pursuant to an exemption under Section 4(a)(2) of the Securities Act of 1933, as amended.
Preferred Stock
The Company is authorized to issue 2,000,000 shares of preferred stock with a par value of $0.001 per share, of which 500 have been authorized as Series A Preferred Stock and 3,000 have been authorized as Series B Preferred Stock.
On June 20, 2019, the Company issued to certain of its promissory noteholders 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 accumulate dividends at 12% per annum, and is convertible into the Company’s common stock at the election of the holder at a conversion price per share to be mutually agreed between the Company and the holder in the future, and be redeemable at the Company’s option following the third year after issuance, without voting rights or a liquidation preference.
On June 20, 2019, the Company issued 3,000 shares of Series B Preferred Stock to Emerging Growth each with a stated value of $1,000 per share, 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. The Series B Preferred Stock accumulates dividends at 6% per annum and is convertible into the Company’s common stock at the election of Emerging Growth at a conversion price per share to be mutually agreed between the Company and Emerging Growth in the future, without voting rights or a liquidation preference, except with respect to accrued penalty interest.
For the year ended December 31, 2021 and 2020, the Company incurred $240,000 and $240,000, respectively, of interest from the outstanding preferred stock.
Warrants
The following summarizes the Company’s warrant activity for the year ended December 31, 2021 and 2020.
| | | | | | | | Weighted- | |
| | | | | | | | Average | |
| | | | | Weighted- | | | Remaining | |
| | | | | Average | | | Contractual | |
| | | | | Exercise | | | Life | |
| | Warrants | | | Price | | | (Years) | |
| | | | | | | | | |
Outstanding at January 1, 2020 | | | 502,930 | | | $ | 7.95 | | | | 4.16 | |
Forfeited/cancelled | | | (152,467 | ) | | | 7.80 | | | | | |
Outstanding at December 31, 2020 | | | 350,463 | | | | 7.80 | | | | 3.56 | |
Exercised | | | (4,630 | ) | | $ | 1.50 | | | | | |
Forfeited/cancelled | | | (33,333 | ) | | | 6.75 | | | | | |
Outstanding at December 31, 2021 | | | 312,500 | | | $ | 4.95 | | | | 2.61 | |
| | | | | | | | | | | | |
Vested and expected to vest at December 31, 2021 | | | 312,500 | | | $ | 4.95 | | | | 2.61 | |
| | | | | | | | | | | | |
Exercisable at December 31, 2021 | | | 312,500 | | | $ | 4.95 | | | | 2.61 | |
As of December 31, 2021 all outstanding warrants were fully vested and there was no remaining unrecorded compensation expense.
The warrants granted during 2021 and 2020 were valued using the Black-Scholes pricing method using the following assumptions below.
| | 2021 | 2020 |
Expected life in years | | NA | NA |
Stock price volatility | | NA | NA |
Risk free interest rate | | NA | NA |
Expected dividends | | NA | NA |
Estimated forfeiture rate | | NA | NA |
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 is currently 1,500,000 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 year ended December 31, 2021 and 2020.
| | | | | | | | Weighted- | |
| | | | | | | | Average | |
| | | | | Weighted- | | | Remaining | |
| | | | | Average | | | Contractual | |
| | | | | Exercise | | | Life | |
| | Options | | | Price | | | (Years) | |
| | | | | | | | | |
Outstanding at January 1, 2020 | | | 421,333 | | | $ | 4.95 | | | | 2.45 | |
Forfeited/cancelled | | | (210,667 | ) | | | 12.90 | | | | | |
Outstanding at December 31, 2020 | | | 210,667 | | | $ | 4.95 | | | | 1.44 | |
Forfeited/cancelled | | | - | | | | | | | | | |
Outstanding at December 31, 2021 | | | 210,667 | | | $ | 4.95 | | | | 0.94 | |
| | | | | | | | | | | | |
Vested and expected to vest at December 31, 2021 | | | 210,667 | | | $ | 4.95 | | | | 0.94 | |
| | | | | | | | | | | | |
Exercisable at December 31, 2021 | | | 210,667 | | | $ | 4.95 | | | | 0.94 | |
As of December 31, 2021 all outstanding options were fully vested and there is no remaining unrecorded compensation expense.
NOTE 8: DISCONTINUED OPERATIONS
During May 2019, the Company decided to discontinue most of its operating activities pursuant to the Asset Purchase Agreement entered into with CAKE Software, Inc. (see Note 1).
In accordance with the provisions of ASC 205-20, the Company has separately reported the assets and liabilities of the discontinued operations in the consolidated balance sheets. The assets and liabilities have been reflected as discontinued operations in the consolidated balance sheets as of December 31, 2021 and 2020, and consist of the following:
| | December 31, | | | December 31, | |
| | 2021 | | | 2020 | |
| | | | | | |
Current liabilities of discontinued operations | | | | | | |
Accounts payable and accrued expenses | | $ | 79,823 | | | $ | 79,823 | |
Total current liabilities of discontinued operations | | $ | 79,823 | | | $ | 79,823 | |
In accordance with the provisions of ASC 205-20, the Company has excluded the results of discontinued operations from its results of continuing operations in the accompanying consolidated statements of operations. The results of the discontinued operations of the CAKE Marketing UK Business for the year ended December 31, 2021 and 2020 have been reflected as discontinued operations in the consolidated statements of operations, and consist of the following:
| | For the Year Ended | |
| | December 31, | | | December 31, | |
| | 2021 | | | 2020 | |
| | | | | | |
Net revenues | | $ | - | | | $ | - | |
Cost of revenue | | | - | | | | - | |
Gross profit | | | - | | | | - | |
| | | | | | | | |
Operating expenses: | | | | | | | | |
Research and development | | | - | | | | - | |
Sales and marketing | | | - | | | | - | |
General and administrative | | | - | | | | (3,507 | ) |
Total operating expenses | | | | | | | (3,507 | ) |
| | | | | | | | |
Loss from operations | | | - | | | | 3,507 | |
| | | | | | | | |
Other income (expense): | | | | | | | | |
Gain on sale of discontinued operations | | | - | | | | - | |
Loss on foreign currency translation | | | - | | | | (83,929 | ) |
Interest income | | | - | | | | - | |
Interest expense | | | - | | | | - | |
Total other income (expense) | | | - | | | | (83,929 | ) |
| | | | | | | | |
Net income (loss) from discontinued operations before provision for income taxes | | | - | | | | 80,422 | ) |
Provision for (benefit from) income taxes | | | - | | | | - | |
Net income (loss) from discontinued operations | | $ | - | | | $ | (80,422 | ) |
NOTE 9: INCOME TAXES
The components of the provision for income taxes for the years ended December 31, 2021 and 2020 consisted of the following. The provision for income taxes in 2020 is a result of the gain on the sale of the CAKE Business, and therefore has been classified as a component of discontinued operations.
| | Years Ended | |
| | December 31, | |
| | 2021 | | | 2020 | |
Current | | | | | | |
Federal | | | - | | | | - | |
State | | | - | | | | - | |
Total current | | $ | - | | | $ | - | |
Deferred | | | | | | | | |
Federal | | | - | | | | - | |
State | | | - | | | | - | |
Total deferred | | $ | - | | | $ | - | |
Total | | $ | - | | | $ | - | |
A reconciliation of the Company’s effective tax rate to the statutory federal rate is as follows:
| | Years Ended | |
| | December 31, | |
| | 2021 | | | 2020 | |
Statutory federal rate | | | - | | | | 21.0 | % |
State income taxes net of federal income tax benefit | | | - | | | | 0.7 | % |
Permanent differences for tax purposes | | | - | | | | 0.0 | % |
Change in valuation allowance | | | - | | | | -20.3 | % |
Effective income tax rate | | | - | | | | 0.0 | % |
The income tax benefit differs from the amount computed by applying the U.S. federal statutory tax rate of 21%, primarily due to the change in the valuation allowance and state income tax benefit, offset by nondeductible expenses.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of the deferred tax assets and liabilities are as follows:
| | Years Ended | |
| | December 31, | |
| | 2021 | | | 2020 | |
Deferred tax assets: | | | | | | |
Net operating loss carryforwards | | $ | 3,518,643 | | | $ | 3,518,643 | |
Impairment of intangible assets | | | 1,054,294 | | | | 1,054,294 | |
Stock-based compensation | | | 21,163 | | | | 21,163 | |
Other temporary differences | | | (321,112 | ) | | | (321,112 | ) |
Total deferred tax assets | | | 4,272,988 | | | | 4,272,988 | |
Change in valuation allowance | | | (4,272,988 | ) | | | (4,272,988 | ) |
Effective income tax rate | | $ | - | | | $ | - | |
At December 31, 2021, the Company had available net operating loss carryovers of approximately $13.1 million that may be applied against future taxable income and expires at various dates between 2027 and 2039, subject to certain limitations. The Company has a deferred tax asset arising substantially from the benefits of such net operating loss deduction and has recorded a valuation allowance for the full amount of this deferred tax asset since it is more likely than not that some or all of the deferred tax asset may not be realized.
The Company files income tax returns in the U.S. federal jurisdiction and California and is subject to income tax examinations by federal tax authorities for tax years ended 2017 and later and by California authorities for tax years ended 2014 and later. The Company currently is not under examination by any tax authority. The Company’s policy is to record interest and penalties on uncertain tax positions as income tax expense. As of December 31, 2020, the Company has no accrued interest or penalties related to uncertain tax positions.
NOTE 10: ACQUISITONS
On August 25, 2021, the Company acquired CNP Operating for a purchase price consideration consisting of 23,600,000 shares of the Company’s common stock valued at $10,620,000.
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 $3,050,000 and CSIS and its sole member guaranteed the CBSG debt. CSIS has agreed to fund the loan repayments at $138,625 per month for 24 months. The original balance of the CBSG debt assumed by CNP Operating has been offset as a contribution receivable from CSIS and treated as an initial reduction in members’ equity. As payments are made by CSIS on the CBSG debt the balance of those payments will be treated as members’ contributions. That balance was $2,218,000 at December 31, 2021.
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 | | $ | 60,589 | |
Accounts receivable, net | | | 496,795 | |
Inventory | | | 532,349 | |
Current portion of note receivable | | | 133,000 | |
Total current assets | | | 1,222,733 | |
| | | | |
Other assets | | | | |
Right of Use Asset | | | 549,902 | |
Property and equipment, net of accumulated depreciation | | | 5,563,610 | |
Goodwill | | | 9,261,591 | |
Other Assets | | | 16,573 | |
Total other assets | | | 15,391,676 | |
Total assets | | $ | 16,614,409 | |
| | | | |
Liabilities | | | | |
| | | | |
Current liabilities | | | | |
Accounts payable and accrued expenses | | $ | 1,829,418 | |
Due to CSIS | | | 298,760 | |
Current portion of lease obligation | | | 198,869 | |
Current portion of notes payable | | | 1,990,021 | |
Total current liabilities | | | 4,317,068 | |
| | | | |
Lease obligation, less current portion | | | 359,979 | |
Long-term note payable, net of current portion and discounts | | | 1,317,362 | |
Total liabilities | | | 1,677,341 | |
| | | | |
Total Purchase Price Consideration | | $ | 10,620,000 | |
The purchase price was 23,600,000 shares of common stock at $0.45 per share totaling $10,620,000.
The historical operations of CNP Operating were as follows:
| | Six Months Ended June 30, 2021 | | | Twelve months ended December 31, 2020 | |
| | Unaudited | | | Audited | |
Net revenues | | $ | 5,541,627 | | | $ | 6,183,469 | |
Cost of revenue | | | 3,546,763 | | | | 5,772,804 | |
Gross profit (loss) | | | 1,976,864 | | | | 410,665 | |
| | | | | | | | |
Operating expenses: | | | | | | | | |
Selling, general and administrative | | | 2,159,390 | | | | 3,829,785 | |
Total operating expenses | | | 2,159,390 | | | | 3,829,785 | |
| | | | | | | | |
Loss from operations | | | (182,526 | ) | | | (3,419,120 | ) |
| | | | | | | | |
Total other expense | | | (28,730 | ) | | | (222,376 | ) |
| | | | | | | | |
Net loss | | $ | (211,256 | ) | | $ | (3,641,496 | ) |
The following unaudited pro forma consolidated results of operations have been prepared, expressed in rounded thousands, as if the acquisition of CNP Operating had occurred as of January 1, 2020:
| | Years Ended December 31, | |
| | 2021 | | | 2020 | |
| | | | | | |
Revenue | | $ | 10,602,000 | | | $ | 6,183,000 | |
| | | | | | | | |
Net loss from continuing operations | | $ | (874,000 | ) | | $ | (3,419,000 | ) |
| | | | | | | | |
Net loss per share from continuing operations | | $ | (0.05 | ) | | $ | (0.50 | ) |
| | | | | | | | |
Weighted average number of common stock shares – Basic and diluted | | | 16,227,143 | | | | 6,784,028 | |
NOTE 11: 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 $1,500 per month. On August 5, 2020, the Company entered into a lease agreement with Emerging Growth for additional office space in Whitefish, Montana, replacing its previous lease from June 20, 2019. The term of the lease commenced on September 1, 2020 for a period of one year at a rate of $4,500 per month. The lease contains an option for the Company to renew the lease for a period of one additional year at a monthly rent subject to a 3% increase. Management has elected a policy to exclude leases with an initial term of 12 months or less from the balance sheet presentation required under ASC 842. As a result, the office lease has been excluded from balance sheet presentation as it has an original term of 12 months or less.
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 $4,500 per month and has a term of three years and contains an option for the Company to renew the lease for a period of one additional year at a monthly rent subject to a 3% increase.
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 $10,521 per month. On September 26, 2019 this agreement was terminated and replaced with a new agreement starting October 1, 2019 and expiring on June 30, 2023.
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 $835.
The following is a summary of future minimum lease payments and related liabilities for all non-cancelable operating leases maturing as of December:
| | Operating Leases | |
2022 | | $ | 198,869 | |
2023 | | | 256,155 | |
2024 | | | 262,727 | |
2025 | | | 74,161 | |
Thereafter | | | - | |
Total minimum lease payments including interest | | | 791,912 | |
Less: Amounts representing interest | | | (117,718 | ) |
Present value of minimum lease payments | | | 674,194 | |
Less: Current portion of lease liabilities | | | (198,869 | ) |
Non-current portion of lease liabilities | | $ | 475,325 | |
| | | | |
Cash payments on lease liabilities | | $ | 1,035,002 | |
Weighted average remaining lease term | | 3.5 year | |
Weighted average discount rate | | | 10 | % |
NOTE 12: 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.
On October 18, 2021 the Company settled a vendor dispute in the amount of $100,000 of which the initial payment of $40,000.00 was paid on the execution of the settlement and balance to paid in 48 equal monthly payments of $1,250.00. The balance as of December 31, 2021 is $56,250
NOTE 13: SUBSEQUENT EVENTS
On April 14, 2022, the Company entered into securities purchase agreements with investors for the purchase of an aggregate of 1,142,898 shares of common stock at a purchase price of $0.70 per share for gross proceeds of approximately $800,000. The shares were issued pursuant to an exemption under Section 4(a)(2) of the Securities Act of 1933, as amended.
On April 29, 2022, the Company issued 1,000,000 shares of common stock in connection with the closing of the purchase of property in Wray, Colorado, by the Company’s subsidiary CFN Real Estate II, LLC. The shares were issued pursuant to an exemption under Section 4(a)(2) of the Securities Act of 1933, as amended.
On May 11, 2022, the Company’s subsidiary, CFN Real Estate II, LLC, entered into a promissory note with a lender for the repayment of $500,000 in connection with the $500,000 refinancing of the Company’s property located in Wray, Colorado. The company received the proceeds from the refinancing on May 13, 2022. Accrued interest at the rate of 12% is payable monthly commencing on June 15, 2022, and the principal of the promissory note is payable upon maturity on June 15, 2024. The lender received a security interest in the property and equipment contained therein as collateral for the promissory note. The promissory note contains customary events of default and other conditions.