The corresponding costs of revenues associated with license fees was $2,487 for both the three and nine months ended September 30, 2022. The corresponding costs of revenues associated with affiliate advertising revenues was $8,000 for the nine months ended September 30, 2021.
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
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. As of September 30, 2022 and December 31, 2021, the Company had one convertible note with a principal value of $45,000. This note is convertible at a conversion price the note holder and the Company agree and therefore the number of shares it is convertible into is not determinable.
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.
Depreciation is computed using the straight-line method based upon the estimated useful lives of the underlying assets, generally three years. Depreciation expense was zero and $295 for the three months ended September 30, 2022 and 2021, respectively, and $94 and $883 for the nine months ended September 30, 2022 and 2021, respectfully.
Convertible note payable is comprised of a promissory note to an unrelated individual in the amount of $45,000 as of September 30, 2022 and December 31, 2021, respectively. Principal and interest was originally due in July 2018 and is currently in default. The loan bears interest at 18% per annum, accrued monthly and is unsecured. Interest expense related to the convertible note payable was $2,042 for both the three months ended September 30, 2022 and 2021, and $6,059 for both the nine months ended September 30, 2022 and 2021. Accrued interest on the convertible note payable was $42,254 and $36,194 as of September 30, 2022 and December 31, 2021, respectively.
The conversion feature was not 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 September 30, 2022 and December 31, 2021.
In June 2022, the Company executed a Litigation Funding Agreement with Legalist Fund III, LP (“Legalist”), whereby Legalist will provide certain funding, in advance of any collection, in connection with certain claims that the Company has against LAFI. See Note 9. The terms of the Litigation Funding Agreement provide for committed funds of $325,000 with a first tranche of $225,000 and the second tranche of $100,000. With respect to the second tranche, the Company has the option of drawing down the $100,000 in a lump sum payment but is under no obligation to draw down the second tranche. In July 2022, the Company received the first tranche of $225,000.
Upon collection of any claims in the LAFI litigation, Legalist’s recovery is 0.85 of the committed funds then in effect, if repayment in full prior to 12 months, and 0.27 of the committed funds then in effect for every additional four months, if repayment in full occurs thereafter. In addition, Legalist was granted a security interest on the assets of the Company.
Due to Related Parties totaled $88,784 and $158,191 as of September 30, 2022 and December 31, 2021, respectively. These amounts are comprised of cash advances provided to the Company for operating expenses and direct payment of Company expenses by Company officers. For the nine months ended September 30, 2022, Company officers were repaid $69,407. For the prior nine months ended September 30, 2021, Company officers made cash advances of $31,546 and were repaid $23,926. The cash advances are non-interest bearing and are unsecured.
The Company’s authorized capital consists of 295,000,000 shares of common stock, $0.0001 par value per share, and 5,000,000 shares of undesignated preferred stock, $0.0001 par value per share. The Board, in its sole discretion, may establish par value, divide the shares of preferred stock into series, and fix and determine the dividend rate, designations, preferences, privileges, and ratify the powers, if any, and determine the restrictions and qualifications of any series of preferred stock as established.
In July 2022, the Board designated 500,000 shares of the Company’s authorized preferred stock as Series A 10% Cumulative Convertible Participating Preferred Stock (the “Series A Preferred”). As of November 14, 2022, the date of these unaudited interim condensed consolidated financial statements, 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.
In February 2022, the Board authorized an offering of up to 294,118 shares of restricted common stock at $0.85 per share, providing proceeds of up to $250,000, to be offered and sold only to investors that qualify as “accredited investors” as that term is defined in Regulation D. For the nine months ended September 30, 2022, the Company sold 69,900 shares of common stock under this offering for proceeds of $59,415. The offering expired on August 1, 2022.
A summary of the Company’s common stock transactions for the nine months ended September 30, 2022 is as follows:
As a result of these transactions, the Company has 17,027,950 shares of common stock outstanding as of September 30, 2022.
A summary of the Company’s common stock transactions for the nine months ended September 30, 2021 is as follows:
As a result of these transactions, the Company has 15,618,050 shares of common stock outstanding as of September 30, 2021.
The Company is required to reserve and keep available of its authorized but unissued shares of common stock an amount sufficient to effect shares that could be issued in connection the conversion of the convertible note payable. See Note 4. This note is convertible at a conversion price that the noteholder and the Company agree upon, therefore the number of shares it is convertible into is not determinable. Accordingly, no shares of common stock are reserved for future issuance as of September 30, 2022 and December 31, 2021.
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.
In August 2021, the Board granted a Restricted Stock Award (“RSA”) of 200,000 shares of common stock under the 2021 OIP to the Company’s CFO. A total of 50,000 RSA shares vested during the year ended December 31, 2021, leaving a non-vested balance of 150,000 shares. During the three months ended September 30, 2022, the Board granted Restricted Stock Awards (“RSAs”) totaling 1,070,000 shares of common stock under the 2021 OIP to Company officers, directors, and consultants. The RSA shares generally vest over each of the following eight fiscal quarters following the grant date. 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. The Company recognized stock-based compensation expense of $73,950 and $124,950 on vested RSA shares for the three and nine months ended September 30, 2022, respectively. The Company recognized stock-based compensation expense of $25,500 and $25,500 on vested RSA shares for the three and nine months ended September 30, 2021, respectively. Unrecognized stock-based compensation expense on the RSA shares was $231,350 as of September 30, 2022.
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.
Following the issuance of DTLA Judgment, DTLA filed a motion for reimbursement of costs in the amount of $22,382. No objection was filed by LAFI and in June 2021, the amount was confirmed by the Los Angeles County Superior Court as a Judgment. In July 2021, DTLA received reimbursement costs in the amount of $22,382, which is recorded as other income for the year ended December 31, 2021.
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 consolidated financial statements as of September 30, 2022.
In August 2022, a receiver was appointed by the Los Angeles County Superior Court to assume control of LAFI. The receiver is in the process of selling LAFI.
As discussed in Note 6, cash advances are provided to the Company for operating expenses by Company officers, who were owed $88,784 and $158,191 by the Company as of September 30, 2022 and December 31, 2022, respectively. Company officers own approximately 43.9% of the Company as of the date of this report. The Company has agreed to indemnify Company officers for certain events or occurrences arising as a result of the officer or director serving in such capacity. See Note 11.
In the normal course of its business, the Company may be subject to certain contractual obligations and litigation. In 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.
The Company leased desk space in an incubator in San Francisco, CA at the rate of $700 per desk. This lease was vacated in October 2021. The Company owes the property owner $8,050 as of September 30, 2022, which is included in accrued liabilities on the accompanying balance sheet.
The Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of 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 September 30, 2022 and December 31, 2021.
In June 2022, the Company received an unsolicited offer for $165,000, net of commission, for its domain name “blunt.com” from an unaffiliated party. Management considered this offer to be a fair arms-length price for a premium domain name and in July 2022, the Company sold the domain name. The domain name was a long-lived asset that was fully impaired and the Company is not in the business of buying and selling domain names. Accordingly, this sale is recorded as other income for the three and nine months ended September 30, 2022.
NOTE 13 – SUBSEQUENT EVENTS
As of November 14, 2022, 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 other than those listed below and elsewhere in these unaudited interim condensed consolidated financial statements.
Restricted Stock Awards
Subsequent to September 30, 2022, the Board granted a Restricted Stock Award (“RSA”) of 24,000 shares of common stock under the 2021 OIP to a consultant. The RSA shares vest over each of the following four fiscal quarters, commencing December 31, 2022. 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.
19
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, 2021 as filed with the Securities and Exchange Commission (the “SEC”) on April 22, 2022. 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 leading connection platform in the legal 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 us to connect, promote and advocate for the industry. These properties leverage the WeedClub® Platform to drive valuable
20
connections that have generated over $50 million in funding for cannabis startups, supplier connections for retail dispensaries, and more. We will continue to serve as a leading cannabis connection platform and branch its well-known brand into the budding web3 and metaverse. Every company needs Friends in High Places® and our multiple divisions to provide exactly that.
Recent Business Developments
In December 2021, we launched a Non-Fungible Token (NFT) Licensing Division dedicated to connecting the metaverse with cannabis brands. As a leader in technology, we established this division to bring NFTs to cannabis brands to create a symbiotic relationship between two fast-growing industries. Our NFT division explores how cannabis brands can connect with the metaverse through NFTs. It is a natural expansion of our brand and bridges the gap between physical cannabis brands and digital assets.
Our NFT Licensing Division experienced promising growth across cannabis brands and popular NFT collectors. We have grown our licensing vault to over 25 blue-chip NFTs spanning 8 collections including Bored Ape Yacht Club, CryptoPunks, Doodles, Mutant Ape Yacht Club, and Gutter Cat Gang. We also received encouraging sales data from our first brand activation which demonstrated a higher sell-through rate for NFT-branded products and increased social engagement for dispensaries.
This initial traction generated revenues in our three months ended September 30, 2022 and multiple new licensee leads across the cannabis and hemp industries, and our over 6,000 Twitter followers. These encouraging numbers led us to establish a Web3 advisory board that consists of influential NFT collectors with established followers in the top NFT communities. Our advisors work closely with us to guide web3 strategy, advise cannabis brands, and expand our web3 network. Their digitally native expertise and our cannabis network have unlocked multiple opportunities with cannabis and hemp brands.
In our DTLA litigation, a receiver was appointed by the Los Angeles County Superior Court in August 2022 to assume control of LAFI. The receiver is in the process of selling LAFI. See further discussion below.
Farmhouse Divisions
Our @420 brand and Twitter handle (with over 93,000 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 space and work with established projects.
The WeedClub® Platform is a premier networking platform with over 5,000 cannabis professionals and is the backbone of our Company. WeedClub® Platform is an established presence in the cannabis industry that people trust to make valuable connections. As we continue to expand our operations, WeedClub members benefit immensely from the added potential connections.
After four years of litigation, a Final Judgment was filed into the record in the Superior Court of California in the County of Los Angeles for case number BC681251 (the “DTLA Judgment”). The DTLA Judgment awarded 49% of an LA-based dispensary to DTLA. In addition to equity ownership, the DTLA Judgment awarded DTLA a share of any profits of this dispensary from November 2017 to the present and going forward along with accrued interest on those profits and the costs of bringing 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.
21
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.
Although ownership percentages over 20% would typically be accounted for using the equity method, we are accounting for this investment as an investment in equity securities due to the Company not having significant influence over the LA dispensary. The cost of this investment was expensed during the fiscal year ended December 31, 2017 and, due to uncertainties surrounding the value of the LA dispensary and determining any award of back profits and interest, as well as the pending litigation, no value has been reflected in our interim condensed consolidated financial statements as of September 30, 2022.
In August 2022, a receiver was appointed by the Los Angeles County Superior Court to assume control of LAFI. The receiver is in the process of selling LAFI. Reference is made to Note 9, Litigation, to the interim condensed consolidated financial statements included under Item 1 in this Report.
Current and Future Plan of Operations
Farmhouse is built on connection, brand and trust. These three pillars establish the foundation that drives value for our community across all our divisions. Through technology, we leverage these pillars to connect members to value-add products, services, capital, and consumers. Our commitment to developing cannabis-specific technology solutions firmly established us as a trusted connector in the cannabis industry.
As our industry continues to grow, it faces the same problems due to the lack of federal legalization. For many cannabis brands, the lack of federal legalization leads to increased cost of expansion, lack of access to many proven digital marketing channels and lack of access to capital and banking. We addressed these problems by being early movers by creating the WeedClub® Platform and establishing the @420 brand including our @420 Twitter handle with over 93,000 followers.
Over the past few years, new technology centered around a decentralized future (web3) has emerged as a potentially more effective solution for all the core problems our industry faces. Decentralization and web3 eliminate the walled gardens created by the platform economy that cannabis companies lack access to due to the lack of federal legalization. Through web3, cannabis brands can connect directly with their consumers, build community and raise capital through new channels to better position themselves for potential federal legalization.
The key feature of this decentralized future (web3)is NFTs. What started out as simple digital JPEGs has rapidly evolved in the past year into curated collectible art and the digital proof of ownership that unlocks holder-specific value such as community, product and services discounts, and more. Just as we were early movers when we created the WeedClub® Platform as a professional social network for the cannabis industry, we launched our NFT division to connect cannabis brands directly to a community of cannabis and cryptocurrency enthusiasts. The NFT division is an exploration on how we can connect these two similar, rapidly growing industries.
The NFT division is our first step that allows us to leverage our existing foundation to solve the problems of our industry through web3 solutions. As we build this new crypto native, cannabis enthusiast community, we will drive brand awareness and access an entirely new demographic of members of our ecosystem. Not only will this provide new opportunities for cannabis brands to engage with us, it will also
22
expand our reach to younger demographics that care about engaging in a more instantaneous and genuine way.
We believe our entrance into web3 and NFTs adds a new layer to our current foundation and allows us to leverage what we have built to strengthen our ability to provide technological solutions that address the core problems our industry continues to face. We believe we are uniquely positioned to fill this industry need by scaling its commercial presence.
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 Company Officers. 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 of the demand and revenues from our new products. Both of these 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 equity financing, debt financing, or other sources, which may result in further dilution in the equity ownership of our shares.
During the three months ended September 30, 2022, we received cash proceeds totaling $390,000. We sold domain name “blunt.com” for $165,000, net of commissions, and we received $225,000 under a litigation funding agreement with Legalist Fund III, LP (“Legalist”). Legalist provides certain funding in advance of any collection in connection with our claims against LAFI.
For the nine months ended September 30, 2022, we had a net loss from operations of $639,595, consisting primarily of general and administrative and legal and professional expenses. In addition, as of September 30, 2022, we had stockholders’ deficit of $1,712,660. Our auditors have raised substantial doubt regarding our ability to continue as a going concern because of our historical recurring losses and negative cash flows from operations as well as our dependence on private equity and financings. 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 on financing our future working capital needs from these sources until such time that funds provided by our operations are sufficient to fund our working capital requirements. We believe that the loans from Company officers and funds raised from the sale of our common stock will allow us sufficient capital for operations and to continue as a going concern.
On February 1, 2022, the board of directors (“Board”) authorized an offering of up to 294,118 shares of restricted common stock at $0.85 per share, providing proceeds of up to $250,000, to be offered and sold only to investors that qualify as “accredited investors” as that term is defined in Regulation D. For the nine months ended September 30, 2022, we sold 69,900 shares of common stock under this offering for proceeds of $59,415. This offering expired on August 1, 2022.
Results of Operations
We generate four types of revenue: subscription fees consisting of membership dues; affiliate advertising from links within the web properties; referral fees from strategic business introductions; and licensing revenues in connection with NFT Art License Agreements. Each of the above segments is dependent on leads generated within the Farmhouse ecosystem. Subscription fees were billed based on the types of membership privileges that Members such as being able to communicate privately with dispensary owners and other licensed operators. Affiliate advertising revenue is derived from the placement of web
23
links on WeedClub, @420 Twitter, e-mail and social media primarily. Details regarding when each revenue stream is recognized are listed below:
(1)Subscription fees. Subscription fees related to the 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)Affiliate advertising. Affiliate advertising revenues result from advertising campaigns and are generally multi-month arrangements. Our performance obligation is met when we run the agreed upon advertisements on its platform, accordingly, we recognize revenue ratably over the campaign period and deferred revenue is recorded for the portion of the campaign period subsequent to each reporting date.
(3)Referral fees. We generate referral fees when a business transaction is consummated between our Company, as referee, and a potential target company. Our performance obligation is met at the time such business transaction is consummated; accordingly, we recognize revenue at that point.
(4)License revenues. We generate 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 purposes of creating, marketing, and selling a line of cannabis accessory products for retail sale in cannabis dispensaries. Our performance obligation is met over the term of the license agreement, accordingly, we recognize revenue ratably over the term of the license agreement.
Nine months ended September 30, 2022, compared to the nine months ended September 30, 2021 (Unaudited)
Revenues generated for the nine months ended September 30, 2022 and 2021 were as follows:
| Nine months ended September 30,
|
| 2022
|
| 2021
|
|
|
|
|
|
|
Subscription fees
| $
| 149
|
| $
| 695
|
Affiliate advertising
|
| -
|
|
| 8,850
|
Referral fees
|
| -
|
|
| 2,500
|
License revenues
|
| 7,474
|
|
| -
|
| $
| 7,623
|
| $
| 12,045
|
Subscription fees. We generated new subscriptions for the nine months ended September 30, 2022 and 2021 related to the WeedClub portal.
Affiliate advertising. Affiliate advertising, through our advertising deal with Twitter, generated $8,850 of revenues for the nine months ended September 30, 2021. We have an advertising deal with Twitter which provides us a revenue stream and growth opportunity due to our ability to post approved hemp social media ads. The corresponding costs of revenues associated with affiliate advertising revenues was $8,000.
Referral fees. We generate referral fees when a business transaction is consummated between us and the potential target company. Such business transactions generally arise from the connections with company presenters during @420 events of which none were held during the nine months ended September 30, 2022. Accordingly, our revenues from referral fees declined from $2,500 to zero for the nine months ended September 30, 2022.
24
License revenues. We recognized license revenue of $7,474 for the nine months ended September 30, 2022. Of this total, $2,500 was an up-front license fee in connection with an NFT Art License Agreement. Under our NFT Art License Agreements, a licensee grants us a limited license to use one of their licensed NFT’s. We, in turn, license the NFT to California dispensaries to market and sell as a line of cannabis products using that NFT. We share profits from this license arrangement with the NFT licensee. A total of $4,974 of license revenues was earned for the nine months ended September 30, 2022 and the corresponding costs of revenues was $2,487, paid to the NFT licensee.
Operating expenses for the nine months ended September 30, 2022 and 2021 were as follows:
| Nine months ended September 30,
|
| 2022
|
| 2021
|
|
|
|
|
|
|
General and administrative
| $
| 317,550
|
| $
| 316,308
|
Professional fees
|
| 327,087
|
|
| 309,440
|
Depreciation and amortization
|
| 94
|
|
| 883
|
| $
| 644,731
|
| $
| 626,631
|
For the nine months ended September 30, 2022 and 2021, general and administrative expenses were $317,550 and $316,308, respectively, a decrease of approximately $1,200. Contributing factors to this increase were:
·Outside consulting fees increased by approximately $40,500, all of which was non-cash, stock-based fees in both nine-month periods. We have contracted with two advisors with experience in merger and acquisitions and one advisor to assist in expanding our NFT licensing reach to licensees and California dispensaries. Together their non-cash, stock-based fees were approximately $57,200 for the nine months ended September 30, 2022, compared to approximately $38,100 for the nine months ended September 30, 2021. In addition, consulting fees includes $21,375 of non-cash, stock-based fees to our independent director for vesting of a restricted stock award (“RSA”).
·Labor-related expenses decreased by approximately $15,200, due to consultant who stopped working for the Company in May 2022. Labor-related expenses included recognizing approximately $45,900 in stock-based fees for the nine months ended September 30, 2022, compared to approximately $61,100 for the nine months ended September 30, 2021.
·Public company related costs, including OTC filing fees, press releases and transfer agent costs increased by approximately $3,500, due primarily to increased OTCQB listing fees.
·Overall other general and administrative expenses, including website development, dues and subscriptions, rent and office expenses and travel and entertainment decreased by approximately $27,600 for the current nine-month period. Notably, rent decreased by approximately $9,500 as we vacated our offices and work virtual, and website development costs declined by approximately $16,000. All other expense categories generally decreased due to spending constraints by management.
25
For the nine months ended September 30, 2022 and 2021, professional fees were $327,087 and $309,440, respectively, an increase of approximately $17,600. Our professional fees for the nine months ended September 30, 2022 and 2021 were comprised of the following:
| Nine months ended September 30,
|
| 2022
|
| 2021
|
|
|
|
|
|
|
Legal
| $
| 43,054
|
| $
| 88,976
|
Accounting and audit
|
| 169,222
|
|
| 127,430
|
Other professional fees
|
| 114,811
|
|
| 93,034
|
| $
| 327,087
|
| $
| 309,440
|
Legal. Legal expenses decreased by approximately $45,900 for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. Contributing factors to this net decrease were:
·Legal fees to our corporate and securities counsel firms decreased by approximately $13,600.
·Legal fees to our patent and trademark counsel increased by approximately $2,600.
·Fees incurred by Judicate West, Planet Depot and court reporting related to our litigation against LAFI decreased by approximately $32,100, due to winding down of the active litigation.
·Our portion of the fees incurred by the Monitor to advance our litigation against LAFI decreased by approximately $5,200. In April 2021, the Arbitrator overseeing the arbitration hearing issued a judgment in our favor and against LAFI. This judgment also appointed a Monitor, to be supervised by the Arbitrator, to determine how much in past profits and interest we are entitled to be awarded. The costs of the Monitor are borne equally between the Company and LAFI. Between July and December 2021, the Monitor undertook a detailed forensic examination of LAFI. Reference is made to Note 9, Litigation, to the interim condensed consolidated financial statements included under Item 1 in this Report.
·Other miscellaneous legal expenses increased approximately $2,400.
Accounting and audit. Accounting and audit expenses increased by approximately $41,800 for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021. Contributing factors to this increase were:
·Audit and accounting fees to our independent public accounting firm increased by approximately $3,500 related to our annual fiscal year audit and quarterly reviews.
·Accounting fees for our contracted CFO services increased by approximately $33,500, which included approximately $81,200 in stock-based fees in the nine months ended September 30, 2022 compared to approximately $60,800 of stock-based fees recognized in the nine months ended September 30, 2021. In June 2022, our CFO reduced his monthly fees to $4,000, which is accrued and not paid.
·Accounting fees to our outside bookkeeping services increased by approximately $4,800.
Other professional fees. Other professional fees increased by approximately $21,800 for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021 due to an increase in fees to our contracted software engineers and developers of our software technology platforms. Professional fees included approximately $108,800 in stock-based fees in the nine months ended September 30, 2022 compared to approximately $91,900 of stock-based fees recognized in the nine months ended September 30, 2021.
26
Interest expense. Interest expense increased by approximately $8,500 for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. Approximately $6,200 of the increase in interest expense was due to interest accrued on our unpaid liability to our predecessor law firm in the aforementioned litigation. This law firm resigned in April 2021 when we engaged a new “contingency-based” law firm and started accruing interest expense on their unpaid amount. The additional increase in interest expense of approximately $2,300 pertains to our two loan obligations during the nine months ended September 30, 2022.
Overall, for the nine months ended September 30, 2022, we reported a net loss of $515,364 compared to a net loss of $618,213 for the nine months ended September 30, 2021.
Non-GAAP Adjusted Net Loss
The following table reflects the reconciliation of net loss to Adjusted Net Loss for the nine months ended September 30, 2022 and 2021. 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.
| Nine months ended September 30,
|
| 2022
|
| 2021
|
|
|
|
|
|
|
Net loss as reported
| $
| 515,364
|
| $
| 618,213
|
Less: Stock-based fees
|
| (314,532)
|
|
| (254,568)
|
Adjusted Net Loss
| $
| 200,832
|
| $
| 363,645
|
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.”
Three months ended September 30, 2022, compared to the three months ended September 30, 2021 (Unaudited)
Revenues generated for the three months ended September 30, 2022 and 2021 were as follows:
| Three months ended September 30,
|
| 2022
|
| 2021
|
|
|
|
|
|
|
Subscription fees
| $
| -
|
| $
| 149
|
Affiliate advertising
|
| -
|
|
| -
|
Referral fees
|
| -
|
|
| -
|
License revenue
|
| 4,974
|
|
| -
|
| $
| 4,974
|
| $
| 149
|
Subscription fees. We generated one new subscription for the three months ended September 30, 2021 related to the WeedClub portal.
License revenues. Under our NFT Art License Agreements, a licensee grants us a limited license to use one of their licensed NFT’s. We, in turn, license the NFT to California dispensaries to market and sell a line of cannabis accessory products using that NFT. We share profits from this license arrangement with
27
the NFT licensee. A total of $4,974 of license revenues was earned for the three months ended September 30, 2022 and the corresponding costs of revenues was $2,487, paid to the NFT licensee.
Operating expenses for the three months ended September 30, 2022 and 2021 were as follows:
| Three months ended September 30,
|
| 2022
|
| 2021
|
|
|
|
|
|
|
General and administrative
| $
| 103,636
|
| $
| 130,337
|
Professional fees
|
| 73,294
|
|
| 118,004
|
Depreciation and amortization
|
| -
|
|
| 294
|
| $
| 176,930
|
| $
| 248,635
|
For the three months ended September 30, 2022 and 2021, general and administrative expenses were $103,636 and $130,337, respectively, a decrease of approximately $26,700. Contributing factors to this increase were:
·Outside consulting fees increased by approximately $14,400, all of which was non-cash, stock-based fees in both nine-month periods. We have contracted with two advisors with experience in merger and acquisitions and one advisor to assist in expanding our NFT licensing reach to licensees and California dispensaries. Together their non-cash, stock-based fees were approximately $28,500 for the three months ended September 30, 2022, compared to approximately $14,100 for the three months ended September 30, 2021. Current period consulting fees includes $21,375 of non-cash, stock-based fees to our independent director for vesting of a restricted stock award (“RSA”).
·Labor-related expenses decreased by approximately $16,900, due to consultant who stopped working for the Company in May 2022. Labor-related expenses included recognizing approximately $9,500 in stock-based fees for the three months ended September 30, 2022, compared to approximately $26,400 for the three months ended September 30, 2021.
·Public company related costs, including OTC filing fees, press releases and transfer agent costs decreased by approximately $3,400.
·Overall other general and administrative expenses, including website development, dues and subscriptions, rent and office expenses and travel and entertainment decreased by approximately $20,800 for the current three-month period. Notably, rent decreased by approximately $2,100 as we vacated our offices and work virtual, and website development costs declined by approximately $15,000. All other expense categories generally decreased due to spending constraints by management.
For the three months ended September 30, 2022 and 2021, professional fees were $73,294 and $118,003, respectively, a decrease of approximately $44,700. Our professional fees for the three months ended September 30, 2022 and 2021 were comprised of the following:
| Three months ended September 30,
|
| 2022
|
| 2021
|
|
|
|
|
|
|
Legal
| $
| 9,844
|
| $
| 28,770
|
Accounting and audit
|
| 52,750
|
|
| 53,972
|
Other professional fees
|
| 10,700
|
|
| 35,262
|
| $
| 73,294
|
| $
| 118,004
|
28
Legal. Legal expenses decreased by approximately $18,900 for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. Contributing factors to this net decrease were:
·Legal fees to our corporate and securities counsel firms decreased by approximately $10,400.
·Legal fees to our patent and trademark counsel increased by approximately $800.
·Fees incurred by Judicate West, Planet Depot and court reporting related to our litigation against LAFI decreased by approximately $2,300, due to winding down of the active litigation.
·Our portion of the fees incurred by the Monitor to advance our litigation against LAFI decreased by approximately $8,500 for the three months ended September 30, 2022. In April 2021, the Arbitrator overseeing the arbitration hearing issued a judgment in our favor and against LAFI. This judgment also appointed a Monitor, to be supervised by the Arbitrator, to determine how much in past profits and interest we are entitled to be awarded. The costs of the Monitor are borne equally between the Company and LAFI. Between July and December 2021, the Monitor undertook a detailed forensic examination of LAFI. Reference is made to Note 9, Litigation, to the interim condensed consolidated financial statements included under Item 1 in this Report.
·Other miscellaneous legal expenses increased approximately $1,500.
Accounting and audit. Accounting and audit expenses decreased by approximately $1,200 for the three months ended September 30, 2022, compared to the three months ended September 30, 2021. Contributing factors to this increase were:
·Audit and accounting fees to our independent public accounting firm increased by approximately $4,500 related to our annual fiscal year audit and quarterly reviews.
·Accounting fees for our contracted CFO services decreased by approximately $7,200, which included approximately $30,200 in stock-based fees in the nine months ended September 30, 2022 compared to approximately $25,500 of stock-based fees recognized in the three months ended September 30, 2021. In June 2022, our CFO reduced his monthly fees to $4,000, which is accrued and not paid.
·Accounting fees to our outside bookkeeping services increased by approximately $1,500.
Other professional fees. Other professional fees decreased by approximately $24,600 for the three months ended September 30, 2022, compared to the three months ended September 30, 2021 due to an increase in fees to our contracted software engineers and developers of our software technology platforms. Professional fees included approximately $5,700 in stock-based fees in the three months ended September 30, 2022 compared to approximately $35,200 of stock-based fees recognized in the three months ended September 30, 2021.
Interest expense. Interest expense increased by approximately $2,800 for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. Approximately $2,700 of the increase in interest expense was from interest accrued on our unpaid liability to our predecessor law firm in the aforementioned litigation. This law firm resigned in April 2021 when we engaged a new “contingency-based” law firm and started accruing interest expense on their unpaid amount. Additionally, there was an increase in interest expense of approximately $100 on our two loan obligations during the three months ended September 30, 2022.
Overall, for the three months ended September 30, 2022, we reported a net loss of $25,068 compared to a net loss of $224,721 for the three months ended September 30, 2021.
29
Non-GAAP Adjusted Net Loss
The following table reflects the reconciliation of net loss to Adjusted Net Loss for the three months ended September 30, 2022 and 2021. 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 September 30,
|
| 2022
|
| 2021
|
|
|
|
|
|
|
Net loss as reported
| $
| 25,068
|
| $
| 224,721
|
Less: Stock-based fees
|
| (73,950)
|
|
| (103,987)
|
Adjusted Net Loss (income)
| $
| 48,882
|
| $
| 120,734
|
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.”
Cash Flows
The following table summarizes the sources and uses of cash for the nine months ended September 30, 2022 and 2021, respectively:
| Nine months ended September 30,
|
| 2022
|
| 2021
|
|
|
|
|
|
|
Net cash used in operating activities
| $
| (242,644)
|
|
| (154,032)
|
Net cash provided by investing activities
|
| 165,000
|
|
| -
|
Net cash provided by financing activities
|
| 189,978
|
|
| 195,120
|
Net change in cash and cash equivalents
| $
| 112,334
|
| $
| 41,088
|
Nine months ended September 30, 2022
Operating activities used $242,644 of cash, primarily resulting from our net loss for the nine months ended September 30, 2022 of $515,364, offset by non-cash stock-based compensation expense recorded for services rendered of $189,582 and non-cash stock-based compensation expense recorded for vested restricted stock awards of $124,950. Other uses of cash from operating activities were primarily from increases in accrued payroll and payroll taxes of $138,109 and accrued liabilities of $43,254, offset by a decrease in accrued legal fees of $52,843.
Investing activities provided $165,000 of cash for the nine months ended September 30, 2022. In June 2022, we received an unsolicited offer for $165,000, net of commission, for our domain name “blunt.com” from an unaffiliated party. We considered this offer to be a fair arms-length price for a premium domain name and in July 2022, we sold the domain name. The domain name was a long-lived asset that was fully impaired and we are not in the business of buying and selling domain names. Accordingly, this sale is recorded as other income for the three and nine months ended September 30, 2022.
Financing activities provided $189,979 of cash for the nine months ended September 30, 2022. Financing activities consisted of $59,415 in proceeds from the sale of common stock and $232,620 of borrowings on
30
notes payable, including $225,000 in borrowings under a litigation funding agreement (see below). These were offset by repayment of a note payable of $32,650 and repayment of advances from company officers of $69,407.
On June 21, 2022, we executed a Litigation Funding Agreement with Legalist Fund III, LP (“Legalist”), whereby Legalist will provide certain funding, in advance of any collection, in connection with certain claims that we have against the LA dispensary. The terms of the Litigation Funding Agreement provide for committed funds of $325,000 with a first tranche of $225,000 and the second tranche of $100,000. With respect to the second tranche, we have the option of drawing down the $100,000 in a lump sum payment but we are under no obligation to draw down the second tranche. On July 15, 2022, we received the first tranche of $225,000.
Upon collection of any claims in the LAFI litigation, Legalist’s recovery is 0.85 of the committed funds then in effect, if repayment in full prior to 12 months, and 0.27 of the committed funds then in effect for every additional four months, if repayment in full occurs thereafter. In addition, Legalist was granted a security interest on all of our assets.
Nine months ended September 30, 2021
Operating activities used $154,032 of cash, primarily resulting from our net loss for the nine months ended September 30, 2021 of $618,213, offset by non-cash stock issued for services of $229,068 and to settle liabilities of $15,780 (net of gain on settlement of debt of $14,220) and increases in liabilities across all categories: accounts payable, accrued legal fees, accrued payroll and other accrued liabilities. There was no use of cash for investing activities for the nine months ended September 30, 2021. Financing activities provided $195,120 of cash for the nine months ended September 30, 2021, consisting of $127,500 in proceeds from the sale of common stock and $60,000 of borrowings on two loan obligations, one for $50,000 (senior) and one for $10,000, from unrelated lenders. Borrowings under the $50,000 loan obligation shall remain senior with respect to priority lien and right of payment to any indebtedness later acquired. As a condition of this loan agreement, our Company’s Chief Executive Officer personally and unconditionally guaranteed the timely repayment of the loan. In addition to these cash increases, short-term advances from Company officers, net of repayments provided of $7,620 of cash for the nine months ended September 30, 2021.
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 nine months or less when purchased to be cash equivalents. Cash and cash equivalents were $116,114 and $3,780 as of September 30, 2022 and December 31, 2021, respectively.
31
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, 2021 as filed with the SEC on April 22, 2022. 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 September 30, 2022.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting subsequent to September 30, 2022, 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 error and all fraud. A control
32
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 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 its 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, our 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.
On October 25, 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. On March 27, 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. On April 8, 2021, the Arbitrator overseeing the arbitration hearing issued a judgment in favor of DTLA and against LAFI (the
33
“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.
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.
Although ownership percentages over 20% would typically be accounted for using the equity method, we are accounting for this investment as an investment in equity securities due to the Company not having significant influence over the LA dispensary. The cost of this investment was expensed during the fiscal year ended December 31, 2017 and, due to uncertainties surrounding the value of the LA dispensary and determining any award of back profits and interest, as well as the pending litigation, no value has been reflected in our interim condensed consolidated financial statements as of September 30, 2022.
In August 2022, a receiver was appointed by the Los Angeles County Superior Court to assume control of LAFI. The receiver is in the process of selling LAFI. Reference is made to Note 9, Litigation, to the interim condensed consolidated financial statements included under Item 1 in this Report.
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 Offerings
In April 2021, the Board authorized an offering of up to 1,000,000 shares of restricted common stock at $0.51 per share (the “Offering Price”), providing proceeds of up to $510,000 (the “Offering”). The Offering will be offered and sold only to investors that qualify as “accredited investors” as that term is defined in Regulation D. The Offering terminated on August 21, 2021. In addition, the Board approved a one-time, limited “anti-dilution protection” to certain investors who, in the last 12 months, have invested at a per share price higher than the Offering Price, provided such investors make a new minimum investment under the Offering.
On February 1, 2022, the Board authorized an offering of up to 294,118 shares of common stock at $0.85 per share, providing proceeds of up to $250,000, to be offered and sold only to investors that qualify as “accredited investors” as that term is defined in Regulation D. For the nine months ended September 30, 2022, we sold 69,900 shares of common stock under this offering for proceeds of $59,415. This offering expired on August 1, 2022.
Unless otherwise indicated, all of the following sales or issuances of Company securities were conducted under the exemption from registration as provided under Section 4(2) of the Securities Act of 1933 (and also qualified for exemption under 4(5), formerly 4(6) of the Securities Act of 1933, except as noted below). All of the shares issued were issued in transactions not involving a public offering, are considered
34
to be restricted stock as defined in Rule 144 promulgated under the Securities Act of 1933 and stock certificates issued with respect thereto bear legends to that effect.
Common Stock Issuances
A summary of our common stock transactions for the nine months ended September 30, 2022 is as follows:
·We sold 69,900 shares of common stock for cash proceeds of $59,415.
·We issued 193,500 shares of common stock for services rendered and recorded an expense of $189,582 for the nine months ended September 30, 2021 based on the closing price of our common stock on the OTCQB market.
·We granted Restricted Stock Awards of 1,070,000 shares of common stock under our 2021 Omnibus Incentive Plan to officers, directors, and consultants.
As a result of these transactions, we have 17,027,950 shares of common stock outstanding as of September 30, 2022.
A summary of our common stock transactions for the nine months ended September 30, 2021 is as follows:
·We sold 8,000 shares of common stock for cash proceeds of $6,000.
·We issued 246,178 shares of common stock for services rendered and recorded an expense of $229,068 for the nine months ended September 30, 2021 based on the closing price of our common stock on the OTC Pink market.
·We sold 238,236 shares of common stock under the Offering for proceeds of $121,500.
·We issued 39,844 shares of common stock for anti-dilution protection to five investors who invested at a per share price higher than the Offering Price in the last 12 months.
·We issued 30,000 shares of common stock in settlement of $30,000 of liabilities and recognized a gain on extinguishment of debt in connection with this settlement. which is recorded as other income for the three and nine-month periods ended September 30, 2021.
·We granted a Restricted Stock Award of 200,000 shares of common stock under our Omnibus Incentive Plan to a Company officer. See Note 8.
As a result of these transactions, we have 15,618,050 shares of common stock outstanding as of September 30, 2021.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
There have been no events which are required to be reported under this item.
35
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.OTHER INFORMATION
None.
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:
