RSA shares are measured at fair market value on the date of grant and stock-based compensation expense is recognized as the shares vest with a corresponding offset credited to additional paid-in-capital. For the three months ended March 31, 2023 and 2022, the Company recognized stock-based compensation expense of $58,259 and $25,500, respectively. As of March 31, 2023, there was $130,165 of unrecognized stock-based compensation expense on the RSA shares.
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, 2022.
Between July and December 2021, the Monitor undertook a detailed process to determine the value of the 49% of profits and proceeds from 2017 to the present that DTLA is entitled to, in addition to the 10% prejudgment interest. The Monitor’s report was completed in January 2022. Based on the information in the Monitor’s report, DTLA has requested that the Arbitrator issue an award of back profits and interest and order the sale of LAFI to an independent third party in order to allow any judgment to be paid to DTLA. Due to uncertainties, the impact of the DLTA Judgment has not been reflected in the accompanying interim condensed consolidated financial statements as of March 31, 2023.
In August 2022, a receiver was appointed by the Los Angeles County Superior Court to assume control of LAFI. As of May 15, 2022, the date of these unaudited interim condensed consolidated financial statements, the receiver is in the process of selling LAFI. It is not known at this time whether the sale of LAFI, if consummated and approved by the Superior Court, will result in any proceeds of the sale being paid to satisfy the DLTA Judgment.
As discussed in Note 6, cash advances are provided to the Company for operating expenses by Company officers, who were owed $26,622 and $44,882 by the Company as of March 31, 2023 and December 31, 2022, respectively. Company officers own approximately 44.7% of the Company as of the date of this report. The Company has agreed to indemnify Company officers for certain events or occurrences arising from 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 the management’s opinion, upon consultation with legal counsel, there are no contractual obligations or current litigation that will materially affect the Company’s unaudited interim condensed consolidated financial position or results of operations.
The Company has agreed to indemnify its officers and directors for certain events or occurrences arising from the officer or director serving in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company believes the estimated fair value of these indemnification agreements is minimal and no liability has been recorded as of March 31, 2023 and December 31, 2022.
NOTE 12 – SUBSEQUENT EVENTS
As of May 15, 2023, the date of these unaudited interim condensed consolidated financial statements, there are no subsequent events that are required to be recorded or disclosed in the accompanying unaudited interim condensed consolidated financial statements.
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 three months ended March 31, 2023 as filed with the Securities and Exchange Commission (the “SEC”) on April 19, 2023. Certain statements made in this discussion are “forward-looking statements” within the meaning of 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are based upon beliefs of, and information currently available to management as well as estimates and assumptions made by management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used herein, the words “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “future,” “intend,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue” or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks relating to our business, industry, and our operations and results of operations. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
Our interim condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of these interim condensed consolidated financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our interim condensed consolidated financial statements would be affected to the extent there are material differences between these estimates and actual results. The following discussion should be read in conjunction with our interim condensed consolidated financial statements and notes thereto appearing elsewhere in this Report.
Unless otherwise indicated or the context requires otherwise, the words “we,” “us,” “our,” the “Company,” “our Company” or “Farmhouse” refer to Farmhouse Inc., a Nevada corporation, and our wholly owned subsidiaries, Farmhouse, Inc., a Washington corporation (“Farmhouse Washington”) and Farmhouse DTLA, Inc. (“DTLA”), a California corporation.
Corporate Overview
We are a holding company with multiple divisions dedicated to connecting professionals and brands in the legal cannabis industry. We are built on two core competencies–trust and connection. Our divisions provide solutions that leverage our trusted brand and facilitate valuable connections across the cannabis industry. We connect the industry through multiple divisions including the @420 brand and @420
Twitter, and the WeedClub® Platform. Our @420 brand and @420 Twitter serve as trusted, influential properties that enable the Company to connect, promote and advocate for the industry. We will continue to serve as a leading cannabis connection platform and branch its well-known brand into the budding web3 and metaverse.
2022 Business Developments
We began exploring potential acquisitions of cannabis companies to expand our physical footprint in the industry. Acquisitions would improve our ability to leverage our WeedClub® Platform and our @420 Twitter handle to connect with consumers.
We launched a Non-Fungible Token (NFT) 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 division is currently investigating initiatives from creating NFTs with artists, launching an NFT project, and developing NFT IP licensing opportunities with cannabis brands.
Farmhouse Divisions
Each division solves a unique problem within an industry navigating state-by-state regulations and an uncertain federal regulatory landscape. This environment has created a fragmented cannabis market that emphasizes the importance of a trusted facilitator to make value-added connections across the supply chain in our industry.
·@420. Our consumer-facing brand and Twitter handle (with over 100,000 followers) serve as an influential brand that connects us with the greater public. Our Twitter handle enables the NFT division to forge valuable connections in the space and work with established projects.
·WeedClub®. Weedclub is one of the first social networks for cannabis professionals with over 5,000 members, generating thousands of valuable connections. WeedClub is an established presence in the cannabis industry that people trust to make valuable connections. As we continue to expand our operations, WeedClub members benefit immensely from the added potential connections.
·Web3 division (“Vault”): Our newest division that connects cannabis brands with licensing opportunities with influential digital collectible holders and communities to develop new brands that appeal to digitally native consumers.
Current and Future Plan of Operations
The COVID-19 pandemic catalyzed a behavioral shift to digital connection and verifiable trust. This shift thrust blockchain technology and digital collectibles to the forefront as virtual groups transformed into supportive, thriving communities centered around digital collectible brands. The top brands generate immense value (intrinsic and financial) while building highly loyal, engaged communities.
As we transitioned our company online, we started researching and participating in this behavioral shift. Many established brands attempted to enter this space, but few understood the collaborative, accretive culture and failed to gain traction within the community. We positioned our web3 division to leverage our core competencies to drive value for the digital collectible community and our shareholders.
Our web3 (“Vault”) division connects cannabis companies to intellectual property (IP) licensing opportunities from digital collectible holders to launch digitally native cannabis brands. Since our launch of our Vault division in December 2021, we have developed relationships with six digital collectible holders to seed our IP vault with over 25 blue-chip NFTs. These NFTs include Bored Ape Yacht Club, Mutant Ape Yacht Club, Bored Ape Kennel Club, CryptoPunks, CrypToadz, Doodles, Meebits, and Gutter Cat Gang.
Our most notable licensed NFT is Mutant Ape Yacht Club #30000, “Mega Robot”, one of twelve Mega Mutants, the rarest NFTs in the Bored Ape Yacht Club (BAYC) universe. Mega Mutants have sold for over $1,000,000 with the Mega Serum previously selling for $5.8 million.
In July 2022, we launched our first cannabis activation with Oro Blanco (BAYC #2186) and Urbana to debut a branded cannabis strain across three retail stores in San Francisco. The initial results generated encouraging monthly and quarterly sell-through rates and sales which informed us of our decision to further build out our Vault division.
To better understand web3 culture and the overall market, we developed an advisory board of web3-native experts. Our advisory board helps guide our strategy and decision-making across social media, community, art and branding, and product development. Each advisor has built a personal brand and is well-known across the community.
In August 2022, we began developing the concept for a Mega Robot cannabis line with Bronx Extracts. This brand builds on our key learnings from the Oro Blanco launch which highlighted the need for standout packaging paired with curated cannabis. This collaboration pairs the premium IP of Mega Robot with premium cannabis sourced and developed by Bronx Extracts to create a brand that appeals to everyday consumers.
The Mega Robot x Bronx Extracts cannabis line launched in February 2023, and we recognized $1,069 of licensing revenues during the three months ended March 31, 2023. The Mega Robot brand will demonstrate the power of our cannabis network combined with our advisory board to launch a brand that appeals to all consumers, including digitally native ones.
Liquidity and Capital Resources
Until such time we can raise additional capital or generate positive cash flow from operations, we will continue to be funded through short-term advances from the Company officers, borrowings under promissory notes and sales of restricted common stock under various offerings. We estimate we will need $2,500,000 in capital, after satisfying our debt obligations, to cover our ongoing expenses and to successfully market and expand our product offerings. This is only an estimate and may change as we receive feedback from customers and have a better feel for the demand and revenues from our new products. Both factors may change, and we may not be able to raise the necessary capital and if we are able to, that it may not be at favorable rates. We intend to meet our cash requirements for the next 12 months with equity financing, debt financing, or other sources, which may result in further dilution in the equity ownership of our shares.
For the three months ended March 31, 2023 and 2022, we generated revenues of $1,069 and zero, respectively, and we reported net losses of $171,315 and $234,217, respectively. We had negative cash flow from operating activities of $35,125 and $45,660, respectively. As of March 31, 2023, we had an accumulated deficit of $5,916,014 and total shareholders’ deficit of $1,696,972.
Our auditors have raised substantial doubt regarding our ability to continue as a going concern as a result of our historical recurring losses and negative cash flows from operations as well as our dependence on private equity and financing. We anticipate that we will continue to report losses and negative cash flow. To date, we have financed our activities principally from the sale of common stock and loans from Company officers. We intend to finance our future working capital needs from these sources until such a time that funds provided by our operations are sufficient to fund our working capital requirements. We believe that the current cash on hand, loans from Company officers and funds raised from the sale of our common stock allows us sufficient capital for operations and to continue as a going concern.
Related party matters
The terms of any transaction determined to be with related parties are presented to the board of directors (other than any interested director) for approval and documented in the corporate minutes. Cash advances are commonly provided by our officers for operating expenses and direct payment of Company expenses. Company officers were owed $26,622 and $44,882 as of March 31, 2023 and December 31, 2022, respectively, and is comprised of cash advances provided to the Company for operating expenses and direct payment of Company expenses by Company officers. For the three months ended March 31, 2023, Company officers made cash advances of zero and were repaid $18,260. For the three months ended March 31, 2022, Company officers made cash advances of zero and were repaid $16. The cash advances are non-interest bearing and are unsecured.
Company officers own approximately 44.7% of the Company as of March 31, 2023. We have agreed to indemnify Company officers for certain events or occurrences arising from the officer or director serving in such a capacity. Other than the foregoing, none of the directors or executive officers of the Company, nor any person who owned of record or was known to own beneficially more than 5% of our outstanding shares of common stock has any material interest, direct or indirect, in any transaction that has occurred during the past fiscal year.
Litigation developments
In July 2021, we successfully enforced our subsidiary’s, DTLA, contract rights in a multi-licensed cannabis retail dispensary, grow, manufacturer and distributor called Los Angeles Farmers, Inc. (“LAFI”). 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 “DLTA Judgment”). The DTLA Judgment awarded 49% of LAFI 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.
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.
In August 2022, a receiver was appointed by the Los Angeles County Superior Court to assume control of LAFI. As of May 15, 2022, the date of these interim condensed consolidated financial statements, the receiver is in the process of selling LAFI. It is not known at this time whether the sale of LAFI, if
consummated and approved by the Superior Court, will result in any proceeds of the sale being paid to satisfy the DLTA Judgment.
Under GAAP accounting, ownership percentages over 20% would typically be accounted for using the equity method, the Company is accounting for this investment as an investment in equity securities due to the Company not having significant influence over LAFI. The cost of this investment was expensed during the year ended December 31, 2017 and, due to uncertainties surrounding the value of LAFI and determining any award of back profits and interest, as well as the pending litigation, no value has been reflected in our interim condensed consolidated financial statements as of March 31, 2023.
Results of Operations
We generate revenues from the following sources:
(1)Subscription fees. Subscription fees related to our WeedClub portal are received at the time of purchase. Our performance obligation is to provide services over a fixed subscription period; accordingly, we recognize revenue ratably over the subscription period and deferred revenue is recorded for the portion of the subscription period subsequent to each reporting date.
(2)License revenues. License revenues are generated in connection with NFT Art License Agreements, whereby a licensee is granted a limited license from the Company to use one of our licensed NFTs for the purpose of creating, marketing, and selling branded cannabis and hemp products and accessories. Our performance obligation is met over the term of the license agreement; accordingly, we recognize revenue ratably over the term of the license agreement.
Three months ended March 31, 2023, compared to the three months ended March 31, 2022 (Unaudited)
Revenues generated for the three months ended March 31, 2023 and 2022 were as follows:
| 2023
|
| 2022
|
|
|
|
|
Subscription fees
| $-
|
| $-
|
License revenues
| 1,069
|
| -
|
| 1,069
|
| -
|
Less: Costs of revenues associated with license revenues
| (535)
|
| -
|
| $534
|
| $-
|
For the three months ended March 31, 2023 and 2022, general and administrative expenses were $84,679 and $92,586, respectively, a decrease of approximately $7,900. Contributing factors to this increase were:
·Outside consulting fees decreased overall by approximately $4,800. We have contracted with two advisors with experience in merger and acquisitions and two advisors to assist in expanding our NFT licensing reach to licensees and California dispensaries. Together their non-cash, stock-based fees were approximately $12,800 for the three months ended March 31, 2023, compared to approximately $17,600 for the three months ended March 31, 2022. In addition, consulting fees include $2,375 of non-cash, stock-based fees to our independent director for vesting of a restricted stock award (“RSA”).
·Labor-related expenses decreased by approximately $6,000, due to consultant who stopped working for the Company in May 2022. Labor-related expenses included recognizing $9,500 in
stock-based fees for the three months ended March 31, 2023, compared to $15,540 for the three months ended March 31, 2022.
·Public company-related costs, including OTC filing fees, press releases and transfer agent costs increased by approximately $900.
·Overall other general and administrative expenses, including website development, dues and subscriptions, rent and office expenses and travel and entertainment increased by approximately $2,000 for the current three-month period.
For the three months ended March 31, 2023 and 2022, professional fees were $74,650 and $125,729, respectively, a decrease of approximately $51,000. Our professional fees for the three months ended March 31, 2023 and 2022 were comprised of the following:
| Three months ended March 31,
|
| 2023
|
| 2022
|
|
|
|
|
|
|
Legal
| $
| 3,302
|
| $
| 26,531
|
Accounting and audit
|
| 65,648
|
|
| 61,938
|
Other professional fees
|
| 5,700
|
|
| 37,260
|
| $
| 74,650
|
| $
| 125,729
|
Legal. Legal expenses decreased by approximately $23,200 for the three months ended March 31, 2023 compared to the three months ended March 31, 2022, all of which is attributable to fees incurred by the Monitor to advance our litigation against LAFI decreased by approximately $23,300 as we no longer require the services of the Monitor. Reference is made to Note 9, Litigation, to the interim condensed consolidated financial statements included under Item 1 in this Report.
Accounting and audit. Accounting and audit expenses increased by approximately $3,700 for the three months ended March 31, 2023, compared to the three months ended March 31, 2022. Contributing factors to this increase were:
·Audit and accounting fees to our independent public accounting firm increased by approximately $10,000 due to the timing of invoicing audit fees related to our annual fiscal year audit. Overall, our audit costs remained consistent between years.
·Accounting fees for our contracted CFO services decreased by approximately $7,200, which included $30,250 in stock-based fees in the three months ended March 31, 2023 compared to $25,500 of stock-based fees recognized in the three months ended March 31, 2022. In June 2022, our CFO reduced his monthly fees to $4,000; accordingly, our CFO fees were $12,000 in the three months ended March 31, 2023 compared to $24,000 in the three months ended March 31, 2022, for a total decrease of $12,000. All fees to our CFO are accrued and not paid.
·Accounting fees for our outside bookkeeping services increased by approximately $900.
Other professional fees. Other professional fees decreased by approximately $31,600 for the three months ended March 31, 2023, compared to the three months ended March 31, 2022 due to a decrease in fees to our contracted software engineers and developers of our software technology platforms. Professional fees included $5,700 in stock-based fees in the three months ended March 31, 2023 compared to $36,260 of stock-based fees recognized in the three months ended March 31, 2022.
Interest expense. Interest expense decreased by approximately $3,300 for the three months ended March 31, 2023 compared to the three months ended March 31, 2022. Approximately $2,900 of the decrease in interest expense was related to our unpaid liability to our predecessor law firm in the
aforementioned litigation. The additional decrease in interest expense of approximately $400 pertains to one of our loans that was paid off in July 2022.
Overall, for the three months ended March 31, 2023, we reported a net loss of $171,849 compared to a net loss of $234,217 for the three months ended March 31, 2022.
Non-GAAP Adjusted Net Loss
The following table reflects the reconciliation of net loss to Adjusted Net Loss for the three months ended March 31, 2023 and 2022. This is a non-GAAP measurement of earnings and considers the stock-related compensation expense for services rendered by consultants and professionals for the comparable years. Management considers this non-GAAP measurement of earnings important to investors and other interested parties to evaluate our performance on a comparable basis.
| Three months ended March 31,
|
| 2023
|
| 2022
|
|
|
|
|
|
|
Net loss as reported
| $
| 171,315
|
| $
| 234,217
|
Less: Stock-based fees
|
| (58,259)
|
|
| (94,912)
|
Adjusted Net Loss
| $
| 113,056
|
| $
| 139,305
|
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 three months ended March 31, 2023 and 2022, respectively:
| Three months ended March 31,
|
| 2023
|
| 2022
|
|
|
|
|
|
|
Net cash used in operating activities
| $
| (35,125)
|
|
| (45,660)
|
Net cash provided by investing activities
|
| -
|
|
| -
|
Net cash provided by (used in) financing activities
|
| (18,260)
|
|
| 42,709
|
Net change in cash and cash equivalents
| $
| (53,385)
|
|
| (2,951)
|
Three months ended March 31, 2023
Operating activities used $35,125 of cash, primarily resulting from our net loss for the three months ended March 31, 2023 of $171,315, offset by non-cash stock-based compensation for vested restricted stock awards of $58,259. Other uses of cash from operating activities were primarily from increases in accounts payable of $12,614, accrued legal fees of $9,784, accrued payroll and payroll taxes of $46,036 and accrued liabilities of $12,000, offset by an increase in accounts receivable of $1,069 and prepaid expenses of $4,170.
Three months ended March 31, 2022
Operating activities used $45,660 of cash, primarily resulting from our net loss for the three months ended
March 31, 2022 of $234,217, offset by non-cash stock-based compensation expense recorded for services rendered of $69,412, non-cash stock-based compensation expense recorded for vested restricted stock awards of $25,500, and increases in liabilities across most categories: accrued legal fees, accrued payroll and other accrued liabilities. Accounts payable decreased slightly. Financing activities provided $42,709 of cash for the three months ended March 31, 2022, consisting of $35,105 in proceeds from the sale of common stock, $7,620 of borrowings from an unrelated lender, offset by repayments of $16 in short-term advances from officers.
Contractual Obligations
We qualify as a smaller reporting company, as defined by Item 10 of Regulation S-K and, thus, are not required to provide the information required by this Item.
Off Balance Sheet Arrangements
We are not currently a party to, or otherwise involved with, any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Cash and Cash Equivalents
We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents were $8,678 and $62,063 as of March 31, 2023 and December 31, 2022, respectively.
Critical Accounting Policies and Estimates
The preparation of our interim condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of these interim condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Our accounting policies that are critical or most important to understanding our financial condition and results of operations and that require management to make the most difficult judgments are described in our Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the SEC on April 20, 2023. There have been no material changes in these critical accounting policies.
Recently Adopted Accounting Pronouncements
Reference is made to Note 2, Summary of Significant Accounting Policies, to the interim condensed consolidated financial statements included under Item 1 in this Report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management carried out an evaluation under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were not effective as of March 31, 2023.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting subsequent to March 31, 2023, which were identified in connection with our management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations of the Effectiveness of Disclosure Controls and Internal Controls
Our management, including our Principal Executive Officer and Principal Financial Officer, does not expect that our disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their 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 “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. Due to uncertainties, the impact of the DLTA Judgment has not been reflected in the accompanying interim condensed consolidated financial statements as of March 31, 2023, 2022.
In August 2022, a receiver was appointed by the Los Angeles County Superior Court to assume control of LAFI. As of May 15, 2022, the date of these interim condensed consolidated financial statements, the receiver is in the process of selling LAFI. It is not known at this time whether the sale of LAFI, if consummated and approved by the Superior Court, will result in any proceeds of the sale being paid to satisfy the DLTA Judgment.
ITEM 1A. RISK FACTORS
We qualify as a smaller reporting company, as defined by Item 10 of Regulation S-K and, thus, are not required to provide the information required by this Item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Common Stock Issuances
The Company has 17,075,950 shares of common stock outstanding as of March 31, 2023. There were no common stock transactions for the three months ended March 31, 2023. A summary of the Company’s common stock transactions for the three months ended March 31, 2022 is as follows:
·The Company sold 41,300 shares of common stock for cash proceeds of $35,105.
·The Company issued 100,500 shares of common stock for services rendered. The Company recorded an expense of $69,412 for the three months ended March 31, 2022 based on the closing price of the Company’s common stock on the OTCQB market.
As a result of these transactions, the Company had 15,836,350 shares of common stock outstanding as of March 31, 2022.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
There have been no events which are required to be reported under this item.
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.OTHER INFORMATION
None.
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:
