Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is designed to provide a reader of the financial statements
with a narrative report on our financial condition, results of operations, and
liquidity. We use United States GAAP financial measures in the MD&A, unless
otherwise noted. All the GAAP financial measures used by us in this report
relate to the inclusion of financial information. This MD&A should be read in
conjunction with the audited Financial Statements and notes thereto for the year
ended December 31, 2022 and 2021 included under Item 8 in this Report. The MD&A
contains forward-looking statements that involve risks and uncertainties, such
as statements of our plans, objectives, expectations, and intentions. Our actual
results could differ materially from those discussed in the forward-looking
statements. See the cautionary language at the beginning of this Report
regarding forward-looking statements.
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
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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.
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 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.
For the years ended December 31, 2022 and 2021, we generated revenues of $10,261
and $12,243, respectively, and we reported net losses of $442,782 and $975,579,
respectively. We had negative cash flow from operating activities of $252,793
and $210,232, respectively. As of December 31, 2022, we had an accumulated
deficit of $5,744,699 and total shareholders' deficit of $1,583,916.
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
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 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.
In February 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.
During the year ended December 31, 2022, we sold 69,900 shares of common stock
under this offering for proceeds of $59,415. The offering expired on August 1,
2022.
In June 2022, we sold our domain name "blunt.com" to an unaffiliated party for
$165,000. This was recorded as other income during the year ended December 31,
2022. Also in June 2022, we executed a Litigation Funding Agreement with
Legalist Fund III, LP ("Legalist"), whereby Legalist provided $225,000 of
funding to the Company. This was recorded as investment income during the year
ended December 31, 2022.
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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 $44,882 and $158,191 as of December 31, 2022 and 2021,
respectively, and is comprised of cash advances provided to the Company for
operating expenses and direct payment of Company expenses by Company officers.
During the year ended December 31, 2022, Company officers made cash advances of
zero and were repaid $113,309. During the year ended December 31, 2021, Company
officers made cash advances of $24,620 and were repaid $14,857. The Company also
paid the Company officers the accrued interest of $1,937 during the year ended
December 31, 2021. The cash advances are non-interest bearing and are unsecured.
Company officers own approximately 43.8% of the Company as of December 31, 2022.
We have agreed to indemnify Company officers for certain events or occurrences
arising as a result of the officer or director serving in such 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 April 20, 2022, the date of these
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
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using the equity method, the Company is accounting for this investment as an
investment in equity securities due to the Company not having significant
influence over LAFI. The cost of this investment was expensed during the fiscal
year ended December 31, 2017 and, due to uncertainties surrounding the value of
LAFI and determining any award of back profits and interest, as well as the
pending litigation, no value has been reflected in our consolidated financial
statements as of December 31, 2022.
Results of Operations
Year ended December 31, 2022 compared to the year ended December 31, 2021
For the years ended December 31, 2022 and 2021, we generated revenues of $10,261
and $12,243, respectively, a decrease of approximately $2,000. We generated four
types of revenue for the years ended December 31, 2022 and 2021, as follows:
Years ended December 31,
2022 2021
Subscription fees $ 149 $ 893
Affiliate advertising - 8,850
Referral fees - 2,500
License fees 10,112 -
$ 10,261 $ 12,243Subscription fees. We generated new subscriptions for the year ended December
31, 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 year ended December 31, 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 year ended December 31, 2022.
Accordingly, our revenues from referral fees declined from $2,500 to zero for
the year ended December 31, 2022.
License revenues. We recognized license revenue of $10,112 for the year ended
December 31, 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 for the purpose of creating, marketing, and selling branded cannabis and
hemp products and accessories. We, in turn, license the NFT to California
dispensaries to market and sell as a line of branded cannabis and hemp products
and accessories using that NFT. We share profits from this license arrangement
with the NFT licensee. A total of $7,612 of license revenues was earned for the
year ended December 31, 2022 and the corresponding costs
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of revenues was $3,806 paid to the NFT licensee.
For the years ended December 31, 2022 and 2021, general and administrative
expenses were $403,372 and $451,012, respectively, a decrease of approximately
$47,700. Contributing factors to this decrease were:
·Outside consulting fees increased by approximately $21,500. 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
$65,500 for the year ended December 31, 2022 compared to approximately $54,900
for the year ended December 31, 2021. In addition, consulting fees includes
$23,800 of non-cash, stock-based fees to our independent director for vesting of
a restricted stock award ("RSA").
·Labor-related expenses decreased by approximately $37,200, due to consultant
who stopped working for the Company in May 2022. Labor-related expenses included
recognizing approximately $55,400 in stock-based fees for the year ended
December 31, 2022 compared to approximately $95,200 for the year ended December
31, 2021.
·Public company related costs, including OTC filing fees, press releases and
transfer agent costs increased by approximately $2,900, 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 $34,900 for the current year period.
Notably, rent decreased by approximately $11,500 as we vacated our offices to
work virtual, and website development costs declined by approximately $12,500.
All other expense categories generally decreased due to spending constraints by
management.
For the years ended December 31, 2022 and 2021, professional fees were $382,371
and $522,476, respectively, a decrease of approximately $140,100. Our
professional fees the years ended December 31, 2022 and 2021 were comprised of
the following:
Years ended December 31,
2022 2021
Legal $ 43,390 $ 189,985
Accounting and audit 218,471 182,057
Other professional fees 120,510 150,434
$ 382,371 $ 522,476Legal. Legal expenses decreased overall by approximately $146,600 for the year
ended December 31, 2022 compared to the year ended December 31, 2021.
Contributing factors to this increase were:
·Legal fees to our corporate and securities counsel firms decreased by
approximately $9,600.
·Legal fees to our patent and trademark counsel increased by approximately
$2,400.
·Fees incurred by Judicate West, Planet Depot and court reporting related to our
litigation against LAFI decreased by approximately $33,400, due to winding down
of the active litigation.
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·Our portion of the fees incurred by the Monitor to advance our litigation
against LAFI decreased by approximately $106,200 due to winding down of the
active litigation. The costs of the Monitor were borne equally between the
Company and 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 $200.
Accounting and audit. Accounting and audit expenses increased by approximately
$36,400 for the year ended December 31, 2022 compared to the year ended December
31, 2021. Contributing factors to this increase were:
·Audit and accounting fees to our independent public accounting firm increased
by approximately $4,000 related to our annual fiscal year audit and quarterly
reviews.
·Accounting fees for our contracted CFO services increased by approximately
$26,200, which included approximately $111,500 in stock-based fees in the year
ended December 31, 2022 compared to approximately $86,300 of stock-based fees
recognized in the year ended December 31, 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
$6,200.
Other professional fees. Other professional fees decreased by approximately
$30,000 for the year ended December 31, 2022 compared to the year ended December
31, 2021 due to a decrease in fees to our contracted software engineers and
developers of our software technology platforms. Professional fees included
approximately $114,500 in stock-based fees in the year ended December 31, 2022
compared to approximately $150,400 of stock-based fees recognized in the year
ended December 31, 2021.
Other (income) and expenses for the years ended December 31, 2022 and 2021 were
as follows:
Years ended December 31,
2022 2021
Recovery of expense in litigation $ - $ (22,382)
Gain on extinguishment - (14,220)
Gain on sale of domain name (165,000) -
Investment income (225,000) -
Interest expense 53,150 41,758
$ 336,850 $ (5,156)
Recovery of expense in litigation. Following the issuance of a judgment against
LAFI, we filed a motion for reimbursement of costs in the amount of $22,382. No
objection was filed by LAFI and we received reimbursement of these costs during
the year ended December 31, 2021.
Gain on extinguishment. For the year ended December 31, 2021, we settled debt
with shares of our common stock which resulted in a gain on extinguishment of
debt for the difference between the amount of debt settled and the fair value of
the shares of common stock issued based on the closing price of the Company's
common stock on the OTCQB market.
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Gain on sale of domain name. During the year ended December 31, 2022, we sold
our domain name "blunt.com" to an unaffiliated party for $165,000, which was
recorded as other income.
Investment income. During the year ended December 31, 2022, we executed a
Litigation Funding Agreement with Legalist, whereby Legalist provided $225,000
of funding, which was recorded as investment income.
Interest expense. Interest expense increased by approximately $11,400 for the
year ended December 31, 2022 compared to the year ended December 31, 2021.
Approximately $9,200 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 $2,200 pertains to our two loan obligations during the year ended
December 31, 2022.
Overall, for the year ended December 31, 2022, we reported a net loss of
$442,782 compared to a net loss of $975,579 for the year ended December 31,
2021.
Non-GAAP Adjusted Net Loss
The following table reflects the reconciliation of net loss to Adjusted Net Loss
for the year ended December 31, 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.
Years ended December 31,
2022 2021
Net loss as reported $ 442,782 $ 975,579
Less: Stock-based fees (370,694) (396,768)
Adjusted Net Loss $ 72,088 $ 578,811
Adjusted Net Loss should only be viewed in conjunction with our reported
financial results or other financial information prepared in accordance with
accounting principles generally accepted in the United States, or "GAAP."
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Cash Flows
The following table summarizes the sources and uses of cash for the years ended
December 31, 2022 and 2021, respectively:
Years ended December 31,
2022 2021
Net cash used in operating activities $ (252,793) $ (210,232)Net cash provided by (used in) investing activities 390,000 (250)
Net cash provided by (used in) financing activities (78,924) 210,356
Net increase (decrease) in cash and cash equivalents $ 58,283 $ (126)
Year ended December 31, 2022. Operating activities used $252,793 of cash,
primarily resulting from our net loss for the year ended December 31, 2022 of
$442,782, investment income of $225,000, a gain on the sale of a domain name of
$165,000, and a decrease in accrued legal fees offset by non-cash stock-based
fees issued for services rendered by consultants and professionals of $370,694
and increases in accounts payable, accrued payroll and other accrued
liabilities. Investing activities provided $390,000 of cash for the year ended
December 31, 2022 resulting from proceeds of $165,000 from the sale of a domain
name and a Litigation Funding Agreement with Legalist, whereby Legalist provided
$225,000 of funding which is effectively proceeds from the Company's investment
in LAFI. Financing activities consisted of $59,415 in proceeds from the sale of
common stock and $7,620 of borrowings on notes payable. These were offset by
repayment of a note payable of $32,650 and repayment of advances from company
officers of $113,309.
Year ended December 31, 2021. Operating activities used $210,232 of cash,
primarily resulting from our net loss for the year ended December 31, 2021 of
$975,579, offset by non-cash stock-based fees issued for services rendered by
consultants and professionals of $396,768 and increases in liabilities across
all categories: accounts payable, accrued legal fees, accrued payroll and other
accrued liabilities. Financing activities provided $210,356 of cash for the year
ended December 31, 2021, consisting of $127,500 in proceeds from the sale of
common stock and $75,030 of borrowings on two loan obligations, one for $50,000
(senior) and one for $25,030, 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 $7,826 of cash for the year ended December 31, 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.
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Off Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures, or capital resources that is material to investors.
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 $62,063 and $3,780 as of December 31, 2022 and 2021, respectively.
Critical Accounting Policies and Estimates
Reference is made to Note 2, Summary of Significant Accounting Policies, to the
Consolidated Financial Statements included under Item 8 in this Report.
Recently Adopted Accounting Pronouncements
Reference is made to Note 2, Summary of Significant Accounting Policies, to the
Consolidated Financial Statements included under Item 8 in this Report.
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