FARMHOUSE, INC. AND SUBSIDIARIES
NOTES TO QUARTERLY CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2024
(Unaudited)
NOTE 1 – ORGANIZATION AND OPERATIONS
Organization
The Company was incorporated in June 2013 as Somerset Transition Corporation under the Oklahoma General Corporation Act. In September 2013, the Company was redomesticated in Maryland and changed its name to Somerset Property, Inc. In July 2017, the Company was redomesticated in Nevada and changed its name to Revival, Inc. In June 2019, the Company changed its name to Farmhouse, Inc. to reflect its new business endeavors.
In August 2019, the Company acquired Farmhouse, Inc., a Washington corporation (“Farmhouse Washington”) as its wholly owned subsidiary (the “Acquisition”). The financial statements of the Company are the continuation of Farmhouse Washington with the adjustment to reflect the capital structure of the Company. The consolidated financial statements also includes Farmhouse DTLA, Inc., a wholly owned subsidiary of Farmhouse Washington (“DTLA”). DTLA is party to certain litigation. See Note 9.
Current Operations
The Company is a technology company with multiple cannabis related divisions and IP, including the WeedClub® Platform, the @420 Twitter handle and a Web3 division. The WeedClub® Platform is a cannabis social network platform that enables industry professionals to connect, discover products and services and scale their businesses. Within the WeedClub® Platform, members utilize an increasing set of technology-based tools for discovering professional connections and information. The Company’s @420 Twitter handle serves as a public platform to engage with cannabis enthusiasts. The Company’s Web3 division, launched in December 2021, facilitates licensing opportunities between established cannabis brands and influential digital collectible holders to launch digital collectible branded products and accessories.
Memorandum of Understanding
On May 17, 2024, the Company executed a non-binding Memorandum of Understanding (“MOU”) which establishes the framework for a proposed acquisition of all membership interests of Thrown, LLC (“Thrown”). Thrown, operating under the brand Nappy Boy Dranks, is a joint venture beverage firm led by T-Pain, the Grammy Award-winning artist, professional gamer, and entrepreneur (“T-Pain”). Thrown’s premier product, T-Pain’s GamerShot, is a zero-crash, focus-enhancing functional esports beverage, featuring a proprietary Nootropic Energy Blend and conveniently packaged in 2-ounce servings.
The MOU provides for consideration to Thrown of a) equity deposit of $75,000 in Company shares, subject to lockup and specific return conditions, b) cash compensation contingent on the Company raising $5-$10 million in equity financing, c) equity compensation involving issuance of 5,130,000 shares to Thrown, d) expense reimbursement up to $100,000 for organizational and operating expenses, e) license payment of $50,000 to Nappy Boy Dranks, LLC, and f) additional shares based on sales milestones to be negotiated.
While the MOU outlines the parties’ intent to negotiate in good faith a definitive agreement while highlighting certain binding terms regarding exclusivity and confidentiality, it does not guarantee that the transaction will be completed. The parties are committed to negotiating in good faith and working towards a definitive agreement, but there are many variables and conditions that must be met for the transaction to close successfully. Therefore, there is no assurance that the MOU will result in a final agreement or that the transaction will be consummated.
Subsequent to June 30, 2024, the parties agreed to a price per share of the Company’s stock of $0.40 and the Company issued 187,500 shares of common stock to Thrown as the equity deposit of $75,000 as provided in the MOU. The fair market value of the stock on July 6, 2024 was $0.1396 or $26,175. See Note 12.
Going Concern and Management’s Plans
The accompanying unaudited interim condensed consolidated financial statements have been presented on the basis that the Company is a going concern which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. For the six months ended June 30, 2024, the Company had a net loss from operations of $255,190 and as of June 30, 2024, the Company had stockholders’ deficit of $2,172,681. In view of these matters, the recoverability of any asset amounts shown in the accompanying unaudited interim condensed consolidated financial statements is dependent upon the Company’s ability to expand operations and achieve profitability from its business. These factors raise substantial doubt about the Company’s ability to continue as a going concern. These unaudited interim condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company has financed its activities principally from the sale of its common stock, loans and advances from Company officers, and loans from third parties. The Company intends to finance its future working capital needs from these sources until such time that funds provided by operations are sufficient to fund working capital requirements. Management believes that loans and advances from Company officers, funds raised from the sale of its common stock, and funds raised from loans with third parties allow the Company sufficient capital for operations and to continue as a going concern.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist the reader in understanding and evaluating the Company’s unaudited interim condensed consolidated financial statements. These accounting policies conform to Generally Accepted Accounting Principles (“GAAP”) and have been consistently applied in the preparation of these unaudited interim condensed consolidated financial statements.
Principals of Consolidation
The unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries Farmhouse Washington and DTLA (together the “Company”). All material intercompany accounts, transactions, and earnings have been eliminated in the accompanying unaudited interim condensed consolidated financial statements.
Financial Statement Reclassification
Certain amounts from the prior year’s financial statements have been reclassified in these unaudited interim condensed consolidated financial statements to conform to the current year’s classifications.
Cash and Cash Equivalents
Cash and cash equivalents as of June 30, 2024 included cash in banks. The Company considers all highly liquid instruments with maturity dates within 90 days at the time of issuance to be cash equivalents.
Basis of presentation
The accompanying unaudited interim condensed consolidated financial statements contained in this Report have been prepared in accordance with U.S. GAAP and the rules of the Securities and Exchange Commission (“SEC”) for interim financial information and do not include all of the information or disclosures required by U.S. GAAP for annual financial statements. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2023 filed with the Securities and Exchange Commission on July 11, 2024. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein.
Use of Estimates
Operating results for interim periods are not necessarily indicative of the results to be expected for the full year. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Significant estimates include convertible debt, deferred tax assets and any related valuation allowance and related disclosure of contingent assets and liabilities. The Company evaluates its estimates based on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. Actual results could materially differ from these estimates.
Accounts receivable
Accounts receivable represent amounts due from customers in the ordinary course of business and are recorded at the invoiced amount and do not bear interest. Receivables are presented net of the allowance for doubtful accounts in the accompanying unaudited interim condensed consolidated balance sheets. We evaluate the collectability of our accounts receivable and determine the appropriate allowance for doubtful accounts based on a combination of factors. When we become aware of a customer’s inability to meet its financial obligation, a specific allowance for doubtful accounts is recorded, reducing the receivable to the net amount we reasonably expect to collect. As of June 30, 2024 and December 31, 2023, one licensee represented 100% of the receivable balances of $1,610 and $4,170, respectively.
Revenue Recognition
In accordance with ASC No. 606, Revenue Recognition, the Company recognizes revenue from product sales or services rendered when the following five revenue recognition criteria are met: identify the contract with the client, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to performance obligations in the contract and recognize revenues when or as the Company satisfies a performance obligation.
During the six months ended June 30, 2024 and 2023, the Company generated revenues of $4,154 and $5,203, respectively. During the three months ended June 30, 2024 and 2023 the Company generated
revenues of $1,893 and $4,134, respectively. Revenues are from license fees in connection with NFT Art License Agreements, whereby the licensee is granted a limited license from the Company to use one of its licensed NFT’s for the purpose of creating, marketing, and selling branded cannabis and hemp products and accessories. The Company’s performance obligation is met upon granting the customer access to its licensed NFT’s. The Company recognizes license revenues or royalties when the subsequent sale of the cannabis and hemp products and accessories by the licensee occurs. The amount of license revenue or royalties recognized is based on a percentage of the sales price of the licensee’s sales of its cannabis and hemp products and accessories. Fees are due the month after customer sales occur. One licensee accounted for 90% and 100% of license revenues for the six months ended June 30, 2024 and 2023.
The corresponding costs of revenues associated with license revenues were $1,874 and $2,601 for the six months ended June 30, 2024 and 2023, respectively, and $744 and $2,066 for the three months ended June 30, 2024 and 2023, respectively.
Earnings (Loss) per Common Share
Net income (loss) per common share is computed pursuant to ASC 260-10-45, Earnings per Share – Overall – Other Presentation Matters. Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock and potentially outstanding shares of common stock during the period. The weighted average number of common shares outstanding and potentially outstanding common shares assumes that we incorporated as of the beginning of the first period presented.
All dilutive common stock equivalents are reflected in our net income (loss) per share calculations. Anti-dilutive common stock equivalents are not included in our loss per share calculations. As of June 30, 2024 and December 31, 2023, the Company had no potentially dilutive securities.
Recently Issued Accounting Pronouncements
There are no recently issued accounting pronouncements that the Company has not yet adopted that they believe are applicable or would have a material impact on the financial statements of the Company.
NOTE 3 – CONVERTIBLE NOTES PAYABLE, IN DEFAULT
Convertible notes payable is comprised of a promissory note to an unrelated individual in the amount of $45,000 as of June 30, 2024 and December 31, 2023. 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 $4,040 and $4,017 for the six months ended June 30, 2024 and 2023, respectively and $2,021 and $2,019 for the three months ended June 30, 2024 and 2023, respectively. Accrued interest on the convertible note payable was $56,434 and $52,394 as of June 30, 2024 and December 31, 2023, respectively.
The note and any unpaid accrued interest automatically converts in whole upon a qualified financing which is defined as an equity financing resulting in gross proceeds to the Company of at least $750,000 (including the conversion of the Notes and other debt). The conversion price would be equal to 100% of the per share price paid in the qualified financing, provided that: if the Company valuation associated with the Qualified Financing is less than $15,000,000, the valuation associated with the conversation shall be $15,000,000; and, if the Company valuation associated with the Qualified Financing is greater than $30,000,000, the Company valuation associated with the conversion shall be $30,000,000.
NOTE 4 – NOTES PAYABLE
In 2021, the Company entered into a loan agreement, not to exceed $75,000. with an unaffiliate individual (“Lender”) and borrowed $50,000 as a first advance. This loan, which was due six months after the first advance, remains outstanding as of June 30, 2024. The loan bears interest at 6% per annum. At the Lender’s sole discretion, the maturity date may be extended, but currently remains in default. Borrowings under this loan agreement shall remain senior with respect to priority lien and right of payment to any indebtedness acquired by the Company. As a condition of the loan, the Company’s Chief Executive Officer personally and unconditionally guaranteed the timely repayment of the loan and is liable for any amounts remaining due and owed if unpaid. Interest expense on this loan was $1,496 and $1,487 for the six months ended June 30, 2024 and 2023, respectively and $748 for each of the three months ended June 30, 2024 and 2023. Accrued interest on this borrowing was $9,132 and $7,636 as of June 30, 2024 and December 31, 2023, respectively.
On April 26, 2024, the Company entered into promissory notes with two unrelated parties each for $5,000, for cash proceeds of $10,000. These notes bear interest at 20% per annum and are unsecured. All unpaid principal, along with any accrued interest, is due on October 26, 2024. Failure to meet the payment terms or any other default condition on these notes could result in financial consequences, including acceleration of the notes’ due date and additional legal costs. Management is aware of the risks associated with this high-interest liability and is committed to meeting all obligations under the terms of the notes. Interest expense on these loans was $362 for the three and six months ended June 30, 2024. Accrued interest on these loans was $362 as of June 30, 2024.
NOTE 5 – CONVERTIBLE NOTES PAYABLE – LONG-TERM
In May 2023, the Board authorized an offering of up to $1,000,000 of mandatorily convertible notes, designated Series 2023 10% Mandatorily Convertible Notes (the “Series 2023 Notes”) to fund its Web3 product development activities and for sales, marketing, and administrative expenses. During the year ended December 31, 2023, the Company raised $34,000 of Series 2023 Notes. The Series 2023 Notes mature on May 31, 2026 and bear interest at 10% per annum. Interest expense related to the Series 2023 Notes was $1,703 and $205 for the six months ended June 30, 2024 and 2023, respectively and $852 and $205 for the three months ended June 30, 2024 and 2023, respectively. Accrued interest on the Series 2023 Notes was $3,418 and $1,715 as of June 30, 2024 and December 31, 2023, respectively.
The Series 2023 Notes are mandatorily convertible 30 calendar days after the first to occur: (i) the Company’s common stock has a closing price of greater than $1.00 for ten consecutive days (the “Market Forced Conversion”), or (ii) the Company closes on an offering of its common stock for no less than $1,000,000 (“Offering Forced Conversion”). The Series 2023 Notes shall be automatically converted into shares of common stock at a conversion price equal to 75.8% of (i) the closing price of the Company’s common stock on the tenth trading day, for a Market Forced Conversion, or (ii) the offering price of the Company’s common stock, for an Offering Forced Conversion.
The conversion price shall equal the sum of the principal amount of the Series 2023 Notes, plus the accrued and unpaid interest on such notes, plus default interest, if any, on the notes. The conversion price is subject to equitable adjustments for stock splits, stock dividends or rights offerings by the Company, combinations, recapitalization, reclassifications, extraordinary distributions, and similar events.
Assuming the Series 2023 Notes are not mandatorily converted by Market Forced Conversion or Offering Forced Conversion, as discussed above, the Series 2023 Notes will mature as follows:
For the fiscal year ended December 31,
|
|
|
2024
| $
| -
|
2025
|
| -
|
2026
|
| 34,000
|
2027
|
| -
|
2028
|
| -
|
Total
| $
| 34,000
|
NOTE 6 – DUE TO RELATED PARTIES
Due to Related Parties totaled $51,353 and $28,958 as of June 30, 2024 and December 31, 2023, respectively, and is comprised of cash advances provided to the Company for operating expenses and direct payment of Company expenses by Company officers. For the six months ended June 30, 2024, Company officers made advances of $23,562 and were repaid $1,167 with the Company’s credit card. For the six months ended June 30, 2023, Company officers made no advances and were repaid $21,254 in cash and $1,048 with the Company’s credit card. The amounts due to related parties are non-interest bearing and are unsecured. See Note 10.
NOTE 7 – STOCKHOLDERS’ DEFICIT
Authorized Capital
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 of directors, 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. As of June 30, 2024 and December 31, 2023, the Company had no shares of preferred stock issued or outstanding.
Common stock transactions
Common stock transactions for the six months ended June 30, 2024 were as follows:
·On May 17, 2024, the Board granted Restricted Stock Awards (“RSAs”) totaling 340,000 shares of common stock under the Omnibus Incentive Plan that was approved in May of 2021. See Note 8.
·On May 28, 2024, the Company issued 62,500 shares of common stock to an unrelated third party in connection with a Subscription Agreement priced at $0.40 per share for cash proceeds of $25,000.
As a result of these issuances, the Company has 17,728,450 shares of common stock outstanding as of June 30, 2024.
There were no common stock transactions for the six months ended June 30, 2023.
Shares Reserved
The Company is required to reserve and keep available of its authorized but unissued shares of common stock an amount sufficient to affect shares that could be issued in connection with the conversion of the convertible note payable (see Note 3) and its Series 2023 Notes (see Note 5). The convertible note payable and Series 2023 Notes are not convertible as of June 30, 2024 and do not become convertible until future events occur, at which time the conversion price will be determined. Therefore, the number of shares these convertible securities are convertible into are not determinable and no shares of common stock were reserved for future issuance as of June 30, 2024 and December 31, 2023.
NOTE 8 – STOCK-BASED COMPENSATION
2021 Omnibus Incentive Plan
In May 2021, the Board approved the Farmhouse, Inc. Omnibus Incentive Plan (the “2021 OIP”). The 2021 OIP permits the granting of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Shares, Performance Units, Other Stock-Based Awards and Cash-Based Awards. The maximum number of shares of common stock that may be issued pursuant to Awards under the 2021 OIP is 3,000,000. Stockholders holding a majority of the Company’s common stock outstanding ratified the 2021 OIP by written consent.
Any options to be granted under the 2021 OIP may be either “incentive stock options,” as defined in Section 422A of the Internal Revenue Code, or “non-statutory stock options,” subject to Section 83 of the Internal Revenue Code, at the discretion of the Board and as reflected in the terms of the written option agreement. The option price shall not be less than 100% of the fair market value of the optioned common stock on the date the option is granted. The option price shall not be less than 110% of the fair market value of the optioned common stock for an optionee holding at the time of grant, more than 10% of the total combined voting power of all classes of stock of the Company. Options become exercisable based on the discretion of the Board and must be exercised within ten years from the date of grant (five years from date of grant for Company employees and directors).
Any restricted stock awards to be granted under the 2021 OIP are issued and measured at fair market value on the date of grant and become vested in various monthly or quarterly installments from the date of grant, subject to the recipient remaining in the Company’s service on specified vesting dates. Vesting of restricted stock awards is based solely on time vesting. Stock-based compensation expense is recognized as the shares vest with a corresponding offset credited to additional paid-in-capital.
Restricted Stock Awards
A summary of the Company’s non-vested restricted stock awards as of June 30, 2024 and changes for the six months then ended is presented below:
| Restricted Stock Awards
|
| Weighted Average Grant Date Fair Value
|
|
|
|
|
|
|
Non-vested restricted stock awards, Dec. 31, 2023
|
| 270,000
|
| $
| 0.128
|
Awarded
|
| 340,000
|
| $
| 0.084
|
Vested
|
| (255,000)
|
| $
| 0.14
|
Forfeited
|
| -
|
| $
| -
|
Non-vested restricted stock awards, June 30, 2024
|
| 355,000
|
| $
| 0.077
|
On May 17, 2024, the Board granted Restricted Stock Awards (“RSAs”) totaling 340,000 shares of common stock under the 2021 OIP to advisors that the Board determined to be critical to closing the aforementioned MOU, including 100,000 RSA shares to the Company’s contracted CFO, LFSI, and 240,000 RSA shares to the newly engaged Company legal counsel. The RSA shares to LFSI vest 50,000 shares on June 30, 2024 and 25,000 shares over each of the following two fiscal quarters. The RSA shares to the newly engaged Company legal counsel vest 10,000 shares monthly starting on June 30, 2024 and continuing until May 31, 2026. No RSAs were granted in the six months ended June 30, 2023. RSA shares are measured at fair market value based on the closing price of the Company’s common stock on the OTCQB market on the date of grant ($0.084 per share on May 17, 2024). Stock-based compensation expense is recognized as the shares vest with a corresponding offset credited to additional paid-in-capital.
For the six months ended June 30, 2024 and 2023, the Company recognized stock-based compensation expense of $35,790 and $116,518, respectively. For the three months ended June 30, 2024 and 2023, the company recognized stock-based compensation expense of $19,915 and $58,259, respectively. As of June 30, 2024, there was $27,270 of unrecognized stock-based compensation expense related to the RSA shares to be recognized over the weighted average remaining period of 1.55 years, as follows:
During the fiscal years ended December 31,
|
|
|
2024 remaining
| $
| 10,490
|
2025
|
| 12,580
|
2026
|
| 4,200
|
Total
| $
| 27,270
|
NOTE 9 – LITIGATION
In August 2017, the Company’s subsidiary, DTLA, entered into a Strategic Consulting Agreement (the “SCA”) with a medical marijuana growing, and retail company that now goes by the name Los Angeles Farmers, Inc. (“LAFI”). 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 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 April 2021, an Arbitrator overseeing the arbitration hearing issued a judgment in favor of DTLA and against LAFI (the “DTLA Judgment”). The DTLA Judgment awarded 49% of LAFI to DTLA as of November 2017, along with a share of any profits from November 2017. In January 2022, DTLA requested that the Arbitrator 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 Court to assume control of LAFI. In April 2024, the sale of LAFI was completed by the receiver. As of the date of this report, it is doubtful, but still uncertain, as to whether DTLA will recover anything from the sale of LAFI.
NOTE 10 – RELATED PARTIES
As discussed in Note 6, cash advances are provided to the Company for operating expenses by Company officers, who were owed $51,353 and $28,958 as of June 30, 2024 and December 31, 2023, respectively. The amounts due to related parties are non-interest bearing and are unsecured.
Company officers own approximately 43.5% of the Company as of June 30, 2024. 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 capacities.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
In the normal course of its business, the Company may be subject to certain contractual obligations and litigation. In the management’s opinion, upon consultation with legal counsel, there are no contractual obligations or current litigation that will materially affect the Company’s unaudited interim condensed consolidated financial position or results of operations.
Indemnification Agreements
The Company has agreed to indemnify its officers and directors for certain events or occurrences arising from the officer or director serving in such capacities. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company believes the estimated fair value of these indemnification agreements is minimal and no liability has been recorded as of June 30, 2024 and December 31, 2023.
NOTE 12 – SUBSEQUENT EVENTS
As of the date of this report, the following events were required to be disclosed in the accompanying consolidated financial statements as of and for the six months ended June 30, 2024.
Notes Payable
On July 2, 2024, the Company entered into a promissory note with an unrelated party for $11,677 for a payment made by the party directly to a company vendor. This note bears interest at 12% per annum, is unsecured and is due on January 2, 2025.
On August 9, 2024, the Company entered into a promissory note with an unrelated party for $5,500 for a payment made by the party directly to a company vendor. This note bears interest at 20% per annum, is unsecured and is due on February 9, 2025.
Notes Payable Related Party
On August 12, 2024, the Company entered into a promissory note with an officer and director for $4,500 for a payment made directly to a company vendor. This note bears interest at 20% per annum, is unsecured and is due on February 12, 2025. This loan constitutes a related-party transaction, and as such, it is subject to the Company’s policies and procedures regarding such transactions.
Amendment to the Memorandum of Understanding – Common Stock Transaction
On July 6, 2024, the Company and Thrown signed an Amendment to the MOU (“Amendment”) to clarify the equity deposit of $75,000 in Company shares “based on the price per share of the Company’s stock then in effect as of the Effective Date.” Under the Amendment, the parties agreed to a price per share of the Company’s stock of $0.40 and the Company issued 187,500 shares of common stock the Thrown as the equity deposit of $75,000 as provided in the MOU. The fair market value of the stock on July 6, 2024 was $0.1396 or $26,175.
As a result of this issuances, the Company has 17,915,950 shares of common stock outstanding as of August 14, 2024.
Amendment to a Restricted Stock Award
As discussed in Note 8, the Company granted 240,000 RSA shares to the newly engaged Company legal counsel. The RSA shares originally vested 10,000 shares monthly starting on June 30, 2024 and continuing until May 31, 2026. In light of the expanded scope of work, including the preparation of a PPM offering document, and in connection with the closing of the definitive agreement, on August 12, 2024, The Board agreed to modify the terms of the RSA such that the vesting schedule for 240,000 shares will be accelerated, and all 240,000 shares shall fully vest upon the closing date of the definitive agreement with Thrown.
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, 2023 as filed with the Securities and Exchange Commission (the “SEC”) on July 11, 2024. 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 Farmhouse Vault, 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 boutique connection platform and branch its well-known brand into more IP licensing relationships continuously. Expanding Farmhouse Vault to license community-driven IP in the music industry is currently underway.
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 IP 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 several digital collectible holders to seed our IP vault with blue-chip web3 brands. These brands include Bored Ape Yacht Club, Mutant Ape Yacht Club, Bored Ape Kennel Club, and CryptoPunks.
Our most notable licensed IP 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 our decision to further build out our Vault division.
In order to 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.
In September 2023, following the successful launch of the Mega Robot brand in California, the company facilitated additional Mega Robot brand licenses. House of Kush developed cannabis products in Missouri, and Raw Genetics released branded seeds in the hemp category. The expansion 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. Farmhouse Vault will develop and release new IP collaborations on an ongoing basis, such as its new collaboration with G. Love to network the music artist for the purpose of launching his cannabis branded products. The company leverages its ability to develop community-driven, IP branded products with its signed MOU with T-Pain to create a new subsidiary that should enter into the energy beverage industry.
Memorandum of Understanding
On May 17, 2024, the Company executed a non-binding Memorandum of Understanding (“MOU”) which establishes the framework for a proposed acquisition of all membership interests of Thrown, LLC (“Thrown”). Thrown, operating under the brand Nappy Boy Dranks, is a joint venture beverage firm led by T-Pain, the Grammy Award-winning artist, professional gamer, and entrepreneur (“T-Pain”). Thrown’s premier product, T-Pain’s GamerShot, is a zero-crash, focus-enhancing functional esports beverage, featuring a proprietary Nootropic Energy Blend and conveniently packaged in 2-ounce servings.
The MOU provides for consideration to Thrown of a) equity deposit of $75,000 in Company shares, subject to lockup and specific return conditions, b) cash compensation contingent on the Company raising $5-$10 million in equity financing, c) equity compensation involving issuance of 5,130,000 shares to Thrown, d) expense reimbursement up to $100,000 for organizational and operating expenses, e) license payment of $50,000 to Nappy Boy Dranks, LLC, and f) additional shares based on sales milestones to be negotiated.
While the MOU outlines the parties’ intent to negotiate in good faith a definitive agreement while highlighting certain binding terms regarding exclusivity and confidentiality, it does not guarantee that the transaction will be completed. The parties are committed to negotiating in good faith and working towards a definitive agreement, but there are many variables and conditions that must be met for the transaction to close successfully. Therefore, there is no assurance that the MOU will result in a final agreement or that the transaction will be consummated.
On July 6, 2024, the Company and Thrown signed an Amendment to the MOU (“Amendment”) to clarify the equity deposit of $75,000 in Company shares “based on the price per share of the Company’s stock then in effect as of the Effective Date.” Under the Amendment, the parties agreed to a price per share of
the Company’s stock of $0.40 and the Company issued 187,500 shares of common stock the Thrown as the equity deposit of $75,000 as provided in the MOU. The fair market value of the stock on July 6, 2024 was $0.1396 or $26,175.
Liquidity and Capital Resources
Until such time we can raise additional capital or generate positive cash flow from operations, we will continue to be funded through short-term advances from the Company officers, borrowings under promissory notes and sales of restricted common stock under various offerings. We estimate we will need $2,500,000 in capital, after satisfying our debt obligations, to cover our ongoing expenses and to successfully market and expand our product offerings. This is only an estimate and may change as we receive feedback from customers and have a better feel for the demand and revenues from our new products. Both factors may change, and we may not be able to raise the necessary capital and if we are able to, that it may not be at favorable rates. We intend to meet our cash requirements for the next 12 months with equity financing, debt financing, or other sources, which may result in further dilution in the equity ownership of our shares.
For the six months ended June 30, 2024 and 2023, we generated revenues of $4,154 and $5,203, respectively, and we reported net losses of $255,190 and $324,392, respectively. We had negative cash flow from operating activities of $56,544 and $57,995, respectively. As of June 30, 2024, we had an accumulated deficit of $6,560,678 and total shareholders’ deficit of $2,172,681.
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, loans from Company officers and loans from third parties. 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 loans from Company officers, loans from third parties 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 $51,353 and $28,958 as of June 30, 2024 and December 31, 2023, respectively, and is comprised of cash advances provided to the Company for operating expenses and direct payment of Company expenses by Company officers. The amounts due to related parties are non-interest bearing and are unsecured. For the six months ended June 30, 2024, Company officers made advances of $23,562 and were repaid $1,167 with the Company’s credit card. For the six months ended June 30, 2023, Company officers made no advances and were repaid $21,254 in cash and $1,048 with the Company’s credit card.
Company officers own approximately 43.5% of the Company as of June 30, 2024. 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 capacities. 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.
On August 12, 2024, the Company entered into a promissory note with an officer and director for $4,500 for a payment made directly to a company vendor. This note bears interest at 20% per annum, is unsecured and is due on February 12, 2025. This loan constitutes a related-party transaction, and as such, it is subject to the Company’s policies and procedures regarding such transactions.
Litigation Developments
In August 2017, the Company’s subsidiary, DTLA, entered into a Strategic Consulting Agreement (the “SCA”) with a medical marijuana growing, and retail company that now goes by the name Los Angeles Farmers, Inc. (“LAFI”). 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 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 April 2021, an Arbitrator overseeing the arbitration hearing issued a judgment in favor of DTLA and against LAFI (the “DTLA Judgment”). The DTLA Judgment awarded 49% of LAFI to DTLA as of November 2017, along with a share of any profits from November 2017. In January 2022, DTLA requested that the Arbitrator 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 Court to assume control of LAFI. In April 2024, the sale of LAFI was completed by the receiver. As of the date of this filing, it is doubtful, but still uncertain, as to whether DTLA will recover anything from the sale of LAFI.
Results of Operations
We generate revenues from license fees in connection with NFT Art License Agreements, whereby the licensee is granted a limited license from the Company to use one of its licensed NFT’s for the purpose of creating, marketing, and selling branded cannabis and hemp products and accessories. The Company’s performance obligation is met upon granting the customer access to its licensed NFT’s. The company recognizes license revenues or royalties when the subsequent sale of the cannabis and hemp products and accessories by the licensee occurs. The amount of license revenue or royalties recognized is based on a percentage of the sales price of the licensee’s sales of its cannabis and hemp products and accessories. Fees are due the month after customer sales occur.
Six months ended June 30, 2024, compared to the six months ended June 30, 2023 (Unaudited)
Revenues generated from license fees were $4,154 and $5,203 for the six months ended June 30, 2024 and 2023, respectively. One licensee accounted for 90% of license revenues for the six months ended June 30, 2024 and 100% of license revenues for the six months ended June 30, 2023.
Operating expenses for the six months ended June 30, 2024 and 2023 were as follows:
| Six months ended June 30,
|
| 2024
|
| 2023
|
|
|
|
|
|
|
General and administrative
| $
| 151,870
|
| $
| 169,347
|
Professional fees
|
| 79,042
|
|
| 132,675
|
| $
| 230,912
|
| $
| 302,022
|
For the six months ended June 30, 2024 and 2023, general and administrative expenses were $151,870 and $169,347, respectively, a decrease of approximately $17,500. Contributing factors to this decrease were:
·Outside consulting fees decreased by approximately $23,400. In the prior year, we contracted with advisors with experience in merger and acquisitions and to assist in expanding our NFT licensing reach to licensees and California dispensaries. Together their non-cash, stock-based fees were $20,900 for the six months ended June 30, 2023 compared to no such fees for the current six months ended June 30, 2024. In addition, consulting fees includes non-cash, stock-based fees to our independent director(s) for vesting of restricted stock award (“RSA”) of $2,250 for the six months ended June 30, 2024 compared to $4,750 for the six months ended June 30, 2023.
·Labor-related expenses did not change from the prior comparable six months. Both six-month periods include accrued compensation of $85,000 and $19,000 in non-cash, stock-based fees.
·Public company related costs increased by approximately $1,200 for the six months ended June 30, 2024 compared to the prior comparable six-month period, including increases in OTC filing fees by $400, transfer agent costs by $500, Edgar filing fees by $1,100, offset by a decrease in press release costs by $800.
·Overall other general and administrative expenses, including website development, dues and subscriptions, office expenses and travel and entertainment increased by approximately $4,700 for the current six-month period, primarily due to increase in credit card finance charges on the Company’s credit card and company vehicle related expenses.
For the six months ended June 30, 2024 and 2023, professional fees were $79,042 and $132,675, respectively, a decrease of approximately $53,600. Our professional fees for the six months ended June 30, 2024 and 2023 were comprised of the following:
| Six months ended June 30,
|
| 2024
|
| 2023
|
|
|
|
|
|
|
Legal
| $
| 5,000
|
| $
| 4,237
|
Accounting and audit
|
| 73,202
|
|
| 115,038
|
Other professional fees
|
| 840
|
|
| 13,400
|
| $
| 79,042
|
| $
| 132,675
|
Legal. Legal expenses increased by approximately $800 for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. All legal fees for the six months ended June 30, 2024 were for the newly engaged Company legal counsel compared to legal fees for the six months ended June 30, 2023 which were incurred by the Company’s patent and trademark lawyers.
Accounting and audit. Accounting and audit expenses decreased by approximately $41,800 for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. Contributing factors to this decrease were:
·Audit and accounting fees to our independent public accounting firm related to our annual fiscal year audit and quarterly reviews increased by approximately $5,000.
·Accounting fees for our contracted CFO services decreased by $46,800, which included $13,700 in non-cash, stock-based fees for the six months ended June 30, 2024, compared to $60,500 of non-cash, stock-based fees recognized for the six months ended June 30, 2023. The CFO monthly fees are $4,000, which is accrued and not paid.
·Accounting fees for our outside bookkeeping services were unchanged at $1,000 per month, or $6,000 for each of the six-month periods
Other professional fees. Other professional fees decreased by approximately $12,600 for the six months ended June 30, 2024, compared to the six months ended June 30, 2023. Professional fees included $840 in non-cash, stock-based fees for the six months ended June 30, 2024 compared to $11,400 of non-cash, stock-based fees recognized for the six months ended June 30, 2023.
Interest expense. Interest expense increased by approximately $1,600 for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The increase is due to interest on new borrowings of Series 2023 Notes of approximately $1,700 for the six months ended June 30, 2024 compared to $200 for the six months ended June 30, 2023, and interest on two new borrowings for the six months ended June 30, 2024 of approximately $400.
Overall, for the six months ended June 30, 2024, we reported a net loss of $255,190 compared to a net loss of $324,392 for the six months ended June 30, 2023.
Non-GAAP Adjusted Net Loss
The following table reflects the reconciliation of net loss to Adjusted Net Loss for the six months ended June 30, 2024 and 2023. This is a non-GAAP measurement of earnings and considers the stock-related compensation expense for services rendered by consultants and professionals for the comparable years. Management considers this non-GAAP measurement of earnings important to investors and other interested parties to evaluate our performance on a comparable basis.
| Six months ended June 30,
|
| 2024
|
| 2023
|
|
|
|
|
|
|
Net loss as reported
| $
| 255,190
|
| $
| 324,392
|
Less: Non-cash, stock-based fees
|
| (35,790)
|
|
| (116,518)
|
Adjusted Net Loss
| $
| 219,400
|
| $
| 207,874
|
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 June 30, 2024, compared to the three months ended June 30, 2023 (Unaudited)
Revenues generated from license fees were $1,893 and $4,134 for the three months ended June 30, 2024 and 2023, respectively. One licensee accounted for 79% of license revenues for the three months ended June 30, 2024 and 100% of license revenues for the three months ended June 30, 2023.
Operating expenses for the three months ended June 30, 2024 and 2023 were as follows:
| Three months ended June 30,
|
| 2024
|
| 2023
|
|
|
|
|
|
|
General and administrative
| $
| 77,689
|
| $
| 84,668
|
Professional fees
|
| 49,119
|
|
| 58,025
|
| $
| 126,808
|
| $
| 142,693
|
For the three months ended June 30, 2024 and 2023, general and administrative expenses were $77,689 and $84,668, respectively, a decrease of approximately $7,000. Contributing factors to this decrease were:
·Outside consulting fees decreased by approximately $12,200. In the prior year, we contracted with advisors with experience in merger and acquisitions and to assist in expanding our NFT licensing reach to licensees and California dispensaries. Together their non-cash, stock-based fees were $10,400 for the three months ended June 30, 2023 compared to no such fees for the current three months ended June 30, 2024. In addition, consulting fees includes non-cash, stock-based fees to our independent director(s) for vesting of restricted stock award (“RSA”) of $625 for the three months ended June 30, 2024 compared to $2,375 for the three months ended June 30, 2023.
·Labor-related expenses did not change from the prior comparable three months. Both three-month periods include accrued compensation of $42,500 and $9,500 in non-cash, stock-based fees.
·Public company related costs increased by approximately $2,100 for the three months ended June 30, 2024 compared to the prior comparable three-month period, including increases in OTC filing fees by $200, transfer agent costs by $800, and Edgar filing fees by $1,100.
·Overall other general and administrative expenses, including website development, dues and subscriptions, office expenses and travel and entertainment increased by approximately $3,100 for the current three-month period, primarily due to increase in credit card finance charges on the Company’s credit card and company vehicle related expenses.
For the three months ended June 30, 2024 and 2023, professional fees were $49,119 and $58,025, respectively, a decrease of approximately $8,900. Our professional fees for the three months ended June 30, 2024 and 2023 were comprised of the following:
| Three months ended June 30,
|
| 2024
|
| 2023
|
|
|
|
|
|
|
Legal
| $
| 5,000
|
| $
| 935
|
Accounting and audit
|
| 43,279
|
|
| 49,390
|
Other professional fees
|
| 840
|
|
| 7,700
|
| $
| 49,119
|
| $
| 58,025
|
Legal. Legal expenses decreased by approximately $4,100 for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. All legal fees for the three months ended June 30, 2024 were for the newly engaged Company legal counsel compared to legal fees for the three months ended June 30, 2023 which were incurred by the Company’s patent and trademark lawyers.
Accounting and audit. Accounting and audit expenses decreased by approximately $6,100 for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. Contributing factors to this decrease were:
·Audit and accounting fees to our independent public accounting firm increased by approximately $15,000 due to the timing of services incurred related to our annual fiscal year audit. Overall, our audit costs remained consistent between the periods.
·Accounting fees for our contracted CFO services decreased by $21,300, which included $8,950 in non-cash, stock-based fees for the three months ended June 30, 2024, compared to $30,250 of non-cash, stock-based fees recognized for the three months ended June 30, 2023. The CFO monthly fees are $4,000, which is accrued and not paid.
·Accounting fees for our outside bookkeeping services were unchanged at $1,000 per month, or $3,000 for each of the three-month periods.
Other professional fees. Other professional fees decreased by approximately $6,900 for the three months ended June 30, 2024, compared to the three months ended June 30, 2023. Professional fees included $840 in non-cash, stock-based fees for the three months ended June 30, 2024 compared to $5,700 of non-cash, stock-based fees recognized for the three months ended June 30, 2023.
Interest expense. Interest expense increased by approximately $1,000 for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. The increase is due to interest on new borrowings of Series 2023 Notes of approximately $850 for the three months ended June 30, 2024 compared to $200 for the three months ended June 30, 2023, and interest on two new borrowings in the three months ended June 30, 2024 of approximately $400.
Overall, for the three months ended June 30, 2024, we reported a net loss of $139,119 compared to a net loss of $153,077 for the three months ended June 30, 2023.
Non-GAAP Adjusted Net Loss
The following table reflects the reconciliation of net loss to Adjusted Net Loss for the three months ended June 30, 2024 and 2023. This is a non-GAAP measurement of earnings and considers the stock-related compensation expense for services rendered by consultants and professionals for the comparable years. Management considers this non-GAAP measurement of earnings important to investors and other interested parties to evaluate our performance on a comparable basis.
| Three months ended June 30,
|
| 2024
|
| 2023
|
|
|
|
|
|
|
Net loss as reported
| $
| 139,119
|
| $
| 153,077
|
Less: Stock-based fees
|
| (19,915)
|
|
| (58,259)
|
Adjusted Net Loss
| $
| 119,204
|
| $
| 94,818
|
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 six months ended June 30, 2024 and 2023, respectively:
| Six months ended June 30,
|
| 2024
|
| 2023
|
|
|
|
|
|
|
Net cash used in operating activities
| $
| (56,544)
|
|
| (57,995)
|
Net cash provided by investing activities
|
| -
|
|
| -
|
Net cash provided by (used in) financing activities
|
| 58,562
|
|
| 3,746
|
Net change in cash and cash equivalents
| $
| 2,018
|
|
| (54,249)
|
Six months ended June 30, 2024
Operating activities used $56,544 of cash, primarily resulting from our net loss for the six months ended June 30, 2024 of $255,190, offset by non-cash, stock-based compensation for vested restricted stock awards of $35,790, decreases in accounts receivable of $2,560 and increases in all liabilities including accounts payable of $17,120, accrued legal fees of $18,958, accrued payroll and payroll taxes of $92,072, accrued liabilities of $24,755 and accrued interest payable of $7,601. Financing activities provided $58,562 of cash for the six months ended June 30, 2024, consisting of $25,000 in proceeds from the sale of Series 2023 Notes, $10,000 in proceeds from borrowings on notes payable and $23,562 in borrowings from Company officers.
Six months ended June 30, 2023
Operating activities used $57,995 of cash, primarily resulting from our net loss for the six months ended June 30, 2023 of $324,392, offset by non-cash stock-based compensation for vested restricted stock awards of $116,518. Other uses of cash from operating activities were primarily from increases in accounts payable of $13,283, accrued legal fees of $20,198, accrued payroll and payroll taxes of $92,072, accrued liabilities of $24,000 and accrued interest payable of $5,709, offset by an increase in accounts receivable of $5,203 and prepaid expenses of $180. Financing activities provided $3,746 of cash for the six months ended June 30, 2023, consisting of $25,000 in proceeds from the sale of Series 2023 Notes, offset by repayments of $21,254 of advances from officers.
Contractual Obligations
We qualify as a smaller reporting company, as defined by Item 10 of Regulation S-K and, thus, are not required to provide the information required by this Item.
Off Balance Sheet Arrangements
We are not currently a party to, or otherwise involved with, any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Cash and Cash Equivalents
We consider all highly liquid investments with an original maturity of six months or less when purchased to be cash equivalents. Cash and cash equivalents were $2,018 and zero as of June 30, 2024 and December 31, 2023, 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, 2023 as filed with the
SEC on July 11, 2024. There have been no material changes in these critical accounting policies.
Recently Adopted Accounting Pronouncements
Reference is made to Note 2, Summary of Significant Accounting Policies, to the interim condensed consolidated financial statements included under Item 1 in this Report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management carried out an evaluation under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were not effective as of June 30, 2024.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the three months ended June 30, 2024, 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.
In August 2017, the Company’s subsidiary, DTLA, entered into a Strategic Consulting Agreement (the “SCA”) with a medical marijuana growing, and retail company that now goes by the name Los Angeles Farmers, Inc. (“LAFI”). 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 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 April 2021, an Arbitrator overseeing the arbitration hearing issued a judgment in favor of DTLA and against LAFI (the “DTLA Judgment”). The DTLA Judgment awarded 49% of LAFI to DTLA as of November 2017, along with a share of any profits from November 2017. In January 2022, DTLA requested that the Arbitrator 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 Court to assume control of LAFI. In April 2024, the sale of LAFI was completed by the receiver. As of the date of this filing, it is doubtful, but still uncertain, as to whether DTLA will recover anything from the sale of LAFI.
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
Common stock transactions for the six months ended June 30, 2024 were as follows:
·On May 17, 2024, the Board granted Restricted Stock Awards (“RSAs”) totaling 340,000 shares of common stock under the Omnibus Incentive Plan that was approved in May of 2021.
·On May 22, 2024, the Company issued 62,500 shares of common stock to an unrelated third party in connection with a Subscription Agreement priced at $0.40 per share for cash proceeds of $25,000.
Common stock transactions subsequent to June 30, 2024 were as follows:
·On July 6, 2024, the Company issued 187,500 shares of common stock in conjunction with the MOU with Thrown.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
Convertible notes payable is comprised of a promissory note to an unrelated individual in the amount of $45,000 as of June 30, 2024. Principal and interest was originally due in July 2018 and is currently in default. In 2021, the Company entered into a loan agreement for $50,000 with an unaffiliate individual which is outstanding as of June 30, 2024. The maturity date may be extended by the lender but currently remains in default. Reference is made to Notes 3 and 4 to the interim condensed consolidated financial statements included under Item 1 in this Report.
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: