FMHS Farmhouse Inc (QB)

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 the financial statements and related notes contained elsewhere in this Report, as well as our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 as filed with the Securities and Exchange Commission (the “SEC”) on April 30, 2021. 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 and the effects that the COVID-19 outbreak, or similar pandemics, could have on our business. 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.

The full extent to which the COVID-19 pandemic may directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat COVID-19, as well as the economic impact on local, regional, national and international customers and markets. We have made estimates of the impact of COVID-19 within our financial statements, and although there is currently no major impact, there may be changes to those estimates in future periods. Actual results may differ from these estimates.

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 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

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assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our 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 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

On August 13, 2019, the Company consummated an Agreement and Plan of Merger with Farmhouse Washington which became a wholly owned subsidiary. On this date, all of the issued and outstanding shares of common stock of Farmhouse Washington were exchanged for shares of common stock of the Company on a one share for one share basis (the “Acquisition”). Upon consummation of the Acquisition, the financial statements are the continuation of Farmhouse Washington with the adjustment to reflect the capital structure of the Company.

The Company is a holding company dedicated to connecting the cannabis industry through multiple divisions including WeedClub, the @420 Twitter handle and a 49% equity interest in a Los Angeles-based multi-licensed cannabis retail dispensary, grow, manufacturer and distributor.

Weedclub.  WeedClub is a professional social networking platform for the regulated cannabis and hemp industries. It was founded in 2014 and has established a trusted brand by providing a private and secure way for members to network with fellow industry stakeholders through the WeedClub platform and in-person and virtual events.

@420.  Our signature @420 pitch events connect cannabis startups with investors. Since 2014, our events have hosted over 100 startup pitches, led to more than $50M in funding and seen over 10 fully funded startups and exits. In response to the COVID-19 pandemic, we moved our event to a virtual pitch format that garnered over 150 online attendees in March 2020. Our @420 Twitter handle enables the Company to raise awareness, engage with and advertise to cannabis enthusiasts and consumers. With over 90,000 followers, our organic tweets consistently generate engagement rates of at least 2% and upwards of 10% while the industry average 0.07% on Twitter according to Social Insider. In addition, our Twitter handle provides an approved paid advertising channel that many companies lack access to. This exclusive ability enables our members to drive traffic to their websites and deliver increased sales through approved paid advertising campaigns.

LA Dispensary.  In April 2021, the Judge overseeing the arbitration hearing in our ongoing lawsuit issued a judgment in favor of the Company. The judgment awarded 49% of a downtown Los Angeles retail dispensary to the Company. In addition to equity ownership, the judgment awarded the Company a share of any profits from November 2017 to the present and going forward along with accrued interest on those profits and the costs of bringing litigation.

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The Court appointed a monitor, to be supervised by the Judge, to determine how much in past profits and interest the Company is entitled to be awarded and to ensure the Company is treated fairly by the counterparty going forward. The impact of the Judgment has not been reflected in our accompanying unaudited interim condensed consolidated financial statements as the amount of the Judgment has not been determined.

WeedClub, our @420 Twitter and @420 pitch events provide essential services that position the Company as a trusted brand and connector within the cannabis industry. Our recent award of 49% equity ownership in the Los Angeles retail dispensary provides an additional asset for our holding company. With our strong brand and far-reaching cannabis network, we believe the Company is uniquely positioned to scale in the current political climate and in the event of federal legalization.

Our principal executive office is located at 1355 Market Street, Suite 488, San Francisco, CA 94103 and our phone number is (888) 420-6856.

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. 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 six months ended June 30, 2021 and 2020, we generated revenues of $11,896 and $2,940, respectively, and we reported net losses of $393,492 and $314,011, respectively. We had negative cash flow from operating activities of $87,345 and $56,018, respectively. As of June 30, 2021, we had an accumulated deficit of $4,719,830 and a stockholders’ deficit of $1,347,623.

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 loans from Company officers and funds raised from the sale of our common stock will allow us sufficient capital for operations and to continue as a going concern.

In April 2021, we authorized an offering of up to 1,000,000 shares of common stock at $0.51 per share, providing proceeds of up to $510,000 (“Common Stock Offering”). The Common Stock

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Offering will be sold only to investors that qualify as “accredited investors,” as that term is defined in Regulation D. A total of 46,020 shares of common stock have been sold under the Private Placement Offering for proceeds of $25,000 as of June 30, 2020. The Common Stock Offering terminated on June 30, 2021, but was extended until August 21, 2020 under the same terms, with the option of the management, with no further action of the board of directors (“Board”), to extend for ten (10) days until August 31, 2021, at which time the Common Stock Offering will terminate. Subsequent to June 30, 2021, the Company sold 99,608 shares of common stock under the Common Stock Offering for proceeds of $50,800.

There is no assurance that we can raise money under the Common Stock Offering, but management believes the full proceeds of this offering will provide sufficient cash for 12 months’ operating expenses.

Results of Operations

Six Months Ended June 30, 2021, compared to the six Months Ended June 30, 2020

For the six months ended June 30, 2021 and 2020, we generated revenues of $11,895 and $2,940, respectively. We generate five types of revenue, which consists of fees from subscriptions, affiliate advertising, event sales, referrals and consulting. Our revenues for the six months ended June 30, 2021 and 2020 were as follows:

In June 2021, we launched a new Membership Benefits Program under the WeedClub® Platform, where subscribers can connect to ‘exclusive deals’ on essential products and services necessary to scale their business. Our special pricing of $149 for an annual subscription makes access to our WeedClub® Platform available to all. Affiliate advertising, through our advertising deal with Twitter, generated $8,850 of revenues for the six months ended June 30, 2021. In 2020, we entered into 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. Referral fees are earned when a business transaction is consummated between us and potential target company, as a result of an introduction at one of our @420 events. Event Sales recognized in the prior year comparable period are from our @420 pitch event with investors. In response to the COVID-19 pandemic, we moved our event to a virtual pitch format that garnered over 150 online attendees.

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For the six months ended June 30, 2021 and 2020, general and administrative expenses were $169,970 and $160,586, respectively, an overall increase of approximately $9,400. For the six months ended June 30, 2021, marketing and sales expenses increased by approximately $8,900 and general and administrative expenses increased of approximately $5,900. These increases were offset by a decrease in labor-related expenses, including payroll, by approximately $5,400. This included recognizing approximately $34,600 in stock-based fees in the current six-month period.

For the six months ended June 30, 2021 and 2020, professional fees were $215,437 and $116,787, respectively, an increase of approximately $98,600. Our professional fees the six months ended June 30, 2021 and 2020 were comprised of the following:

Legal expenses increased by approximately $20,500 for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 due to an increase in legal fees to our current securities counsel fee by approximately $4,900, and legal fees incurred by Judicate West and Planet Depot by approximately $52,500 related to our litigation against LAFI. Reference is made to Note 9, Litigation, to the Condensed Consolidated Financial Statements included under Item 1 in this Report. These increases were offset by a decrease in legal fees to litigation counsel in connection with our litigation against LAFI by approximately $36,900 compared to no litigation-related legal fees incurred in the current six-month period.

Accounting and audit expenses increased by approximately $36,900 for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 due to an increase in fees to our independent public accounting firm by approximately $6,800 for our annual fiscal year audit and an increase in fees for contracted CFO services by approximately $40,100. This included $35,300 in stock-based fees in the current six-month period. These increases were offset by a decrease in fees to our outside bookkeeping services by approximately $10,000 for the costs of filing our corporate federal income tax returns in the prior year comparable period.

Professional fees increased by approximately $17,300 for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 due to an increase in fees to our contracted software engineers and developers of our software technology platforms. This included approximately $56,700 in stock-based fees in the current six-month period.

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Consulting fees increased $24,000 for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 due to fees to an outside strategic business consultant, which was all stock-based fees in the current six-month period.

For the six months ended June 30, 2021 and 2020 interest expense was $19,392 and $38,354, respectively, a decrease of approximately $18,900 entirely due to a decrease in the interest charged by the Company’s former litigation counsel on their unpaid balance.  

Overall, for the six months ended June 30, 2021, we reported a net loss of $393,492 compared to a net loss of $314,011 for the six months ended June 30, 2020, an overall increase of approximately $79,500 from the prior year comparable period. Not including stock-based fees recorded for services rendered by consultants and professionals, which totaled approximately $150,600 for the six months ended June 30, 2021, as discussed above, our net loss actually decreased approximately $71,100 from the prior year comparable period.

Three Months Ended June 30, 2021, compared to the three Months Ended June 30, 2020

For the three months ended June 30, 2021 and 2020, we generated revenues of $546 and $2,490, respectively. Our revenues for the three months ended June 30, 2021 and 2020 were as follows:

In June 2021, we launched a new Membership Benefits Program under the WeedClub® Platform, where subscribers can connect to ‘exclusive deals’ on essential products and services necessary to scale their business. Our special pricing of $149 for an annual subscription makes access to our WeedClub® Platform available to all. Event Sales recognized in the prior year comparable period are from our @420 pitch event with investors. In response to the COVID-19 pandemic, we moved our event to a virtual pitch format that garnered over 150 online attendees.

For the three months ended June 30, 2021 and 2020, general and administrative expenses were $96,622 and $64,962, respectively, an overall increase of approximately $31,700. For the three months ended June 30, 2021, marketing and sales expenses increased by approximately $8,300, general and administrative expenses increased by approximately $6,300, and labor-related expenses, including payroll, increased by approximately $17,100. This included approximately $23,600 in stock-based fees in the current three-month period.

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For the three months ended June 30, 2021 and 2020, professional fees were $148,311 and $53,165, respectively, an increase of approximately $95,100. Our professional fees for the three months ended June 30, 2021 and 2020 were comprised of the following:

Legal expenses increased by approximately $24,800 for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 due to an increase in legal fees to our current securities counsel fee by approximately $3,600 and legal fees incurred by Judicate West by approximately $28,400 related to our litigation against LAFI. Reference is made to Note 9, Litigation, to the Condensed Consolidated Financial Statements included under Item 1 in this Report. These increases were offset by a decrease in legal fees to litigation counsel in connection with our litigation against LAFI by approximately $7,200 compared to no litigation-related legal fees incurred in the current three-month period.

Accounting and audit expenses increased by approximately $21,000 for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 due to an increase in fees for contracted CFO services by approximately $29,000. This included $20,000 in stock-based fees in the current three-month period. This increase was offset by a decrease in fees to our independent public accounting firm by approximately $6,200 for our annual fiscal year audit and a decrease in other miscellaneous accounting-related costs by approximately $1,800.

Professional fees increased by approximately $25,400 for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 due to an increase in fees to our contracted software engineers and developers of our software technology platforms. This included approximately $53,100 in stock-based fees in the current three-month period.

Consulting fees increased $24,000 for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 due to fees to an outside strategic business consultant, which was all stock-based fees in the current three-month period.

For the three months ended June 30, 2021 and 2020 interest expense decreased by approximately $300 and represents interest on one convertible note outstanding and interest charged by the Company’s former litigation counsel on their unpaid balance.  

Overall, for the three months ended June 30, 2021, we reported a net loss of $256,167 compared to a net loss of $127,559 for the three months ended June 30, 2020, an overall increase of approximately $128,900 from the prior year comparable period. Not including stock-based fees

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recorded for services rendered by consultants and professionals, which totaled approximately $120,700 for the three months ended June 30, 2021, as discussed above, our net loss actually increased approximately $8,200 from the prior year comparable period.

Operating activities used $87,345 of cash, primarily resulting from our net loss for the six months ended June 30, 2021 of $393,492, offset by non-cash stock issued for services of $150,581, and increases in liabilities across all categories: accounts payable, accounts payable – related party, accrued legal fees, accrued payroll and other accrued liabilities. There was no use of cash for investing activities for the six months ended June 30, 2021. Financing activities provided $88,977 of cash, consisting of $31,000 in proceeds from the sale of common stock and  $50,000 of borrowings on a Note Payable.  Borrowings under the Note Payable shall remain senior with respect to priority lien and right of payment to any indebtedness later acquired. As a condition of the loan agreement, a Company officer personally and unconditionally guaranteed the timely repayment of the loan. The Company also received net proceeds of $7,977 in short-term advances from Company officers.

Contractual Obligations

We qualify as a smaller reporting company, as defined by Item 10 of Regulation S-K and, thus, are not required to provide the information required by this Item.

Off Balance Sheet Arrangements

We are not currently a party to, or otherwise involved with, any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Cash and Cash Equivalents

We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents were $5,538 and $3,906 as of June 30, 2021 and December 31, 2020, respectively.

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Critical Accounting Policies and Estimates

The preparation of our 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 the 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, 2020, as filed on April 30, 2021. 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 Condensed Consolidated Financial Statements included under Item 1 in this Report.