FMHS Farmhouse Inc (QB)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2022 and 2021

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”). Farmhouse Washington was formed in January 2014 and has developed a social network platform, “The WeedClub® Platform”. At the closing of the Acquisition, 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-for-one basis. The financial statements of the Company are the continuation of Farmhouse Washington with the adjustment to reflect the capital structure of the Company.

Prior to the Acquisition, in August 2017, Farmhouse Washington formed Farmhouse DTLA, Inc. (“DTLA”) in California as a wholly owned subsidiary. On April 8, 2022, DTLA was awarded a 49% equity interest in a Los Angeles based multi- licensed cannabis retail dispensary, grow, manufacturer and distributor called Los Angeles Farmers, Inc. (“LAFI”). Although ownership percentages over 20% would typically be accounted for using the equity method, the Company is accounting for this investment as an investment in equity securities due to the Company not having significant influence over LAFI. The cost of this investment was expensed during the fiscal year ended December 31, 2017 and, due to uncertainties surrounding the value of LAFI and determining any award of back profits and interest, as well as the pending litigation, no value has been reflected in our consolidated financial statements as of December 31, 2022. 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.

Going Concern and Management Plans

The accompanying 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 year ended December 31, 2022, the Company had a net loss from operations of $779,632, consisting primarily of general and administrative and legal and professional expenses. In addition, as of December 31, 2022, the Company had stockholders’ deficit of $1,583,916. In view of these matters, the recoverability of any asset amounts shown in the accompanying 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 consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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The Company has financed its activities principally from the sale of its common stock and loans from Company officers. 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 the current cash on hand, loans from Company officers and funds raised from the sale of its common stock allow the Company sufficient capital for operations and to continue as a going concern.

In February 2022, the board of directors (“Board”) authorized an offering of up to 294,118 shares of restricted common stock at $0.85 per share, providing proceeds of up to $250,000, to be offered and sold only to investors that qualify as “accredited investors” as that term is defined in Regulation D. During the year ended December 31, 2022, the Company sold 69,900 shares of common stock under this offering for proceeds of $59,415. The offering expired on August 1, 2022. See Note 7.

In June 2022, the Company received an unsolicited offer for $165,000, net of commission, for its domain name “blunt.com” from an unaffiliated party. Management considered this offer to be a fair arms-length price for a premium domain name and in July 2022, the Company sold the domain name. This was recorded as other income during the year ended December 31, 2022. See Note 12.

In June 2022, the Company executed a Litigation Funding Agreement with Legalist Fund III, LP (“Legalist”), whereby Legalist provided $225,000 of funding under a Litigation Funding Agreement. See Notes 5 and 9.

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 consolidated financial statements. These accounting policies conform to Generally Accepted Accounting Principles (“GAAP”) and have been consistently applied in the preparation of these consolidated financial statements.

Principals of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries Farmhouse Washington and DTLA (together the “Company”). All inter-company balances have been eliminated in consolidation.

Financial Statement Reclassification

Certain amounts from the prior year’s financial statements have been reclassified in these consolidated financial statements to conform to the current year’s classifications.

Cash and Cash Equivalents

Cash and cash equivalents as of December 31, 2022 and 2021 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.

Use of Estimates

The preparation of these consolidated financial statements in conformity with U.S. GAAP requires management 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 consolidated financial statements and the reported amounts of revenue and expenses for the reporting period. Actual results could differ from those estimates.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash as of December 31, 2022. The Company places its cash with high credit quality financial institutions.

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Accounts Receivable

Revenues that have been recognized but not yet received are recorded as accounts receivable. Losses on receivables will be recognized when it is more likely than not that a receivable will not be collected. An allowance for estimated uncollectible amounts will be recognized to reduce the amount of receivables to its net realizable value. The need for an allowance for uncollectible amounts is evaluated quarterly. No allowance for doubtful accounts was considered necessary as of December 31, 2022 and 2021.

Fair Value of Financial Instruments

The Company accounts for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. The Company categorizes each of their fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities,

Level 2 Quoted prices in markets that are not considered to be active or financial instruments without quoted market prices, but for which all significant inputs are observable, either directly or indirectly, or

Level 3 Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

The Company’s financial instruments consist of cash and cash equivalents, accounts payable and accrued expenses, convertible notes payable and loans from related parties. The carrying amounts of these financial instruments are stated at cost which approximates fair value.

Intangible Assets

Intangible assets are comprised of cryptocurrency and acquired domain names. The useful life of intangible assets is indefinite. In accordance with Accounting Standards Codification (“ASC”) No. 350, Intangibles – Goodwill and Other, the Company reviews the carrying value of its intangible assets whenever circumstances indicate that an intangible asset’s carrying amount may not be recoverable, or if no interim circumstances exist, on the financial statement date. As of December 31, 2022, the Company held $250 of cryptocurrency.

Property and equipment

Property and equipment is carried at the lower of cost or net realizable value. Normal maintenance and repairs are charged to expense as incurred. When assets are sold or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and the resulting gain or loss is recognized in operations. The Company’s property and equipment is reviewed for impairment in accordance with guidance of ASC No. 360, Property, Plant and Equipment. Depreciation is computed using the straight-line method over the estimated useful lives of the assets of three years.

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 years ended December 31, 2022 and 2021, the Company generated four types of revenue, including:

(1)Subscription fees. Subscription fees related to the WeedClub portal are received at the time of purchase. The Company’s performance obligation is to provide services over a fixed subscription period;  

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accordingly, the Company recognizes revenue ratably over the subscription period and deferred revenue is recorded for the portion of the subscription period subsequent to each reporting date.

(2)Affiliate advertising. Affiliate advertising revenues result from advertising campaigns and are generally multi-month arrangements. The Company’s performance obligation is met when the Company runs the agreed upon advertisements on its platform, accordingly, the Company recognizes revenue ratably over the campaign period and deferred revenue is recorded for the portion of the campaign period subsequent to each reporting date. 

(3)Referral fees. The Company generates referral fees when a business transaction is consummated between the Company, as referee, and a potential target company. The Company performance obligation is met at the time such business transaction is consummated; accordingly, the Company recognizes revenue at that point. 

(4)License revenues. The Company generates revenue from license fees in connection with NFT Art License Agreements, whereby the licensee is granted a limited license from the Company to use one of its licensed NFT’s for the purpose of creating, marketing, and selling branded cannabis and hemp products and accessories. The Company’s performance obligation is met over the term of the license agreement; accordingly, the Company recognizes revenue ratably over the term of the license agreement. 

Revenues generated during the years ended December 31, 2022 and 2021 were as follows:

The corresponding costs of revenues associated with license revenues were $3,806 for the year ended December 31, 2022 and the corresponding costs of revenues for affiliate advertising revenues was $8,000 for the year ended December 31, 2021.

Commitment and Contingencies

The Company follows ASC No. 450, Contingencies, paragraph 20 to report accounting for contingencies. Certain conditions may exist as of the date that these consolidated financial statements are issued, which may result in a loss, but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.

Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Management does not believe, based upon the information available at this time, that any matters exist that will have a material adverse effect on the Company’s financial position, results of operations or cash flows. However, there is no assurance that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations or cash flows.

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Net Income (Loss) per Common Share

Net income (loss) per common share is computed pursuant to ASC No. 260, Earnings per Share. 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 for 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 for 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 December 31, 2022 and 2021, the Company had a convertible note with a principal balance of $45,000 and $45,000, respectively. This note is convertible at a conversion price the noteholder and the Company agree upon, therefore the number of shares it is convertible into is not determinable. See Note 6.

Income Tax Provision

The Company accounts for income taxes under ASC No. 740, Income Taxes, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in these consolidated financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect during the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date.

The estimated future tax effects of temporary differences between the tax basis of assets and liabilities are reported in the accompanying consolidated balance sheet, as well as tax credit carrybacks and carryforwards. The Company periodically reviews the recoverability of deferred tax assets recorded on its balance sheet and provides valuation allowances as management deems necessary.

Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. In management’s opinion, adequate provisions for income taxes have been made for all periods presented. If actual taxable income by tax authority varies from estimates, additional allowances or reversals of reserves may be necessary.

Related Parties

The Company follows ASC No. 850, Related Party Disclosures, for the identification of related parties and disclosure of related party transactions. This guidance requires that transactions with related parties that would have influence on decision making be disclosed so that readers of these consolidated financial statements can evaluate their significance.

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.

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Depreciation is computed using the straight-line method based upon the estimated useful lives of the underlying assets, generally three years. Depreciation expense was $94 and $1,178 for the years ended December 31, 2022 and 2021, respectfully.

NOTE 4 – CONVERTIBLE NOTES PAYABLE

Convertible note payable is comprised of a sole promissory note in the amount of $45,000 as of December 31, 2022 and 2021, respectively. Principal and interest was originally due on July 4, 2018 and is currently in default. The convertible note payable bears interest at 18% per annum, accrued monthly and is unsecured. Interest expense on the convertible note payable was $8,101 and $8,099 for the years ended December 31, 2022 and 2021, respectively. Accrued interest on the convertible note payable was $44,295 and $36,194 as of December 31, 2022 and 2021, respectively.

The conversion feature was not accounted for under derivative accounting guidance because the settlement amount is not determinable by an underlying conversion price. Therefore, no derivative was recorded in the accompanying consolidated financial statements as of December 31, 2022 and 2021.

NOTE 5 – NOTES PAYABLE

Notes payable is comprised of the following:

During the year ended December 31, 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 bears interest at 6% per annum and was due six months after the first advance. At the Lender’s sole discretion, the maturity date may be extended, but 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 $3,001 and $1,635 for the years ended December 31, 2022 and 2021, respectively. Accrued interest on this loan was $4,636 and $1,635 as of December 31, 2022 and 2021, respectively.

During the year ended December 31, 2021, the Company borrowed $25,030 from an unrelated party. During the year ended December 31, 2022, the Company borrowed an additional $7,620 from the same party. These loans bore interest at 6% per annum, During the year ended December 31, 2022, the entire loan payable to this party totaling $32,650, together with accrued interest of $1,253, was paid in full.

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NOTE 6 – DUE TO RELATED PARTIES

Due to Related Parties totaled $44,882 and $158,191 as of December 31, 2022 and 2021, respectively, and is comprised of cash advances provided to the Company for operating expenses and direct payment of Company expenses by Company officers. During the year ended December 31, 2022, Company officers were repaid $113,309. During the year ended December 31, 2021, Company officers made cash advances of $24,620 and were repaid $14,857. The Company also paid the Company officers the accrued interest of $1,937 during the year ended December 31, 2021. The cash advances are non-interest bearing and are unsecured. Company officers own approximately 43.8% of the Company as of December 31, 2022. The Company has agreed to indemnify Company officers for certain events or occurrences arising as a result of the officer or director serving in such capacity. See Note 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 December 31, 2022 and 2021, the Company had no shares of preferred stock issued or outstanding.

Common stock transactions

A summary of the Company’s common stock transactions during the year ended December 31, 2022 is as follows:

·The Company sold 69,900 shares of common stock for cash proceeds of $59,415. 

·The Company issued 193,500 shares of common stock for services rendered. The Company recorded an expense of $189,582 during the year ended December 31, 2022 based on the closing price of the Company’s common stock on the OTCQB market. 

·The Company granted Restricted Stock Awards of 1,118,000 shares of common stock under the Company’s 2021 Omnibus Incentive Plan to Company officers, directors, and consultants. See Note 8. 

As a result of these transactions, the Company has 17,075,950 shares of common stock outstanding as of December 31, 2022.

A summary of the Company’s common stock transactions during the year ended December 31, 2021 is as follows:

·The Company sold 246,236 shares of common stock for proceeds of $127,500.  

·The Company issued 39,844 shares of common stock for anti-dilution protection to five investors who invested at a per share price higher than the Offering Price in the last 12 months.  

·The Company granted a Restricted Stock Award of 200,000 shares of common stock under the Company’s 2022 Omnibus Incentive Plan to a Company officer. See Note 8. 

·The Company issued 30,000 shares of common stock in settlement of $30,000 of liabilities and recognized a gain on extinguishment of debt in connection with this settlement, which is recorded as other income during the year ended December 31, 2021. 

·The Company issued 322,678 shares of common stock for services rendered. The Company recorded an expense of $345,768 during the year ended December 31, 2021, based on the closing price of the Company’s common stock on the OTCQB market. 

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As a result of these transactions, the Company has 15,694,550 shares of common stock outstanding as of December 31, 2021.

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 the conversion of the convertible note. See Note 4. This note is convertible at a conversion price that the noteholder and the Company agree upon, therefore the number of shares it is convertible into is not determinable. Accordingly, no shares of common stock are reserved for future issuance as of December 31, 2022 and 2021.

NOTE 8 – STOCK-BASED COMPENSATION

2022 Omnibus Incentive Plan

On May 12, 2022, the Board and majority shareholders approved the Farmhouse, Inc. Omnibus Incentive Plan (the “2022 OIP”). The 2022 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 2022 OIP is 3,000,000. Stockholders holding a majority of the Company’s common stock outstanding signed a consent authorizing the 2022 OIP.

Any options to be granted under the 2022 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 of the Company 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 2022 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.

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During the year ended December 31, 2021, the Board granted a Restricted Stock Award (“RSA”) of 200,000 shares of common stock under the 2021 OIP to the Company’s CFO. The RSA shares vest 25,000 shares over each of the following eight fiscal quarters starting September 30, 2021.

During the year ended December 31, 2022, the Board granted RSAs totaling 1,070,000 shares of common stock under the 2021 OIP to Company officers, directors, and consultants. The RSA shares generally vest over each of the following eight fiscal quarters following the grant date.

RSA shares are measured at fair market value on the date of grant and stock-based compensation expense is recognized as the shares vest with a corresponding offset credited to additional paid-in-capital. For the years ended December 31, 2022 and 2021, the Company recognized stock-based compensation expense of $181,112 and $51,000, respectively.

As of December 31, 2022, there was $188,424 of unrecognized stock-based compensation expense on the RSA shares. The unrecognized stock-based compensation expense is expected to be recognized as follows:

NOTE 9 – LITIGATION

In August 2017, the Company’s subsidiary, DTLA. entered into a Strategic Consulting Agreement (the “SCA”) with Absolute Herbal Pain Solutions, Inc., a medical marijuana growing, and retail company based in Los Angeles that now goes by the name Los Angeles Farmers, Inc. (“LAFI”). The SCA provided for DTLA to invest substantial sums of money into LAFI and also to provide management services for LAFI going forward. In exchange, LAFI agreed to provide DTLA with a share in any future profits and a 49% equity stake in LAFI. Following the SCA, in excess of $700,000 was spent by DTLA to stabilize LAFI’s finances and pay critical bills. In addition, DTLA brought in an outside management company with expertise in running grow and retail operations. Subsequent to DTLA providing funding and management resources to LAFI, DTLA and its management team were locked out of the LAFI facility in late October 2017.

In October 2017, DTLA commenced litigation in Los Angeles County Superior Court (Case #BC681251) against LAFI and David and Irina Vayntrub, who were the sole officers, directors, and members of LAFI, seeking to enforce its contract rights under the SCA. In March 2018, the litigation was stayed so that the parties could pursue the claims by way of arbitration at Judicate West. In January 2020, following more than a year of discovery, DTLA entered into a confidential settlement with the Vayntrubs, however, the case continued against LAFI.

In February 2021, a four-day arbitration hearing was held at Judicate West. In April 2021, the Arbitrator overseeing the arbitration hearing issued a judgment in favor of DTLA and against LAFI (the “DLTA Judgment”). The DLTA Judgment awarded 49% of LAFI to DTLA as of the change of control in November 2017, along with a share of any profits from November 2017 to the present and going forward, accrued interest on those profits, and costs of bringing the litigation. The DLTA Judgment also appointed a Monitor, to be supervised by the Arbitrator, to determine how much in past profits and interest DTLA is entitled to be awarded and that DTLA is treated fairly by LAFI on a going forward basis.

Following the issuance of DTLA Judgment, DTLA filed a motion for reimbursement of costs in the amount of $22,382. No objection was filed by LAFI and in June 2021, the amount was confirmed by the Los Angeles County Superior Court as a Judgment. In July 2021, DTLA received reimbursement costs in the amount of $22,382, which is recorded as other income for the year ended December 31, 2021.

Between July and December 2021, the Monitor undertook a detailed process to determine the value of the 49% of profits and proceeds from 2017 to the present that DTLA is entitled to, in addition to the 10% prejudgment interest. The Monitor’s report was completed in January 2022. Based on the information in the Monitor’s report, DTLA has requested that the Arbitrator issue an award of back profits and interest and order the sale of LAFI to an independent

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third party in order to allow any judgment to be paid to DTLA. Due to uncertainties, the impact of the DLTA Judgment has not been reflected in the accompanying consolidated financial statements as of December 31, 2022.

In August 2022, a receiver was appointed by the Los Angeles County Superior Court to assume control of LAFI. As of April 20, 2022, the date of these consolidated financial statements, the receiver is in the process of selling LAFI. It is not known at this time whether the sale of LAFI, if consummated and approved by the Superior Court, will result in any proceeds of the sale being paid to satisfy the DLTA Judgment.

NOTE 10 – INCOME TAXES

Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Company used an effective tax rate of 21% when calculating the deferred tax assets and liabilities and income tax provision below.

Net deferred tax assets consist of the following components as of December 31, 2022 and 2021:

The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income from continuing operations for the years ended December 31, 2022 and 2021 due to the following:

As of December 31, 2022, the Company has federal and state net operating loss carryforwards of approximately $3,511,000 that may be offset against future taxable income beginning in 2022 through 2041. No tax benefit has been reported in the December 31, 2022 consolidated financial statements since the potential tax benefit is offset by a valuation allowance for the same amount.  Tax years that remain subject to examination are 2018 and forward.

Utilization of the NOL carryforwards might be subject to an annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), as well as similar state and foreign provisions. These ownership changes may limit the amount of NOL carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than fifty percentage points of the outstanding stock of a company by certain stockholders or public groups. Since the Company’s formation, the Company has raised capital through the issuance of common stock on several occasions which, combined with the purchasing stockholders’ subsequent disposition of those shares, may have resulted in such an ownership change, or

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could result in an ownership change in the future upon subsequent disposition.

The Company has not completed a study to assess whether an ownership change has occurred. If the Company has experienced an ownership change, utilization of the NOL carryforwards would be subject to an annual limitation under Section 382 of the Code, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term, tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the NOL carryforwards before utilization. Further, until a study is completed, and any limitation is known, no amounts are considered as an uncertain tax position or disclosed as an unrecognized tax benefit. Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact its effective tax rate. Any carryforwards that will expire prior to utilization because of such limitations will be removed from deferred tax assets with a corresponding reduction of the valuation allowance.

NOTE 11 – RELATED PARTIES

As discussed in Note 7, cash advances are provided to the Company for operating expenses by Company officers, who are owed $44,882 and $158,191 by the Company as of December 31, 2022 and 2021, respectively. Company officers own approximately 44.7% of the Company as of December 31, 2022. The Company has agreed to indemnify Company officers for certain events or occurrences arising because of the officer or director serving in such capacity. See Note 12.

NOTE 12 – COMMITMENTS AND CONTINGENCIES

In the normal course of its business, the Company may be subject to certain contractual obligations and litigation. In management’s opinion, upon consultation with legal counsel, there are no contractual obligations or current litigation that will materially affect the Company’s consolidated financial position or results of operations.

Lease Commitment

The Company leased desk space in an incubator in San Francisco, CA at the rate of $700 per desk. This lease was vacated in October 2021. The Company owes the property owner $8,050 as of December 31, 2022, which is included in accrued liabilities on the accompanying balance sheet.

Indemnification Agreements

The Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of the officer or director serving in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company believes the estimated fair value of these indemnification agreements is minimal and no liability has been recorded as of December 31, 2022 and 2021.

NOTE 13 – Other income / (expense)

Gain on Sale of Domain Name

During the year ended December 31, 2022, the Company received an unsolicited offer for $165,000, net of commission, for its domain name “blunt.com” from an unaffiliated party. Management considered this offer to be a fair arms-length price for a premium domain name and the Company sold the domain name. The domain name was a long-lived asset, and the Company is not in the business of buying and selling domain names. Accordingly, this sale is recorded as other income during the year ended December 31, 2022.

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Investment Income

During the year ended December 31, 2022, the Company executed a Litigation Funding Agreement with Legalist Fund III, LP (“Legalist”), whereby Legalist will provide certain funding, in advance of any collection, in connection with certain claims that the Company has against LAFI. See Note 9. The terms of the Litigation Funding Agreement provide for committed funds of $325,000 with a first tranche of $225,000 and the second tranche of $100,000 (“Funder Costs Amount”). The Company received the first tranche of $225,000 during the year ended December 31, 2022. With respect to the second tranche, the Company has the option of drawing down the $100,000 in a lump sum payment but is under no obligation to draw down the second tranche. Upon collection of any claims in the LAFI litigation, Legalist’s recovery is 0.85 of the committed funds then in effect, if repayment in full prior to 12 months, and 0.27 of the committed funds then in effect for every additional four months if repayment in full occurs thereafter (“Funder Recovery Amount”). In addition, Legalist was granted a security interest on the assets of the Company.

Pursuant to the Litigation Funding Agreement, if the proceeds from the LAFI litigation are insufficient to pay in full both the Funder Costs Amount and Funder Recovery Amount, then such proceeds shall be applied exclusively and entirely to Legalist, after which no further amount will be owed to Legalist. If no proceeds are ever received from the LAFI litigation, then Legalist loses their investment. The Company has determined that the money received from Legalist is not a loan and is effectively proceeds from their investment in LAFI which the Company is accounting for as an investment in equity securities with no value due to uncertainties surrounding the value of LAFI. Accordingly, the Company has recorded this as investment income for the year ended December 31, 2022.