10-Q: Bespoke Extracts Reports Increased Sales but Continues to Face Going Concern Challenges in Q3 2023

Bespoke Extracts, Inc. saw a significant increase in sales during the third quarter of 2023, primarily due to its cannabis operations, but continues to face substantial financial challenges and going concern issues.

Summary

• Bespoke Extracts, Inc. reported a net loss of $301,529 for the three months ended September 30, 2023, and a net loss of $1,213,756 for the nine months ended September 30, 2023.
• The company's sales increased significantly to $244,408 for the quarter and $521,671 for the nine-month period, primarily due to the acquisition of WonderLeaf assets and subsequent sales of pre-rolled joints.
• Operating expenses decreased substantially due to reduced stock-based compensation, but the company still faces a working capital deficit of $851,602 and an accumulated deficit of $25,097,554 as of September 30, 2023.
• The company's ability to continue as a going concern is dependent on generating profitable operations or securing additional financing.
• A related party note payable of $849,500 was converted into a 5% interest-bearing note due June 30, 2025, with repayment contingent on a future capital raise of over $2,000,000.

Sentiment

Score: 3

Explanation: The document highlights significant financial challenges, including a going concern issue, negative cash flow, and material weaknesses in internal controls. While there is some positive revenue growth, the overall sentiment is negative due to the company's precarious financial position.

Positives

• The company experienced a substantial increase in sales due to its cannabis operations.
• Net losses have decreased compared to the same periods in the previous year.
• Operating expenses have been significantly reduced, primarily due to lower stock-based compensation.
• The company successfully acquired the assets of WonderLeaf, expanding its operations in the cannabis market.

Negatives

• The company has a negative cash balance of $2,949 as of September 30, 2023.
• The company has a significant working capital deficit of $851,602.
• The company has an accumulated deficit of $25,097,554.
• The company's auditors have raised substantial doubt about its ability to continue as a going concern.
• The company is heavily reliant on related party loans and future capital raises.
• The company has material weaknesses in its internal controls.

Risks

• The company's ability to continue as a going concern is uncertain and dependent on securing additional financing or achieving profitability.
• The company faces risks related to its reliance on related party loans and the need for a significant capital raise to repay debt.
• The company's internal controls are not effective, which could lead to errors in financial reporting.
• The company is exposed to market risks, including fluctuations in demand for its products and the impact of the COVID-19 pandemic.
• The company's stock price may be volatile and lack liquidity.

Future Outlook

The company's future is dependent on generating profitable operations or obtaining necessary financing, with no assurance that these will be achieved. The company may need to curtail or cease operations if additional financing is not available.

Management Comments

• Management acknowledges the substantial doubt about the company's ability to continue as a going concern.
• Management states that the increase in sales was a direct result of the products they are producing after the purchase of WonderLeaf.
• Management states that the decrease in operating expenses was mainly attributable to reduced stock-based compensation.

Industry Context

The company is operating in the regulated cannabis market, which is a growing industry but also faces regulatory and competitive challenges. The company's focus on marijuana-infused products aligns with current market trends.

Comparison to Industry Standards

• The company's revenue growth is a positive sign, but its negative cash flow and substantial accumulated deficit are concerning when compared to more established cannabis companies.
• Companies like Curaleaf and Green Thumb Industries, while operating at a larger scale, have demonstrated more robust financial performance and better access to capital markets.
• The company's reliance on related party loans and the need for a significant capital raise are not typical of more mature cannabis businesses, which often have access to traditional debt and equity financing.
• The company's internal control weaknesses are a significant concern, as most public companies in the cannabis sector have more robust financial reporting systems.

Related Party Transactions

• Michael Feinsod, the company's CEO, loaned the company an additional $434,000 during the nine months ended September 30, 2023.
• A related party note payable of $849,500 was converted into a 5% interest-bearing note due June 30, 2025.
• Infinity Management, LLC, an affiliate of Michael Feinsod, advanced the company an additional $26,997 during the nine months ended September 30, 2023.
• As of September 30, 2023, Michael Feinsod is owed a total of $165,000 of accrued salary and accounts payable of $138,066.

Stakeholder Impact

• Shareholders face significant risk due to the company's going concern issues and potential dilution from future capital raises.
• Employees may be impacted by potential layoffs or restructuring if the company cannot secure additional funding.
• Customers may be affected by potential disruptions in the company's operations.
• Creditors face the risk of non-payment if the company cannot improve its financial position.

Next Steps

• The company needs to secure additional financing to continue operations.
• The company needs to improve its internal controls over financial reporting.
• The company needs to focus on generating profitable operations.

Key Dates

Keywords

cannabis, marijuana, financial results, going concern, capital raise, Bespoke Extracts, WonderLeaf, stock compensation, related party loans, internal controls