TREES CORPORATION This Management's Discussion and Analysis ("MD&A") is intended to provide an understanding of our financial condition, results of operations and cash flows by focusing on changes in certain key measures from year to year. This discussion should be read in conjunction with the consolidated financial statements and related notes in Item 8 of this Report.
Restatement
As discussed in the Explanatory Note to this Amended Filing, the Company is
amending and restating its audited consolidated financial statements and related
disclosures as of and for the years ended
Cautionary Statement Regarding Forward-looking Statements
Our MD&A contains forward-looking statements that discuss, among other things, future expectations and projections regarding future developments, operations and financial condition. All forward-looking statements are based on management's existing beliefs about present and future events outside of management's control and on assumptions that may prove to be incorrect. If any underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or intended. We undertake no obligation to publicly update or revise any forward-looking statements to reflect actual results, changes in expectations or events or circumstances after the date of this Report is filed.
Going Concern
The consolidated financial statements included elsewhere in this Form 10-K, have
been prepared on a going concern basis, which assumes we will be able to realize
our assets and discharge our liabilities in the normal course of business for
the foreseeable future. Our cash of approximately
and retire our debt of
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due. Management believes that (a) we will be successful obtaining additional capital and (b) actions presently being taken to further implement our business plan and generate additional revenues provide opportunity for the Company to continue as a going concern. While we believe in the viability of our strategy to generate additional revenues and our ability to raise additional funds, there can be no assurances to that effect. Accordingly, there is substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
Results of Operations
As of
The following tables set forth, for the periods indicated, statements of operations data. The tables and the discussion below should be read in conjunction with the accompanying consolidated financial statements and the notes thereto appearing in Item 8 in this Report.
Consolidated Results
Year ended December 31, Percent
2019 2018 Change Change
Revenues $ 3,666,346 $ 1,737,256 $ 1,929,090 111 %
Costs and expenses (12,528,035 ) (12,308,231 ) (219,804 ) 2 %
Other expense (4,946,569 ) (5,564,335 ) 617,766 (11 )%Net loss from continuing operations (13,808,258 ) (16,135,310 ) 2,327,052 (14 )% Loss from discontinued operations (1,675,539 ) (838,448 ) (837,091 ) 100 % Net loss
$ (15,483,797 ) $ (16,973,758 ) $ 1,489,961 (9 )%
The following discussion of our results of operations relates to our continuing operations. See Note 4 to the consolidated financial statements for information concerning discontinued operations.
Revenues
Revenue increased for our Operations and Investments Segments, offset by a loss
from discontinued operations. See Segment discussions below for further
details.
Costs and expenses
Year ended December 31, Percent
2019 2018 Change Change
Cost of service revenues $ 858,714 $ 1,055,593 $ (196,879 ) (19 )%
Cost of goods sold 1,608,386 400,097 1,208,289 302 %
Selling, general and administrative 4,379,800 3,411,724 968,076 28 %
Share-based compensation 3,966,621 5,995,007 (2,028,386 ) (34 )%
Professional fees 1,598,818 1,383,367 215,451 16 %
Depreciation and amortization 115,696 62,443 53,253 85 %
$ 12,528,035 $ 12,308,231 $ 219,804 2 %
Cost of service revenues typically fluctuates with the changes in revenue for our Operations Segments. Cost of goods sold varies with changes in product sales, including an increase in products sold by our Operations Segment, which have smaller margins. See Segment discussions below for further details.
Selling, general and administrative expense increased in 2019 primarily due to increases for (a) salaries; (b) premiums for liability, and directors and officer's insurance; (c) computer and internet costs; and (d) marketing costs.
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Share-based compensation included the following:
Year ended December 31, Percent
2019 2018 Change Change
Employee awards $ 3,040,497 $ 3,626,271 $ (585,774 ) (16 )%
Consulting awards 85,683 306,466 (220,783 ) (72 )%
Feinsod Agreement 840,441 2,062,270 (1,221,829 ) (59 )%
$ 3,966,621 $ 5,995,007 $ (2,028,386 ) (34 )%
Employee awards are issued under our 2014 Equity Incentive Plan, which was
approved by shareholders on
Professional fees consist primarily of accounting and legal expenses and have increased slightly from 2018 due primarily to the cost of raising debt.
Depreciation and amortization expense increased due to normal depreciation
expense for our ERP system.
Other Expense
Year ended December 31, Percent
2019 2018 Change Change
Amortization of debt discount
345,371 323,557 21,814 7 %
Loss on derivative liability 2,204,172 - 2,204,172 100 %
Loss from Desert Created
Investment - 182,136 (182,136 ) (100 )%
Impairment of Desert Created
Investment - 823,819 (823,819 ) (100 )%
Gain/loss on extinguishment of
debt 377,300 - 377,300 100 %
$ 4,946,569 $ 5,564,335 $ (617,766 ) (11 )%
Amortization of debt discount costs generally varies with our debt balance and,
in 2019, includes
Year ended December 31, Percent
2019 2018 Change Change
Revenues $ 3,570,909 $ 1,718,507 $ 1,852,402 108 %
Costs and expenses (3,372,174 ) (1,932,598 ) (1,439,576 ) 74 %
$ 198,735 $ (214,091 ) $ 412,826 193 %
Increased revenues in 2019 primarily related to revenue from license application consulting; and an increase in product sales throughout 2019. The higher margin is due to completed applications in the third and fourth quarters of 2019. Costs and expenses increased in 2019 primarily due to increased product sales.
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Investments
Year ended December 31, Percent
2019 2018 Change Change
Revenues $ 95,437 $ 18,749 $ 76,688 409 %
Costs and expenses (71,723 ) - (71,723 ) 100 %
Investment in Desert Created - (1,005,955 ) 1,005,955 (100 )%
$ 23,714 $ (987,206 ) $ 1,010,920 (102 )%
The increase in revenues in 2019 is related to three new notes receivables that
were executed during 2019. All revenue is from interest and loan origination
fees related to these new notes. The investment in Desert Created includes an
Non-GAAP Financial Measures
For the non-GAAP Adjusted EBITDA (Earnings (loss) Before Interest, Taxes, Depreciation and Amortization) per share-basic and diluted measures presented above, we have provided (1) the most directly comparable GAAP measure; (2) a reconciliation of the differences between the non-GAAP measure and the most directly comparable GAAP measure; (3) an explanation of why our management believes this non-GAAP measure provides useful information to investors; and (4) additional purposes for which we use this non-GAAP measure.
We believe that the disclosure of Adjusted EBITDA per share-basic and diluted provides investors with a better comparison of our period-to-period operating results. We exclude the effects of certain items from net loss per share-basic and diluted when we evaluate key measures of our performance internally, and in assessing the impact of known trends and uncertainties on our business. We also believe that excluding the effects of these items provides a more balanced view of the underlying dynamics of our business. Adjusted EBITDA per share-basic and diluted excludes the impacts of interest expense, tax expense, depreciation and amortization, gain (loss) on its derivative liability, amortization of debt discount and share-based compensation. Weighted average number of common shares outstanding - basic and diluted (adjusted) excludes the impact of shares issued in connection with share-based compensation.
Tabular reconciliations of this supplemental non-GAAP financial information to our most comparable GAAP information are contained in this Report. We present such non-GAAP supplemental financial information, as we believe such information provides additional meaningful methods of evaluating certain aspects of our operating performance from period-to-period on a basis that may not be otherwise apparent on a non-GAAP basis. This supplemental financial information should be considered in addition to, not in lieu of, our Consolidated Financial Statements.
Year ended December 31,
2019 2018
Net loss attributable to common stockholders
(16,149,258 ) (16,135,310 )
Adjustments:
Share-based expense 3,966,621 5,995,007 Depreciation and amortization 115,696 62,443 Impairment of Desert Created investment - 823,819 Amortization of debt discount and equity issuance costs 2,019,726 4,234,823 Loss on extinguishment of debt 377,300 - Interest expense 345,371 323,557 Loss on warrant derivative liability 2,204,172 - Loss on investment of Desert Created - 182,136 Total adjustments 9,028,886 11,621,785 Adjusted EBITDA$ (7,120,372 ) $ (4,513,525 ) Per share - basic and diluted: Net loss$ (0.47 ) $ (0.49 ) Adjusted EBITDA (0.20 ) (0.13 ) Weighted-average shares outstanding: Net loss 38,106,781 34,938,978 Adjusted EBITDA 36,222,752 34,297,078 7
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Table of Contents Liquidity Sources of liquidity
Our sources of liquidity include cash generated from operations, the cash exercise of common stock options and warrants, debt, and the issuance of common stock or other equity-based instruments. We anticipate our more significant uses of resources will include funding operations, developing infrastructure, as well as potential loans, investments, and business acquisitions.
In
In
In
Sources and uses of cash
We had cash of approximately
Year ended December 31,
2019 2018
Net cash used in operating activities $ (5,328,661 ) $ (5,726,207 )
Net cash used in investing activities (753,639 ) (568,266 )
Net cash provided by (used in) financing activities (1,649,875 ) 9,214,855
Net cash used in operating activities decreased in 2019 by
Net cash used in investing activities in 2019 relates primarily to purchasing fixed assets, including the opening of STOA Wellness retail location. In the 2018, we purchased fixed assets and invested in the Flowhub SAFE.
Net cash used in financing activities related to the payoff of the notes
payable, offset by a capital raise in
Capital Resources
We have no material commitments for capital expenditures as of
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Off-balance Sheet Arrangements
We currently have no off-balance sheet arrangements.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles
generally accepted in
We define critical accounting policies as those that are reflective of significant judgments and uncertainties and which may potentially result in materially different results under different assumptions and conditions. In applying these critical accounting policies, our management uses its judgment to determine the appropriate assumptions to be used in making certain estimates. These estimates are subject to an inherent degree of uncertainty.
Purchase Accounting for Acquisitions
Acquisition of a business requires companies to record assets acquired and liabilities assumed at their respective fair market values at the date of acquisition. Any amount of the purchase price paid that is in excess of the estimated fair value of the net assets acquired is recorded as goodwill. We determine fair value using widely accepted valuation techniques, primarily discounted cash flows and market multiple analyses. These types of analyses require us to make assumptions and estimates regarding industry and economic factors, the profitability of future business strategies, discount rates and cash flow. If actual results are not consistent with our assumptions and estimates, or our assumptions and estimates change due to new information, we may be exposed to an impairment charge in the future.
Accounting for Discontinued Operations
We regularly review underperforming assets to determine if a sale or disposal might be a better way to monetize the assets. When an asset group is considered for sale or disposal, we review the transaction to determine if or when the entity qualifies as a discontinued operation in accordance with the criteria of FASB ASC Topic 205-20 "Discontinued Operations." The FASB has issued authoritative guidance that raises the threshold for disposals to qualify as discontinued operations. Under this guidance, a discontinued operation is (1) a component of an entity or group of components that have been disposed of or are classified as held for sale and represent a strategic shift that has or will have a major effect on an entity's operations and financial results, or (2) an acquired business that is classified as held for sale on the acquisition date.
Impairment of Long-lived Assets
We periodically evaluate whether the carrying value of long-lived assets has been impaired when circumstances indicate the carrying value of those assets may not be recoverable. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying value is not recoverable, the impairment loss is measured as the excess of the asset's carrying value over its fair value.
Our impairment analyses require management to apply judgment in estimating future cash flows as well as asset fair values, including forecasting useful lives of the assets, assessing the probability of different outcomes, and selecting the discount rate that reflects the risk inherent in future cash flows. If the carrying value is not recoverable, we assess the fair value of long-lived assets using commonly accepted techniques, and may use more than one method, including, but not limited to, recent third party comparable sales and discounted cash flow models. If actual results are not consistent with our assumptions and estimates, or our assumptions and estimates change due to new information, we may be exposed to an impairment charge in the future.
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Debt with Equity-linked Features
We may issue debt that has separate warrants, conversion features, or no equity-linked attributes.
When we issue debt with warrants, we determine the value of the warrants using the Black-Scholes Option Pricing Model ("Black-Scholes") or the Binomial Model, using the stock price on the date of issuance, the risk-free interest rate associated with the life of the debt, and the estimated volatility of our stock.
When we issue debt with a conversion feature, we must first assess whether the conversion feature meets the requirements to be treated as a derivative. If the conversion feature within convertible debt meets the requirements to be treated as a derivative, we estimate the fair value of the convertible debt derivative using Black-Scholes upon the date of issuance, using the stock price on the date of issuance, the risk free interest rate associated with the life of the debt, and the estimated volatility of our stock. If the conversion feature is not treated as a derivative, we assess whether it is a beneficial conversion feature ("BCF"). A BCF exists if the conversion price of the convertible debt instrument is less than the stock price on the commitment date. This typically occurs when the conversion price is less than the fair value of the stock on the date the instrument was issued. The value of a BCF is equal to the intrinsic value of the feature, the difference between the conversion price and the common stock into which it is convertible.
Equity-based Payments
We estimate the fair value of equity-based instruments issued to employees or to third parties for services or goods using Black-Scholes or the Binomial Model, which requires us to estimate the volatility of our stock and forfeiture rate.
Revenue Recognition
On
The following five steps are applied to achieve that core principle:
† Step 1: Identify the contract with the customer; † Step 2: Identify the performance obligations in the contract; † Step 3: Determine the transaction price;
† Step 4: Allocate the transaction price to the performance obligations in the contract; and
† Step 5: Recognize revenue when the company satisfies a performance
obligation.
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