This Managements 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.
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 managements existing beliefs about present and future events outside of managements 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.
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 $224,994 as of December 31, 2019 is not sufficient to absorb our operating losses and retire our debt of $2,330,351 and other obligations as they come due. The warrants associated with this debt, if exercised, would provide sufficient funds to retire the debt; however, there is no guarantee that these warrants will be exercised. Our ability to continue as a going concern is dependent upon our generating profitable operations in the future and / or obtaining the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come 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 December 31, 2019, we made the strategic decision to cease operations of Chiefton and STOA Wellness. All operations were abandoned in January 2020. Separately, we classified Iron Protection Group as held for sale as of December 31, 2019, in which the contracts of the Colorado division were sold in January 2020 and the remaining contracts in California have been abandoned. The completed and planned divestiture of these non-core businesses has changed the way in which we evaluate performance and allocate resources. As a result, during the year ended December 31, 2019, we revised our business segments, consistent with our management of the business and internal financial reporting structure.
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
|
|
(1,925,411)
|
|
(5,564,335)
|
|
3,638,924
|
|
(65)%
|
Net loss from continuing operations
|
|
(10,787,100)
|
|
(16,135,310)
|
|
5,348,210
|
|
(33)%
|
Loss from discontinued operations
|
|
(1,675,539)
|
|
(838,448)
|
|
(837,091)
|
|
100%
|
Net loss
|
$
|
(12,462,639)
|
$
|
(16,973,758)
|
$
|
4,511,119
|
|
(27)%
|
The following discussion of our results of operations relates to our continuing operations. See Note 3 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.
3
Selling, general and administrative expense increased in 2019 primarily due to increases for (a) salaries; (b) premiums for liability, and directors and officers insurance; (c) computer and internet costs; and (d) marketing costs.
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 June 26, 2015, and expense varies primarily due to the number of stock options granted and the share price on the date of grant. Consulting awards are granted to third parties in lieu of cash for services provided. The Feinsod Agreement expense represents equity-based compensation pursuant to agreements with Michael Feinsod for serving as the Executive Chairman of our Board.
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
|
$
|
2,019,726
|
$
|
4,234,823
|
$
|
(2,215,097)
|
|
(52)%
|
Interest expense
|
|
345,371
|
|
323,557
|
|
21,814
|
|
7%
|
Gain on derivative liability
|
|
(816,986)
|
|
|
|
(816,986)
|
|
(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%
|
|
$
|
1,925,411
|
$
|
5,564,335
|
$
|
(3,638,924)
|
|
(65)%
|
Amortization of debt discount costs generally varies with our debt balance and, in 2019, includes $318,681 of costs associated with derivative warrants from the 2019 Warrants (as defined below). Interest expense varied between 2019 and 2018 due to the payoff of the 12% Notes in January 2018, the payoff of the Infinity Note in February 2018, and the issuance of the 8.5% Notes in April 2018. We recognized issuance costs in relation to the derivative warrants included in our registered direct offering in May 2019. The loss on investment in Desert Created is our 50% share of the net loss of Desert Created during the three quarters September 30, 2018. The impairment of Desert Created occurred primarily because the agreement was priced in November 2017, however, the transaction did not close until January 2018. In the interim, our stock price increased substantially, thus the consideration we paid, in equity instruments, was higher than the fair value of the investment received. In October 2018, we sold our 50% interest to DNFC for cash consideration of $23,045 and, accordingly, impaired the remaining balance. The gain on warrant derivative liability reflects the change in fair value of the 2019 Warrants.
Operations Consulting and Products
|
|
|
|
|
|
|
|
|
|
|
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.
4
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 $823,819 impairment charge and our share of their net loss of $182,136.
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
|
$
|
(14,803,639)
|
$
|
(16,973,758)
|
Adjustment for loss from discontinued operations
|
|
1,675,539
|
|
838,448
|
Loss from continuing operations attributable to common stockholders
|
|
(13,128,100)
|
|
(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
|
Gain on warrant derivative liability
|
|
(816,986)
|
|
|
Loss on investment of Desert Created
|
|
|
|
182,136
|
Total adjustments
|
|
6,007,728
|
|
11,621,785
|
Adjusted EBITDA
|
$
|
(7,120,372)
|
$
|
(4,513,525)
|
Per share basic and diluted:
|
|
|
|
|
Net loss
|
$
|
(0.39)
|
$
|
(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
|
5
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 September 2019, we completed a $1,506,000 private placement with certain accredited investors pursuant to the 2019 12% Notes and the 2019 12% Warrants). In July 2019, we completed a $855,000 private placement pursuant to the SBI Note.
In May 2019, we raised approximately $3 million by issuing three million shares of our common stock and three million warrants (2019 Warrants) to purchase shares of our common stock (together 2019 Units) in a registered direct offering for $1.00 per 2019 Unit. The 2019 Warrants have an exercise price of $1.30 per share and are exercisable for five years from the date of issuance. We received cash of $2,604,355, which is net of $395,645 of issuance costs.
In April 2018, we completed a $7,500,000 private placement pursuant to a promissory note (8.5% Notes) and warrant purchase agreement (the 8.5% Agreement) with certain accredited investors, bearing interest at 8.5%, with principal due May 1, 2019, and interest payable quarterly. The proceeds were made available for general working capital purposes and acquisitions.
Sources and uses of cash
We had cash of approximately $224,994 and $8.0 million, respectively, as of and December 31, 2019 and 2018. Our cash flows from operating, investing and financing activities were as follows:
|
|
|
|
|
|
|
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 activitie
|
|
(1,649,875)
|
|
9,214,855
|
Net cash used in operating activities decreased in 2019 by $397,546 compared to 2018, primarily due to reduction of expenses and personnel. Where possible, we continue to use non-cash equity-based instruments to obtain consulting services and compensate employees.
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 May 2019. Net cash provided by financing activities in 2018 related to the exercise of warrants and options offset by paying off debt.
Capital Resources
We have no material commitments for capital expenditures as of December 31, 2019. Part of our growth strategy, however, is to acquire businesses. We would fund such activity through cash on hand, the issuance of debt, common stock, warrants for our common stock or a combination thereof.
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 the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses. Critical accounting policies are those that require the application of managements most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In applying these critical accounting policies, our management uses its judgment to determine the appropriate assumptions to be used in making certain estimates. Actual results may differ from these estimates.
6
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 entitys 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 assets 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.
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.
7
Revenue Recognition
On January 1, 2018, we adopted ASC Topic 606, Revenue from Contracts with Customers (ASC 606). The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.
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.