UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2020
| ☐ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______ to ______
Commission file number:
YOUNGEVITY INTERNATIONAL, INC.
(Exact nameName of registrantRegistrant as specifiedSpecified in its charter)
Delaware | 90-0890517 | |
(State or | (I.R.S. Employer Identification No.) | |
2400 Boswell Road, Chula Vista, CA | 91914 | |
(Address of Principal Executive Offices) | (Zip Code) |
(619) 934-3980
Registrant’s Telephone Number, including area code:
Not applicable
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Securities registered pursuant to Section 12(b) of the Act: None
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
N/A | N/A | N/A |
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]☐ No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X]☐ No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | |
Non-accelerated filer | Smaller reporting company | ||
☒ | |||
Emerging growth company | ☐ |
If an emerging growth company indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ]☐ No [X]
At June 17, 2022, the issuer had
TABLE OF CONTENTS
Item 1.
Youngevity International, Inc. and Subsidiaries | ||
Condensed Consolidated Balance Sheets | ||
(In thousands, except share amounts) | ||
As of | ||
September 30, 2017 | December 31, 2016 | |
| ASSETS | (Unaudited) | |
| Current Assets | ||
| Cash and cash equivalents | $1,373 | $869 |
| Accounts receivable, due from factoring company | 3,088 | 1,078 |
| Trade accounts receivable, net | 513 | 1,071 |
| Income tax receivable | 311 | 311 |
| Inventory | 21,052 | 21,492 |
| Prepaid expenses and other current assets | 3,327 | 3,087 |
| Total current assets | 29,664 | 27,908 |
| Property and equipment, net | 13,908 | 14,006 |
| Deferred tax assets | 5,703 | 2,857 |
| Intangible assets, net | 18,399 | 14,914 |
| Goodwill | 6,323 | 6,323 |
| Total assets | $73,997 | $66,008 |
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||
| Current Liabilities | ||
| Accounts payable | $10,317 | $8,174 |
| Accrued distributor compensation | 4,678 | 4,163 |
| Accrued expenses | 5,452 | 3,701 |
| Deferred revenues | 1,999 | 1,870 |
| Other current liabilities | 3,652 | 2,389 |
| Capital lease payable, current portion | 997 | 821 |
| Notes payable, current portion | 175 | 219 |
| Warrant derivative liability | 4,128 | 3,345 |
| Contingent acquisition debt, current portion | 422 | 628 |
| Total current liabilities | 31,820 | 25,310 |
| Capital lease payable, net of current portion | 934 | 1,569 |
| Notes payable, net of current portion | 4,452 | 4,431 |
| Convertible notes payable (See Note 6) | 10,766 | 8,327 |
| Contingent acquisition debt, net of current portion | 11,405 | 7,373 |
| Total liabilities | 59,377 | 47,010 |
| Commitments and contingencies, Note 1 | ||
| Stockholders’ Equity | ||
| Convertible Preferred Stock, $0.001 par value: 5,000,000 shares authorized; 161,135 shares issued and outstanding at September 30, 2017 and December 31, 2016 | - | - |
Common Stock, $0.001 par value: 50,000,000 shares authorized; 19,723,285 and 19,634,345 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively (1) | 20 | 20 |
| Additional paid-in capital | 171,693 | 170,212 |
| Accumulated deficit | (156,873) | (151,016) |
| Accumulated other comprehensive loss | (220) | (218) |
| Total stockholders’ equity | 14,620 | 18,998 |
| Total Liabilities and Stockholders’ Equity | $73,997 | $66,008 |
Youngevity International, Inc. and Subsidiaries
Condensed Consolidated BalanceSheets
(In thousands, except share data have been retroactively adjusted to reflect Youngevity’s 1-for-20 reverse stock split, which was effective on June 7, 2017. amounts)
March 31, 2020 | December 31, 2019 | |||||||
ASSETS | (Unaudited) | |||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 3,243 | $ | 4,463 | ||||
Accounts receivable, net | 2,949 | 2,902 | ||||||
Income tax receivable | 73 | 81 | ||||||
Inventory | 22,743 | 22,706 | ||||||
Prepaid expenses and other current assets | 3,488 | 3,982 | ||||||
Total current assets | 32,496 | 34,134 | ||||||
Property and equipment, net | 23,736 | 23,316 | ||||||
Operating lease right-of-use assets | 7,818 | 8,386 | ||||||
Deferred tax assets | 75 | 75 | ||||||
Intangible assets, net | 14,946 | 15,566 | ||||||
Goodwill | 6,992 | 6,992 | ||||||
Other assets | 1,273 | 1,222 | ||||||
Total assets | $ | 87,336 | $ | 89,691 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 10,954 | $ | 9,069 | ||||
Accrued distributor compensation | 4,542 | 3,164 | ||||||
Accrued expenses | 6,420 | 5,108 | ||||||
Deferred revenues, current portion | 3,173 | 1,943 | ||||||
Other current liabilities | 3,152 | 2,664 | ||||||
Operating lease liabilities, current portion | 1,547 | 1,740 | ||||||
Finance lease liabilities, current portion | 726 | 736 | ||||||
Line of credit | 2,025 | 2,011 | ||||||
Notes payable, net of debt discounts, current portion (Note 3) | 4,231 | 4,085 | ||||||
Notes payable, net of debt discounts, current portion | 2,015 | 191 | ||||||
Convertible notes payable, net of debt discounts, current portion | 2,784 | 25 | ||||||
Contingent acquisition debt, current portion | 1,382 | 1,263 | ||||||
Warrant derivative liability | 53 | 1,542 | ||||||
Total current liabilities | 43,004 | 33,541 | ||||||
Operating lease liabilities, net of current portion | 6,473 | 6,646 | ||||||
Finance lease liabilities, net of current portion | 258 | 408 | ||||||
Notes payable, net of current portion (Note 3) | 1,000 | 0 | ||||||
Notes payable, net of debt discounts, net of current portion | 4,962 | 6,790 | ||||||
Convertible notes payable, net of debt discounts, net of current portion | 0 | 2,675 | ||||||
Contingent acquisition debt, net of current portion | 6,759 | 7,348 | ||||||
Other long-term liabilities | 437 | 2,115 | ||||||
Total liabilities | 62,893 | 59,523 | ||||||
Commitments and contingencies (Note 11) | ||||||||
Stockholders’ Equity | ||||||||
Preferred stock, $0.001 par value: 5,000,000 shares authorized | ||||||||
Series A – 8% convertible preferred stock; 161,135 shares issued and outstanding at March 31, 2020 and December 31, 2019 | 0 | 0 | ||||||
Series B – 5% convertible preferred stock; zero and 129,332 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively | 0 | 0 | ||||||
Series D – 9.75% cumulative redeemable perpetual preferred stock; 590,273 and 578,898 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively; $14,877 liquidation preference at March 31, 2020 | 0 | 0 | ||||||
Common stock, $0.001 par value: 50,000,000 shares authorized; 30,712,432 and 30,274,601 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively | 31 | 30 | ||||||
Additional paid-in capital | 265,867 | 265,825 | ||||||
Accumulated deficit | (241,542 | ) | (235,751 | ) | ||||
Accumulated other comprehensive income | 87 | 64 | ||||||
Total stockholders’ equity | 24,443 | 30,168 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 87,336 | $ | 89,691 | ||||
See accompanying notes to condensed consolidated financial statements.
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except share and per share amounts)
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Revenues | $ | 35,531 | $ | 41,192 | ||||
Cost of revenues | 15,744 | 14,343 | ||||||
Gross profit | 19,787 | 26,849 | ||||||
Operating expenses | ||||||||
Distributor compensation | 14,051 | 14,890 | ||||||
Sales and marketing | 3,473 | 4,019 | ||||||
General and administrative | 8,940 | 19,881 | ||||||
Total operating expenses | 26,464 | 38,790 | ||||||
Operating loss | (6,677 | ) | (11,941 | ) | ||||
Other income (expense), net | ||||||||
Interest expense, net | (620 | ) | (1,507 | ) | ||||
Change in fair value of warrant derivative liability | 1,489 | 1,486 | ||||||
Total other income (expense), net | 869 | (21 | ) | |||||
Net loss before income taxes | (5,808 | ) | (11,962 | ) | ||||
Income tax provision (benefit) | (17 | ) | 298 | |||||
Net loss | (5,791 | ) | (12,260 | ) | ||||
Preferred stock dividends | (379 | ) | (14 | ) | ||||
Net loss attributable to common stockholders | $ | (6,170 | ) | $ | (12,274 | ) | ||
Net loss per share, basic | $ | (0.20 | ) | $ | (0.45 | ) | ||
Net loss per share, diluted (Note 1) | $ | (0.20 | ) | $ | (0.49 | ) | ||
Weighted average shares outstanding, basic | 30,314,986 | 27,577,576 | ||||||
Weighted average shares outstanding, diluted | 30,314,986 | 28,025,172 | ||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||
2017 | 2016 | 2017 | 2016 | |
| Revenues | $44,395 | $43,562 | $124,655 | $124,264 |
| Cost of revenues | 18,631 | 17,194 | 52,923 | 49,102 |
| Gross profit | 25,764 | 26,368 | 71,732 | 75,162 |
| Operating expenses | ||||
| Distributor compensation | 17,391 | 18,101 | 49,496 | 50,871 |
| Sales and marketing | 4,074 | 3,181 | 10,650 | 7,619 |
| General and administrative | 6,116 | 4,510 | 16,479 | 13,409 |
| Total operating expenses | 27,581 | 25,792 | 76,625 | 71,899 |
| Operating (loss) income | (1,817) | 576 | (4,893) | 3,263 |
| Interest expense, net | (1,752) | (946) | (4,207) | (3,139) |
| Change in fair value of warrant derivative liability | 1,519 | 369 | 788 | 535 |
| Extinguishment loss on debt | (308) | - | (308) | - |
| Total other expense | (541) | (577) | (3,727) | (2,604) |
| (Loss) income before income taxes | (2,358) | (1) | (8,620) | 659 |
| Income tax (benefit) provision | (1,290) | (68) | (2,763) | 550 |
| Net (loss) income | (1,068) | 67 | (5,857) | 109 |
| Preferred stock dividends | (3) | (3) | (9) | (9) |
| Net (loss) income available to common stockholders | $(1,071) | $64 | $(5,866) | $100 |
Net loss per share, basic (1) | $(0.05) | $0.00 | $(0.30) | $0.00 |
Net loss per share, diluted (1) | $(0.05) | $0.00 | $(0.30) | $0.00 |
Weighted average shares outstanding, basic (1) | 19,678,577 | 19,633,731 | 19,655,312 | 19,631,195 |
Weighted average shares outstanding, diluted (1) | 19,678,577 | 20,026,001 | 19,655,312 | 20,005,758 |
See accompanying notes to condensed consolidated financial statements.
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Income
(In thousands)
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Net loss | $ | (5,791 | ) | $ | (12,260 | ) | ||
Foreign currency translation | 23 | 102 | ||||||
Total other comprehensive income | 23 | 102 | ||||||
Comprehensive loss | $ | (5,768 | ) | $ | (12,158 | ) | ||
Three Months Ended September 30, | Nine Months Ended September 30, | |||
2017 | 2016 | 2017 | 2016 | |
| Net (loss) income | $(1,068) | $67 | $(5,857) | $109 |
| Foreign currency translation | (16) | (28) | (2) | (174) |
| Total other comprehensive loss | (16) | (28) | (2) | (174) |
| Comprehensive (loss) income | $(1,084) | $39 | $(5,859) | $(65) |
See accompanying notes to condensed consolidated financial statements.
Unaudited Condensed Consolidated Statements of Stockholders' Equity
(In thousands, except shares)
Preferred Stock | Additional | Accumulated Other | ||||||||||||||||||||||||||||||||||||||||||||||
Series A | Series B | Series D | Common Stock | Paid-in | Comprehensive | Accumulated | Stockholders' | |||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Income | Deficit | Equity | |||||||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | 161,135 | $ | 0 | 129,332 | $ | 0 | 578,898 | $ | 0 | 30,274,601 | $ | 30 | $ | 265,825 | $ | 64 | $ | (235,751 | ) | $ | 30,168 | |||||||||||||||||||||||||||
Net loss | – | 0 | – | 0 | – | 0 | – | 0 | 0 | 0 | (5,791 | ) | (5,791 | ) | ||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | – | 0 | – | 0 | – | 0 | – | 0 | 0 | 23 | 0 | 23 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock for conversion of Series B preferred stock | 0 | 0 | (129,332 | ) | 0 | 0 | 0 | 258,664 | 1 | 0 | 0 | 0 | 1 | |||||||||||||||||||||||||||||||||||
Issuance of common stock for vesting of RSU | 0 | 0 | 0 | 0 | 0 | 0 | 4,167 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock for debt financing, net of issuance costs | 0 | 0 | 0 | 0 | 0 | 0 | 50,000 | 0 | 65 | 0 | 0 | 65 | ||||||||||||||||||||||||||||||||||||
Issuance of Series D preferred stock through underwritten registered public offering, net | 0 | 0 | 0 | 0 | 11,375 | 0 | 0 | 0 | 233 | 0 | 0 | 233 | ||||||||||||||||||||||||||||||||||||
Fair value of common stock issued related to advance for working capital (recorded in prepaid expenses and other current assets) | – | 0 | – | 0 | – | 0 | – | 0 | (311 | ) | 0 | 0 | (311 | ) | ||||||||||||||||||||||||||||||||||
Dividends on preferred stock | – | 0 | – | 0 | – | 0 | – | 0 | (379 | ) | 0 | 0 | (379 | ) | ||||||||||||||||||||||||||||||||||
Equity-based compensation for services | 0 | 0 | 0 | 0 | 0 | 0 | 125,000 | 0 | 174 | 0 | 0 | 174 | ||||||||||||||||||||||||||||||||||||
Stock-based compensation | – | 0 | – | 0 | – | 0 | – | 0 | 260 | 0 | 0 | 260 | ||||||||||||||||||||||||||||||||||||
Balance at March 31, 2020 | 161,135 | $ | 0 | 0 | $ | 0 | 590,273 | $ | 0 | 30,712,432 | $ | 31 | $ | 265,867 | $ | 87 | $ | (241,542 | ) | $ | 24,443 | |||||||||||||||||||||||||||
Youngevity International, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Stockholders' Equity
(In thousands, except shares)
Series A Preferred Stock | Series B Preferred Stock | Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | Total Stockholders' | ||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Income (Loss) | Deficit | Equity | |||||||||||||||||||||||||||||||
Balance at December 31, 2018 | 161,135 | $ | 0 | 129,437 | $ | 0 | 25,760,708 | $ | 26 | $ | 206,757 | $ | (45 | ) | $ | (183,763 | ) | $ | 22,975 | |||||||||||||||||||||
Net loss | - | 0 | - | 0 | - | 0 | 0 | 0 | (12,260 | ) | (12,260 | ) | ||||||||||||||||||||||||||||
Foreign currency translation adjustment | - | 0 | - | 0 | - | 0 | 0 | 102 | 0 | 102 | ||||||||||||||||||||||||||||||
Issuance of common stock from at-the-market offering and exercise of stock options and warrants, net | 0 | 0 | 0 | 0 | 309,636 | 1 | 1,454 | 0 | 0 | 1,455 | ||||||||||||||||||||||||||||||
Issuance of common stock for services | 0 | 0 | 0 | 0 | 75,000 | 0 | 417 | 0 | 0 | 417 | ||||||||||||||||||||||||||||||
Issuance of common stock in private offering, net of issuance costs | 0 | 0 | 0 | 0 | 255,000 | 0 | 1,750 | 0 | 0 | 1,750 | ||||||||||||||||||||||||||||||
Issuance of common stock for acquisition of Khrysos | 0 | 0 | 0 | 0 | 1,794,972 | 1 | 13,999 | 0 | 0 | 14,000 | ||||||||||||||||||||||||||||||
Issuance of common stock for debt financing, net of issuance costs | 0 | 0 | 0 | 0 | 40,000 | 0 | 350 | 0 | 0 | 350 | ||||||||||||||||||||||||||||||
Issuance of common stock for true-up shares | - | 0 | - | 0 | 44,599 | 0 | 281 | 0 | 0 | 281 | ||||||||||||||||||||||||||||||
Issuance of common stock for convertible note financing, net of issuance costs | - | 0 | - | 0 | 61,000 | 0 | 293 | 0 | 0 | 293 | ||||||||||||||||||||||||||||||
Issuance of common stock related to purchase of land - H&H | - | 0 | - | 0 | 153,846 | 0 | 1,200 | 0 | 0 | 1,200 | ||||||||||||||||||||||||||||||
Issuance of common stock related to purchase of trademark - H&H | - | 0 | - | 0 | 100,000 | 0 | 750 | 0 | 0 | 750 | ||||||||||||||||||||||||||||||
Issuance of common stock related to advance for working capital (note receivable) net of settlement of debt | - | 0 | - | 0 | 295,910 | 1 | 2,308 | 0 | 0 | 2,309 | ||||||||||||||||||||||||||||||
Release of warrant liability upon exercise of warrants | - | 0 | - | 0 | - | 0 | 866 | 0 | 0 | 866 | ||||||||||||||||||||||||||||||
Release of warrant liability upon reclassification of liability to equity | - | 0 | - | 0 | - | 0 | 1,494 | 0 | 0 | 1,494 | ||||||||||||||||||||||||||||||
Warrant issued upon vesting for services | - | 0 | - | 0 | - | 0 | 1,656 | 0 | 0 | 1,656 | ||||||||||||||||||||||||||||||
Dividends on preferred stock | - | 0 | - | 0 | - | 0 | (14 | ) | 0 | 0 | (14 | ) | ||||||||||||||||||||||||||||
Stock based compensation expense | - | 0 | - | 0 | - | 0 | 11,344 | 0 | 0 | 11,344 | ||||||||||||||||||||||||||||||
Balance at March 31, 2019 | 161,135 | $ | 0 | 129,437 | $ | 0 | 28,890,671 | $ | 29 | $ | 244,906 | $ | 57 | $ | (196,023 | ) | $ | 48,969 | ||||||||||||||||||||||
Nine Months Ended September 30, | ||
2017 | 2016 | |
| Cash Flows from Operating Activities: | (As Restated) | |
| Net (loss) income | $(5,857) | $109 |
| Adjustments to reconcile net (loss) income to net cash used in operating activities: | ||
| Depreciation and amortization | 3,230 | 2,865 |
| Stock based compensation expense | 471 | 292 |
| Amortization of deferred financing costs | 281 | 270 |
| Amortization of warrant issuance costs | 172 | 96 |
| Amortization of debt discount | 799 | 790 |
| Amortization of prepaid advisory fees | 42 | 46 |
| Stock issuance for services | 200 | 30 |
| Stock issuance related to debt financing | 106 | - |
| Fair value of warrant issuance | 341 | - |
| Change in fair value of warrant derivative liability | (788) | (535) |
| Expenses allocated in profit sharing agreement | (195) | (557) |
| Change in fair value of contingent acquisition debt | (1,020) | (1,185) |
| Extinguishment loss on debt | 308 | - |
| Deferred income taxes | (2,846) | - |
| Changes in operating assets and liabilities, net of effect from business combinations: | ||
| Accounts receivable | (1,452) | (1,411) |
| Inventory | 440 | (1,925) |
| Income taxes receivable | - | 173 |
| Prepaid expenses and other current assets | (282) | (502) |
| Accounts payable | 2,143 | 293 |
| Accrued distributor compensation | 515 | 401 |
| Deferred revenues | 129 | (652) |
| Accrued expenses and other liabilities | 1,480 | 705 |
| Net Cash Used In Operating Activities | (1,783) | (697) |
| Cash Flows from Investing Activities: | ||
| Acquisitions, net | (175) | (88) |
| Purchases of property and equipment | (690) | (938) |
| Net Cash Used in Investing Activities | (865) | (1,026) |
| Cash Flows from Financing Activities: | ||
| Proceeds from the exercise of stock options and warrants, net | 28 | 39 |
| Proceeds from factoring company | 1,723 | 1,131 |
| Proceeds from issuance of convertible notes, net of offering cost | 2,720 | - |
| Payments of notes payable, net | (159) | (411) |
| Payments of contingent acquisition debt | (440) | (708) |
| Proceeds (payments) of capital leases | (718) | 19 |
| Repurchase of common stock | - | (36) |
| Net Cash Provided by Financing Activities | 3,154 | 34 |
| Foreign Currency Effect on Cash | (2) | (174) |
| Net increase (decrease) in cash and cash equivalents | 504 | (1,863) |
| Cash and Cash Equivalents, Beginning of Period | 869 | 3,875 |
| Cash and Cash Equivalents, End of Period | $1,373 | $2,012 |
| Supplemental Disclosures of Cash Flow Information | ||
| Cash paid during the period for: | ||
| Interest | $2,773 | $1,987 |
| Income taxes | $31 | $192 |
| Supplemental Disclosures of Noncash Investing and Financing Activities | ||
Purchases of property and equipment funded by capital leases | $398 | $1,416 |
| Acquisitions of net assets in exchange for contingent acquisition debt (see Note 4) | $5,920 | $4,876 |
| Fair value of the bifurcated embedded conversion option recorded as a derivative liability (see Notes 6 & 7) | $330 | $- |
| Fair value of the warrants issued in connection with financing recorded as a derivative liability (see Notes 6 & 7) | $2,334 | $- |
Youngevity International, Inc. and Renew Interest, LLC acquisitions and reduced the initial purchaseSubsidiaries
Unaudited Condensed Consolidated Statements of the intangibles acquired and the contingent debt by $92,000, $266,000 and $30,000, respectively (see Note 4).CashFlows
(In thousands)
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net loss | $ | (5,791 | ) | $ | (12,260 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 1,293 | 1,145 | ||||||
Stock-based compensation | 260 | 11,344 | ||||||
Equity-based compensation for services | 689 | 1,859 | ||||||
Amortization of debt discounts and issuance costs | 337 | 199 | ||||||
Change in fair value of warrant derivative liability | (1,489 | ) | (1,486 | ) | ||||
Change in fair value of contingent acquisition debt | (361 | ) | 0 | |||||
Decrease in allowance for accounts receivables | (30 | ) | 0 | |||||
Change in allowance for other receivable (Note 3) | (311 | ) | 0 | |||||
Change in allowance for notes receivable (Note 3) | 112 | 0 | ||||||
Changes in inventory reserve | 33 | 159 | ||||||
Loss on disposal of property and equipment | 15 | 0 | ||||||
Stock issuance for true-up shares | 0 | 281 | ||||||
Noncash operating lease expense | 568 | 0 | ||||||
Changes in operating assets and liabilities, net of effect from business combinations: | ||||||||
Accounts receivable | (17 | ) | (3,369 | ) | ||||
Income tax receivable | 8 | 0 | ||||||
Inventory | (70 | ) | (1,283 | ) | ||||
Prepaid expenses and other current assets | (20 | ) | (111 | ) | ||||
Other assets | (166 | ) | 0 | |||||
Accounts payable | 1,884 | 54 | ||||||
Accrued distributor compensation | 1,378 | 854 | ||||||
Deferred revenues | 1,230 | (44 | ) | |||||
Accrued expenses and other current liabilities | 1,812 | (2,173 | ) | |||||
Operating lease liabilities | (367 | ) | 0 | |||||
Other long-term liabilities | (1,678 | ) | 0 | |||||
Net Cash Used in Operating Activities | (681 | ) | (4,831 | ) | ||||
Cash Flows from Investing Activities: | ||||||||
Acquisitions, net of cash acquired | 0 | (425 | ) | |||||
Purchases of property and equipment | (1,082 | ) | (2,291 | ) | ||||
Net Cash Used in Investing Activities | (1,082 | ) | (2,716 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Proceeds from issuance of promissory notes, net of offering costs | 1,000 | 3,750 | ||||||
Proceeds from private placement of common stock, net of offering costs | 0 | 2,267 | ||||||
Proceeds from at-the-market-offering and exercise of stock options and warrants, net | 0 | 1,455 | ||||||
Proceeds from the issuance of Series D preferred stock | 233 | 0 | ||||||
Proceeds from line of credit, net | 14 | 176 | ||||||
Payments of notes payable | (46 | ) | (35 | ) | ||||
Payments of contingent acquisition debt | (109 | ) | (128 | ) | ||||
Payments of finance leases | (184 | ) | (368 | ) | ||||
Payments of dividends | (388 | ) | (11 | ) | ||||
Net Cash Provided by Financing Activities | 520 | 7,106 | ||||||
Foreign Currency Effect on Cash | 23 | 102 | ||||||
Net decrease in cash and cash equivalents | (1,220 | ) | (339 | ) | ||||
Cash and Cash Equivalents, Beginning of Period | 4,463 | 2,879 | ||||||
Cash and Cash Equivalents, End of Period | $ | 3,243 | $ | 2,540 | ||||
Supplemental Disclosures of Cash Flow Information | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 284 | $ | 1,034 | ||||
Income taxes | $ | 0 | $ | 0 | ||||
Supplemental Disclosures of Noncash Investing and Financing Activities | ||||||||
Purchases of property and equipment funded by mortgage agreements | $ | 0 | $ | 450 | ||||
Purchases of property and equipment funded by financing leasing agreements | $ | 26 | $ | 0 | ||||
Decrease in fair value of common stock issued for in relation to advance for working capital (Note 3) | $ | 311 | $ | 0 | ||||
Issuance of common stock for promissory note financing (Note 10) | $ | 65 | $ | 0 | ||||
Fair value of stock issued for property and equipment (land) | $ | 0 | $ | 1,200 | ||||
Fair value of stock issued for purchase of intangibles (tradename) | $ | 0 | $ | 750 | ||||
Fair value of stock issued for note receivable, net of debt settlement | $ | 0 | $ | 2,309 | ||||
Fair value of stock issued for services | $ | 0 | $ | 417 | ||||
Fair value of stock issued in connection with the acquisition of Khrysos Global, Inc. (Note 2) | $ | 0 | $ | 14,000 | ||||
Dividends declared but not paid at the end of period (Note 10) | $ | 120 | $ | 14 | ||||
See accompanying notes to condensed consolidated financial statements.
Note1. Description of Business and Basis of Presentation and
Description of Business
Youngevity International, Inc. (the “Company”) operates in 3 segments: (i) the direct selling segment where products are offered through a global distribution network of preferred customers and distributors, (ii) the commercial coffee segment where products are sold directly to businesses and (iii) the commercial hemp segment where the Company manufactures proprietary systems to provide end-to-end extraction and processing of hemp feed stock into hemp oil and hemp extracts, oil extraction services, and contract manufacturing services.
Information on the operations of the Company’s three segments is as follows:
● | The direct selling segment is operated through the Company’s three domestic subsidiaries, AL Global Corporation, 2400 Boswell LLC, and Youngevity Global LLC, and twelve foreign subsidiaries: |
● | Youngevity Australia Pty. Ltd., |
● | Youngevity NZ, Ltd., |
● | Youngevity Mexico S.A. de CV, |
● | Youngevity Russia, LLC, |
● | Youngevity Israel, Ltd., |
● | Youngevity Europe SIA (Latvia), |
● | Youngevity Colombia S.A.S, |
● | Youngevity International Singapore Pte. Ltd., |
● | Mialisia Canada, Inc., |
● | Youngevity Global LLC, Taiwan Branch, |
● | Youngevity Global LLC, Philippine Branch, and |
● | Youngevity International (Hong Kong). |
● | The commercial coffee business is operated through the Company’s wholly-owned subsidiary, CLR Roasters LLC (“CLR”) and its wholly-owned subsidiary, Siles Plantation Family Group S.A. (“Siles”). |
● | The commercial hemp business is operated through the Company’s wholly-owned subsidiary, Khrysos Industries, Inc., a Delaware corporation (“KII”). KII acquired the assets of Khrysos Global Inc., a Florida corporation (“Khrysos Global”), in February 2019 and the wholly-owned subsidiaries of Khrysos Global, INXL Laboratories, Inc., a Florida corporation (“INXL”) and INX Holdings, Inc., a Florida corporation (“INXH”). |
In the following text, the term “the Company” refers collectively to the Company and its subsidiaries.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such rules and regulations.
Youngevity International, Inc. (the “Company”) consolidates all wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
The condensed consolidated financial statements presented as of September 30, 2017 at March 31, 2020 and for the three and nine months ended September 30, 2017 March 31, 2020 and 20162019 are unaudited. In the opinion of management, these unaudited condensed consolidated financial statements reflect all normal recurring and other adjustments necessary for a fair presentation, and to make the financial statements not misleading. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K/A10-K for the year ended December 31, 2016. 2019, filed with the SEC on June 25, 2021. The results for interim periods are not necessarily indicative of the results for the entire year.
Summary of Significant Accounting Policies
A summary of the Company’s adoptionsignificant accounting policies consistently applied in the preparation of Accounting Standards Update (“ASU”) 2015-17 pertaining to the presentation ofdeferred tax assets and liabilities as noncurrentwith retrospective application effective January 1, 2017. This resulted in a reclassificationfrom deferred tax assets, net current to deferred tax assets, net long-term. These reclassifications did not affect revenue, total costs and expenses, income (loss) from operations, or net income (loss). The adoption of ASU No. 2015-17 resulted in a reclassification of deferred tax assets, net current of $565,000 todeferred tax assets, net long-termon the Company’saccompanying condensed consolidated financial statements as of December 31, 2016.
Segment Information
The Company founded in 1996,has 3 reportable segments: direct selling, commercial coffee, and commercial hemp. The direct selling segment develops and distributes health and nutrition relatedwellness products through its global independent direct selling network also known as multi-level marketing,marketing. The commercial coffee segment is engaged in coffee roasting and sells coffee productsdistribution, specializing in gourmet coffee. The commercial hemp segment manufactures proprietary systems to commercial customers.provide end-to-end extraction and processing that allow for the conversion of hemp feed stock into hemp oil and hemp extracts. The determination that the Company operateshas three reportable segments is based upon the guidance set forth in two business segments,Accounting Standards Codification (“ASC”) Topic 280, “Segment Reporting.”
During the three months ended March 31, 2020, the Company derived approximately 87.7% of its revenue from its direct selling segment, where products are offered through a global distribution networkapproximately 11.4% of preferred customers and distributors andits revenue from its commercial coffee segment where products are sold directly to businesses. Inand approximately 0.9% from the following text,commercial hemp segment. During the terms “we,” “our,” and “us” may refer, as the context requires, to three months ended March 31, 2019, the Company or collectively to the Company andderived approximately 81.1% of its subsidiaries.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires the Company 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 revenue and expense for each reporting period. Estimates are used in accounting for, among other things, allowances for doubtful accounts, deferred taxes and related valuation allowances, fair value of derivative liabilities, uncertain tax positions, loss contingencies, fair value of options granted under ourthe Company’s stock basedand equity-based compensation plan, fair value of assets and liabilities acquired in business combinations, capitalfinance leases, asset impairments, estimates of future cash flows used to evaluate impairments, useful lives of property, equipment and intangible assets, value of contingent acquisition debt, inventory obsolescence, and sales returns.
Actual results may differ from previously estimated amounts and such differences may be material to the condensed consolidated financial statements. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected prospectively in the period they occur.
Liquidity
The accompanying condensed consolidated financial statements have been prepared and presented on a basis assuming the Company will continue as a going concern. The Company has sustained significant operatingnet losses forduring the ninethree months ended September 30, 2017March 31, 2020 and 2019 of $4,893,000, compared to operating income in the prior year of $3,263,000. The losses in the current year were primarily due to lower than anticipated revenues, increases in legal fees, distributor eventsapproximately $5,791,000 and sales and marketing costs.$12,260,000, respectively. Net cash used in operating activities was $1,783,000 inapproximately $681,000 and $4,831,000 for the current year. Based on its current cash levels three months ended March 31, 2020 and its current rate of cash requirements,2019, respectively.
Management has assessed the Company will need to raise additional capital and will need to significantly reduce its expenses from current levels to be ableCompany’s ability to continue as a going concern and concluded that additional capital will be required during the twelve-months subsequent to the filing date of this Quarterly Report on Form 10-Q. The timing of when the additional capital will be required is uncertain and highly dependent on factors discussed below. There can be no assurance that the Company will be able to execute license or purchase agreements or to obtain equity or debt financing, or on terms acceptable to it. Factors within and outside the Company’s control could have a significant bearing on its ability to obtain additional financing. As a result, management has determined that there are material uncertainties that raise substantial doubt upon the Company’s ability to continue as a going concern.
The Company has already commencedand continues to take actions to alleviate the processcash used in operations. During the three months ending March 31, 2020, the Company reported total revenue of $35,531,000 a decrease of approximately 13.7% compared to increasethe same period a year ago. The Company continues to focus on revenue growth, but the Company cannot make assurances that revenues will grow. Additionally, the Company has plans to make the necessary cost reductions and to reduce non-essential expenses, including international operations that are not performing well to help alleviate the cash used in operating activities.
The outbreak of COVID-19 and resulting pandemic resulted in significant contraction of economies around the world and interrupted global supply chains as many governments issued stay-at-home orders to combat COVID-19. The outbreak of COVID-19 also impacted the Company’s ability to properly staff and maintain its Crestmark line of credit duringdomestic and international warehousing operations due to stay-at-home orders issued within various locations where the fourth quarter of this yearCompany operates warehouse and shipping operations. The Company took actions to mitigate the impact but cannot assert that future stay-at-home orders or further restrictive orders will not have an impact on future operations. The Company experienced changes in product mix demand, with demand increasing toward health-oriented products and weakening for non-health related products. Such changes in demand may have a significant impact on revenues, margins and net operating profit in the future. The outbreak also impacted the Company’s ability to obtain some ingredients and packaging as well as ship products in some markets. The Company’s supply chain and logistics incurred some interruptions and cost impacts to date, and the Company could experience more significant interruptions and cost impacts. The Company’s suppliers of raw material and supplies have and could continue to be impacted by geopolitical events, such as the war in Ukraine, thus interrupting the Company’s supply chain. Additionally, the Company’s customers may experience interruptions from other suppliers that could cause a customer to delay or cancel orders. These factors and other events have negatively impacted the Company’s sales and operations and will likely continue to negatively affect the Company’s business and financial results. The Company is considering multiple alternatives, including, but not limitedunable to additionalpredict the possible future effect on the demand for products sold by the Company, and the related revenues, margins and operating profit due to these events.
In addition, the outbreak of the COVID-19 coronavirus has disrupted the Company’s operations due to absenteeism by infected or ill members of management or other employees, or absenteeism by members of management and other employees who elect not to come to work due to the illness affecting others in the Company’s office or other workplace, or due to quarantines. COVID-19 illness could also impact members of the Company’s board of directors resulting in absenteeism from meetings of the directors or committees of directors and making it more difficult to convene the quorums of the full board of directors or its committees needed to conduct meetings for the management of the Company’s affairs.
The Company continues to seek and obtain equity financings andor debt financings.financing on terms that are acceptable to the Company. Depending on market conditions, we cannotthere can be sureno assurance that additional capital will be available when needed or that, if available, it will be obtained on terms favorable to usthe Company or to ourits stockholders.
These financial statements have been prepared on a going concern basis, which asserts the Company believes that legal fees will decreasehas the ability in the future from the levels spentnear term to continue to realize its assets and discharge its liabilities and commitments in the current year. Furthermore, the Company expects to get reimbursements from its insurance company for legal fees already incurred. The Company expects costs related to distributor events will decrease next year from current year levels as its costs in the current year were unusually high duea planned manner giving consideration to the twentieth anniversary convention held in Dallas in Augustabove and one-time events held at the beginning of the year to stabilize the sales force due to the departure of the previous president and high-level sales management and distributors. The Company anticipates revenues to start growing again and it intends to make necessary cost reductions related to international programs that are not performing and also reduce non-essential expenses.
Revenue Recognition
The Company recognizes revenue from product sales when the following five steps are completed: i) Identify the contract with the customer; ii) Identify the performance obligations in the contract; iii) Determine the transaction price; iv) Allocate the transaction price to the performance obligations in the contract; and Cash Equivalents
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company enters into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.
The transaction price for all sales is based on the price reflected in the individual customer's contract or purchase order. Variable consideration has not been identified as a significant component of the transaction price for any of the Company’s transactions.
Independent distributors receive compensation which is recognized as distributor compensation in the Company’s consolidated statements of operations. Due to the short-term nature of the contract with the customers, the Company accrues all distributor compensation expense in the month earned and pays the compensation the following month.
The Company also charges fees to become a distributor, and earn a position in the network genealogy, which are recognized as revenue in the period received. The Company’s distributors are required to pay a one-time enrollment fee and receive a welcome kit specific to that country or region that consists of forms, policy and procedures, selling aids, access to the Company’s distributor website and a genealogy position with no down line distributors.
The Company has determined that most contracts will be completed in less than one year. For those transactions where all performance obligations will be satisfied within one year or less, the Company is applying the practical expedient outlined in ASC 606-10-32-18. This practical expedient allows the Company not to adjust promised consideration for the effects of a significant financing component if the Company expects at contract inception the period between when the Company transfers the promised good or service to a customer and when the customer pays for that good or service will be one year or less. For those transactions that are expected to be completed after one year, the Company has assessed that there are no significant financing components because any difference between the promised consideration and the cash selling price of the good or service is for reasons other than the provision of financing.
Revenue recognition by segment is as follows:
Direct Selling. Direct distribution sales are made through the Company’s network (direct selling segment), which is a web-based global network of customers and distributors. The Company’s independent sales force markets a variety of products to an array of customers, through friend-to-friend marketing and social networking. The Company considers onlyitself to be an e-commerce company whereby personal interaction is provided to customers by its monetary liquid assetsindependent sales network. Sales generated from direct distribution includes; health and wellness, beauty product and skin care, scrap booking and story booking items, packaged food products and other service-based products.
Revenue is recognized when the Company satisfies its performance obligations under the contract. The Company recognizes revenue by transferring the promised products to the customer, with original maturities of three months or less as cash and cash equivalents.
Commercial Coffee - Roasted Coffee. The Company engages in the commercial sale of roasted coffee through CLR, which is sold under a variety of private labels through major national sales outlets and to customers including cruise lines and office coffee service operators, and under its own Café La Rica brand, Josie’s Java House Brand, Javalution brands and Café Cachita as well as through its distributor network within the direct selling segment.
Revenue is recognized when the title and risk of loss is passed to the customer under the terms of the shipping arrangement, typically, FOB shipping point. At this point the customer has a present obligation to pay, takes physical possession of the product, takes legal title to the product, bears the risks and rewards of ownership, and as such, revenue will be recognized at their estimated fair value,this point in time. Sales taxes in domestic and foreign jurisdictions are collected from customers and remitted to governmental authorities, all at the local level, and are accounted for on a net basis and therefore are excluded from revenues.
Commercial Coffee - Green Coffee. The commercial coffee segment includes the sale of green coffee beans, which are sourced from the Nicaraguan rainforest.
Revenue is recognized when the title and risk of loss is passed to the customer under the terms of the shipping arrangement, typically, FOB shipping point. At this point the customer has a present obligation to pay, takes physical possession of the product, takes legal title to the product, bears the risks and rewards of ownership, and as such, revenue will be recognized at this point in time. Revenues where the Company sells green coffee beans that it has milled and where the Company has determined usingit is the Black-Scholes option-pricing model.agent with regard to the green coffee beans is recorded at net or recorded to reflect only the milling services provided. Sales taxes in domestic and foreign jurisdictions are collected from customers and remitted to governmental authorities, all at the local level, and are accounted for on a net basis and therefore are excluded from revenues.
Commercial Hemp. In the commercial hemp segment, the Company develops, manufactures, and sells equipment and related services to customers which enable them to extract CBD oils from hemp stock. The fair valueCompany provides hemp growers, feedstock suppliers, and CBD crude oil producers the use of options grantedequipment, intellectual capital, production consultancy, tolling services, and wholesale CBD channel sales capabilities. The Company is also engaged in hemp-based CBD extraction technology including tolling processing which converts hemp crude oil to non-employeeshemp extracts such as full spectrum distillate, and cannabinoid isolate (CBD, cannabigerol or CBG, cannabinol or CBN). The Company offers customers turnkey manufacturing solutions in extraction services and end-to-end processing systems. In addition, the Company provides a broad range of capabilities in regard to formulation, quality control, and testing standards with our CBD products, including potency analysis for its supply partners of hemp derived CBD products. The Company follows all guidelines for Current Good Manufacturing Practices ("CGMP") and our hemp extracts are processed, produced, and tested throughout the manufacturing process to confirm that the cannabinoid content meets strict company standards.
Revenue is re-measuredrecognized when the title and risk of loss is passed to the customer under the terms of the shipping arrangement, typically, FOB shipping point. At this point the customer has a present obligation to pay, takes physical possession of the product, takes legal title to the product, bears the risks and rewards of ownership, and as they vest,such, revenue will be recognized at this point in time. Sales taxes in domestic and foreign jurisdictions are collected from customers and remitted to governmental authorities, all at the local level, and are accounted for on a net basis and therefore are excluded from revenues.
Contract Balances. Timing of revenue recognition may differ from the timing of invoicing to customers. The Company records contract assets when performance obligations are satisfied prior to invoicing.
Contract liabilities are reflected as deferred revenues and customer deposits in accrued expenses, deferred revenue, other current liabilities and other long-term liabilities on the Company’s consolidated balance sheets. Contract liabilities relate to payments invoiced or received in advance of completion of performance obligations and are recognized as revenue upon the fulfillment of performance obligations. The Company recognizes deferred revenue in its direct selling, commercial coffee and commercial coffee segments.
In January 2020, the Company introduced a rewards program in the direct selling segment where its distributors earn points awards that can be redeemed for the future product purchases. These points awards are earned by the distributors through the purchase of products or through actions and participation in non-product purchase activities. The Company records the points earned through the purchase of product by reducing revenue and creates the liability at the point of purchase. Award points earned through non-product purchasing activities are recorded as marketing expenses and creates the liability at the time the distributor performs the non-revenue activity.
The deferred revenue related to Heritage Maker’s product line obligation for points purchased by customers represents cash payments received that have not yet been redeemed for product. Revenue is recognized when customers redeem the points, and the resulting increaseproduct is shipped. Deferred revenues related to pre-enrollment in value, if any, is recognized as expense during the period the related services are rendered.
The Company also records deferred revenue within its direct selling, commercial coffee segment. Effective May 1, 2016, the Company entered into a third amendmentand commercial hemp segments related to the factoring agreement (“Agreement”). Under the terms of the Agreement, all new receivables assignedpayments made by customers for unshipped orders.
Deferred costs relate to Crestmark shall be “Client Risk Receivables”Heritage Makers prepaid commissions are recorded in prepaid expenses and no further credit approvals will be provided by Crestmark. Additionally, the Agreement expands the factoring facility to include advanced borrowings against eligible inventory up to 50% of landed cost of finished goods inventory that meet certain criteria, not to exceed the lesser of $1,000,000 or 85% of the value of the accounts receivables already advanced with a maximum overall borrowing of $3,000,000. Interest accruesother current assets on the outstanding balance and a factoring commission is charged for each invoice factored which is calculated as the greater of $5.00 or 0.75% to 0.875% of the gross invoice amount and is recorded as interest expense. In addition, the Company and the Company’s CEO, Mr. Wallach have entered into a Guaranty and Security Agreement with Crestmark Bank guaranteeing payments in the event that CLR were to default. This Agreement is effective until February 1, 2019.
Plantation Costs
The Company’s commercial coffee segment CLR includes the results of the Siles, Plantation Family Group (“Siles”), which is comprised of (i) a 500 acre500-acre coffee plantation and (ii) a dry-processing facility located on 26 acres, both of which are located in Matagalpa, Nicaragua. Siles is a wholly-owned subsidiary of CLR, and the results of CLR include the depreciation and amortization of capitalized costs, development and maintenance and harvesting costs of Siles. In accordance with US generally accepted accounting principles (“GAAP”),GAAP, plantation maintenance and harvesting costs for commercially producing coffee farms are charged against earnings when sold. Deferred harvest costs accumulate and are capitalized throughout the year and are expensed over the remainder of the year as the coffee is sold. The difference between actual harvest costs incurred and the amount of harvest costs recognized as expense is recorded as either an increase or decrease in deferred harvest costs, which is reported as an asset and included with prepaid expenses and other current assets in the condensed consolidated balance sheets. Once the harvest is complete, the harvest cost iscosts are then recognized as the inventory value.
Stock-based Compensation
The Company made purchases of approximately $61,000 and $33,000 from Northwest Nutraceuticals Inc.,accounts for the three months ended September 30, 2017 and 2016, respectively, and $142,000 and $83,000 for the nine months ended September 30, 2017 and 2016, respectively. In addition, Mr. Renton and his wife are distributors of the Company and can earn commissions on product sales.
The Company uses the Black-Scholes to estimate the fair value of stock options. The use of a valuation model requires the Company entered a settlement agreementto make certain assumptions with Alain Piedra Hernandez, one ofrespect to selected model inputs. Expected volatility is calculated based on the owners of H&H and the operating manager of Siles, who was issued a non-qualified stock option for the purchase of 75,000 shareshistorical volatility of the Company’s Common Stock at astock price over the expected term of $2.00 with an expiration date of three years, in lieu of an obligation due from the Company to H&H as relates to a Sourcing and Supply Agreement with H&H. Duringoption. The expected life is based on the three months ended September 30, 2017 the Company replaced the non-qualified stock option and issued a warrant agreement with the same terms. There was no financial impact related to the cancellationcontractual life of the option and the issuance of the warrant. As of September 30, 2017 the warrant remains outstanding.
Income Taxes
The Company accounts for income taxes in accordance with ASC Topic 740, “
Income taxes for the interim periods are computed using the effective tax rates estimated to be applicable for the full fiscal year, as adjusted for any discrete taxable events that occur during the period.
The Company files income tax returns in the United States (“U.S.”) on a federal basis and in many U.S. state and foreign jurisdictions. Certain tax years remain open to examination by the major taxing jurisdictions to which the Company is subject.
Commitments and CostsContingencies
The Company is from time to time, the subject of Revenues
Basic and Diluted Net Loss Per Share
Basic loss per share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted loss per share is computed by dividing net loss attributable to common stockholders by the sum of the weighted-average number of common shares outstanding during the period and the weighted-average number of dilutive common share equivalents outstanding during the period, using the first-in, first-outtreasury stock method. Dilutive common share equivalents are comprised of stock options, restricted stock, warrants, convertible preferred stock and common stock associated with the Company's convertible notes based on the average stock price for each period using the treasury stock method. Potentially dilutive shares are excluded from the computation of diluted net loss per share when their effect is anti-dilutive.
In periods where a net loss is presented, all potentially dilutive securities are anti-dilutive and are excluded from the computation of diluted net loss per share. Potentially dilutive securities for the three months ended March 31, 2020 and 2019 were 11,895,578 and 12,882,194, respectively.
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
| (unaudited) | (unaudited) | |||||||
Warrants | 6,488,182 | 6,943,874 | ||||||
Preferred stock conversions | 20,124 | 275,604 | ||||||
Principal conversions on convertible notes | 312,571 | 351,142 | ||||||
Stock options | 4,631,924 | 4,836,574 | ||||||
Restricted stock units | 442,777 | 475,000 | ||||||
Total | 11,895,578 | 12,882,194 | ||||||
The Company records an inventory reserve for estimated excess and obsolete inventory based upon historical turnover,calculation of diluted loss per share requires that, to the extent the average market conditions and assumptions about future demand for its products. When applicable, expiration dates of certain inventory items with a definite life are taken into consideration.
As of | ||
September 30, 2017 | December 31, 2016 | |
| Finished goods | $10,935 | $11,550 |
| Raw materials | 11,181 | 11,006 |
22,116 | 22,556 | |
| Reserve for excess and obsolete | (1,064) | (1,064) |
| Inventory, net | $21,052 | $21,492 |
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
| (unaudited) | (unaudited) | |||||||
Loss per Share – Basic | ||||||||
Numerator for basic loss per share | $ | (6,170,000 | ) | $ | (12,274,000 | ) | ||
Denominator for basic loss per share | 30,314,986 | 27,577,576 | ||||||
Loss per common share – basic | $ | (0.20 | ) | $ | (0.45 | ) | ||
Loss per Share – Diluted | ||||||||
Numerator for basic loss per share | $ | (6,170,000 | ) | $ | (12,274,000 | ) | ||
Adjust: Fair value of dilutive warrants outstanding | 0 | (1,409,000 | ) | |||||
Numerator for dilutive loss per share | $ | (6,170,000 | ) | $ | (13,683,000 | ) | ||
Denominator for basic loss per share | 30,314,986 | 27,577,576 | ||||||
Plus: Incremental shares underlying “in the money” warrants outstanding | 0 | 447,596 | ||||||
Denominator for diluted loss per share | 30,314,986 | 28,025,172 | ||||||
Loss per common share – diluted | $ | (0.20 | ) | $ | (0.49 | ) | ||
Recently Issued and Adopted Accounting Pronouncements
The Company does not believe that any recently issued effective pronouncements, or estimated revenue streams, discount periods, discount rates and probabilities that contingencies will be met.
Note 2. Acquisitions and Business Combinations
During 2019, the Company entered into threetwo acquisitions which are detailed below. The acquisitions were conducted in an effort to allow the Company to enter into the hemp market and expand the Company’s distributor network within the direct selling segment, enhance and expand its product portfolio, and diversify its product mix. As a result of the Company’s business combinations, the Company’s distributors and customers will have access to the acquired company’s products and acquired company’s distributors and customers will gain access to products offered by the Company.
As such, the major purpose for all of the business combinations was to increase revenue and profitability. The acquisitions were structured as asset purchases which resulted in the recognition of certain intangible assets.
During the three months ended March 31, 2020, the Company acquireddid not have any acquisitions.
2019 Acquisitions
BeneYOU
On October 31, 2019, the Company entered into an asset purchase agreement with an effective date of November 1, 2019, with BeneYOU, LLC, a Utah limited liability company (“BeneYOU”), and Ryan Anderson (the “BeneYOU Representing Party”), for the Company to acquire certain assets and assumed certain liabilities of Sorvana International, LLC “Sorvana”. Sorvana was the resultBeneYOU to including all of the unificationoutstanding equity of the two companies FreeLife International, Inc. “FreeLife”BeneYOU Holding, LLC, a Utah limited liability company (“BeneYOU Holding”), and L’dara. Sorvana offers a variety of productscollectively “BeneYOU”. In accordance with the addition ofasset purchase agreement, the FreeLifeCompany also acquired BeneYOU’s customer and L’daradistributor organization lists, all intellectual property, product lines. Sorvana offersformulations, products, product packaging, product registrations, licenses, marketing materials, sales tools and swag, and all saleable inventory. BeneYOU’s flagship brand Jamberry has an extensive line of nail products with a core competency in social selling, and two other brands including Avisae which focuses on the gut health and wellness product solutions including healthy weight loss supplements, energy and performancethe M.Global brand of products that includes hydration products.
The Company is obligated to make monthly payments based on a percentage of the BeneYOU distributor revenue derived from sales of the Company’s products and skin care product linesa percentage of royalty revenue derived from sales of BeneYOU products until the earlier of the date that is ten years from the closing date or such time as well as organic product options. As a resultthe Company has paid to BeneYOU aggregate cash payments of this business combination, the Company’s distributorsBeneYOU distributor revenue and customers will have accessroyalty revenue equal to Sorvana’s unique linethe maximum aggregate purchase price of products and Sorvana’s distributors and clients will gain access$3,500,000. In addition, the Company paid an acquisition liability payment of $200,000 on the closing date, which reduced the maximum aggregate purchase price to products offered by the Company.
The contingent consideration’s estimated fair value at the date of acquisition was $3,487,000approximately $2,648,000 as determined by management using a discounted cash flow methodology. The acquisition related costs, such as legal costs and other professional fees were minimal and expensed as incurred. In addition,
The purchase agreement contains customary representations, warranties and covenants of the Company, has assumedBeneYOU and the BeneYOU Representing Party. Subject to certain customary limitations the BeneYOU Representing Party have agreed to indemnify the Company and BeneYOU against certain losses related to, among other things, breaches of the BeneYOU Representing Party’s representations and warranties, certain specified liabilities in accordance withand the failure to perform covenants or obligations under the purchase agreement.
The Company is obligated to make monthly payments based on a percentage ofrecorded the Sorvana distributor revenue derived from sales of the Company’s products and a percentage of royalty revenue derived from sales of Sorvana’s products until the earlier of the date that is twelve (12) years from the closing date or such time as the Company has paid to Sorvana aggregate cash payments of the Sorvana distributor revenue and royalty revenue equal to a predetermined maximum aggregate purchase price.
Contingent consideration | $ | 2,648 | ||
Aggregate purchase price | $ | 2,648 |
The following table summarizes the fair values of the assets acquired assets have not been finalized pending further information that may impact the valuation of certain assets or liabilities. and liabilities assumed in November 2019 (in thousands):
Current assets (excluding inventory) | $ | 408 | ||
Inventory (net of $469 reserve) | 441 | |||
Trademarks and trade name | 343 | |||
Distributor organization | 1,175 | |||
Customer relationships | 44 | |||
Non-compete agreement | 277 | |||
Goodwill | 669 | |||
Current liabilities | (709 | ) | ||
Net assets acquired | $ | 2,648 |
The preliminary purchase price allocation is as follows (in thousands):
Goodwill of $669,000 was recognized as the excess purchase price over the acquisition-date fair value of net assets acquired. Goodwill is estimated to finalizerepresent the valuations within one (1) yearsynergistic values expected to be realized from the acquisition date.
The pro-forma effect assuming the business combination with SorvanaBeneYOU discussed above had occurred at the beginning of the year2019 is not presented as the information was not available.
Khrysos Global, Inc.
On February 12, 2019, the Company acquired certainand KII entered into an asset and equity purchase agreement (the “AEPA”) with Khrysos Global, and Leigh Dundore and Dwayne Dundore (collectively, the “Khrysos Representing Party”), for KII to acquire substantially all the assets of BellaVita Group, LLC “BellaVita”Khrysos Global and all the outstanding equity of INXL and INXH. The collective business manufactures proprietary systems to provide end-to-end extraction and processing that allow for the conversion of hemp feed stock into hemp oil and hemp extracts.
The aggregate consideration payable for the assets of Khrysos Global and the equity of INXL and INXH of $16,000,000 is to be paid as set forth under the terms of the AEPA and allocated between Khrysos Global and Leigh Dundore in such manner as they determine at their discretion.
At closing on February 15, 2019, Khrysos Global and the Khrysos Representing Party received an aggregate of 1,794,972 shares of the Company’s common stock which had a direct sales companyvalue of $14,000,000 for the purposes of the AEPA and producer$500,000 in cash. The fair value of healththe common stock calculated as part of the acquisition valuation was approximately $14,000,000. In addition, the Company agreed to pay the sellers $1,500,000 in cash towards the AEPA of which $1,000,000 was paid to Khrysos Global and beauty productsthe Khrysos Representing Party during 2019. The remaining cash payment of $500,000 was not paid at the filing date herewith as the Company continues to evaluate the terms of the acquisition agreement in conjunction with locations the termination of the KII President, noted below. At March 31, 2020 and customers primarilyDecember 31, 2019, the Company’s remaining liability of $500,000 was outstanding and recorded as accrued expenses on the condensed consolidated balance sheet.
The AEPA contains customary representations, warranties and covenants of the Company, Khrysos Global and the Khrysos Representing Party. Subject to certain customary limitations Khrysos Global and the Khrysos Representing Party have agreed to indemnify the Company and KII against certain losses related to, among other things, breaches of the Khrysos Representing Party’s representations and warranties, certain specified liabilities and the failure to perform covenants or obligations under the AEPA.
In conjunction with the acquisition and organization of KII, the Company retained Dwayne Dundore as President of KII. Previously agreed-upon equity compensation in the Asian market.
The contingent consideration’sCompany has estimated fair value at the date of acquisition was $1,750,000 as determined by management using a discounted cash flow methodology. The acquisition related costs, such as legal costs and other professional fees were minimal and expensed as incurred. In addition, the Company has assumed certain liabilities in accordance with the agreement.
Present value of cash consideration | $ | 1,894 | ||
Estimated fair value of common stock issued | 14,000 | |||
Aggregate purchase price | $ | 15,894 |
The Company is obligated to make monthly payments based on a percentage offollowing table summarizes the BellaVita distributor revenue derived from sales of the Company’s productsestimated and a percentage of royalty revenue derived from sales of BellaVita products until the earlier of the date that is twelve (12) years from the closing date or such time as the Company has paid to BellaVita aggregate cash payments of the BellaVita distributor revenue and royalty revenue equal to a predetermined maximum aggregate purchase price.
Current assets | $ | 636 | ||
Inventory | 1,264 | |||
Property, plant and equipment | 1,133 | |||
Trademarks and trade name | 1,876 | |||
Customer-related intangible | 5,629 | |||
Non-compete intangible | 956 | |||
Goodwill | 6,831 | |||
Current liabilities | (1,904 | ) | ||
Notes payable | (527 | ) | ||
Net assets acquired | $ | 15,894 |
The preliminary purchase price allocation is as follows (in thousands):
Goodwill of $6,831,000 was recognized as the excess purchase price over the acquisition-date fair value of net assets acquired. In connection with the Company’s annual impairment test in 2019, the full amount of goodwill recognized was determined to be impaired.
The Company expectscosts related to finalize the valuations within one (1) year from the acquisition date.
The pro-forma effect assuming the business combination with BellaVitaKII discussed above had occurred at the beginning of the year2019 is not presented as the information was not available.
Note 3.Related Party Transactions
Hernandez, Hernandez, Export Y Company and H&H Coffee Group Export Corp.
The Company’s wholly-owned subsidiary, CLR, is associated with Hernandez, Hernandez, Export Y Company (“H&H”), a Nicaragua company, through sourcing arrangements to procure Nicaraguan grown green coffee beans. As part of the 2014 Siles acquisition, CLR engaged the owners of H&H, Alain Piedra Hernandez (“Mr. Hernandez”) and Marisol Del Carmen Siles Orozco (“Ms. Orozco”), as employees to manage Siles.
H&H is a sourcing agent that purchases raw green coffee beans from the local producers in Nicaragua and supplies CLR’s mill with unprocessed green coffee for processing. CLR does not have a direct relationship with the local producers and is dependent on H&H to negotiate agreements with local producers for the supply and provide to CLR’s mill raw unprocessed green coffee to CLR in a timely and efficient manner. During the three months ended March 1, 2017,31, 2019, CLR’s largest customer for green coffee beans was H&H Coffee Group Export Corp. (“H&H Export”), a company related to H&H. In consideration for H&H's sourcing of green coffee for processing within CLR’s mill, CLR and H&H share in the green coffee profit from milling operations.
During the three months ended March 31, 2020, CLR had purchases from H&H and H&H Export of approximately $991,000 and $271,000, respectively. CLR made purchases of green coffee from H&H of approximately $2,576,000 during the three months ended March 31, 2019.
During the three months ended March 31, 2020 and 2019, CLR recorded net revenues from green coffee milling and processing services of approximately $168,000 and $4,826,000 respectively, from H&H Export.
At March 31, 2020 and December 31, 2019, CLR's accounts receivable balances for customer related revenue from H&H Export was $8,707,000, of which the full amounts were past due at the respective periods. As a result, the Company acquired certain assetsreserved $7,871,000 as bad debt related to the accounts receivable balances for both periods, which was net of Ricolife, LLC “Ricolife”collections through December 31, 2020.
At March 31, 2020, the following balances were recorded from transactions with H&H:
● | Prepaid expenses and other current assets of approximately $640,000 related to green coffee acquisition, |
● | accounts payable of $230,000 related to billings for freight and other charges by H&H, |
● | accrued expenses of $60,000 primarily related to mill operation costs, and |
● | accrued expenses offset of $88,000 related to overpaid cost of green coffee. |
H&H Finance Agreement
In March 2020, CLR entered into a directFinance, Security and ARAP Monetization Agreement (the “H&H Finance Agreement”) with H&H Export Y CIA. LTDA and H&H Export (collectively, the “H&H Export Group”). The H&H Finance Agreement was designed to provide the Company with access to a continued supply of unprocessed green coffee beans for the 2020 growing season and a solution for funding of the continued operations of the Company’s green coffee distribution business. Pursuant to the Agreement, the H&H Export Group had agreed to allow a Nicaraguan agency (the “Nicaraguan Agency”) to advance on behalf of the H&H Export Group, approximately $22,000,000 of the $30,100,000 of accounts receivable owed by H&H Export to CLR for its purchase of processed green coffee during the 2019 season. The Nicaraguan Agency also entered into a $46,500,000 credit facility with the H&H Export Group to provide funding for the H&H Export Group’s future coffee purchases of unprocessed green coffee from independent producers. Of the 2020 sales companyamounts to be billed by CLR for future coffee purchases of processed coffee, CLR was to be paid an additional amount, at a rate of $0.225 per pound of processed green coffee shipped to customers, to be applied to the remaining outstanding 2019 accounts receivable balance owed by H&H Export to CLR. Until such time as the entire accounts receivable balance is paid in full, H&H Export has agreed not take any profit interest. However, given the COVID crisis’ impact on the 2020 growing season and producerthe continued delay in full payment of teasthe 2020 receivable balances, management considered H&H Export accounts receivable impaired at March 31, 2020. Subsequent to the H&H Finance Agreement, CLR adopted the recognition of recording revenues at net for sales between CLR and H&H Export.
In March 2021, CLR entered into a master relationship agreement with health benefits contained within its tea formulas.
H&H Export Note Receivable
In December 2018, CLR advanced $5,000,000 to H&H Export to provide services in support of a five-year contract for the sale and processing of 41 million pounds of green coffee beans on an annual basis. The contingent consideration’s estimatedservices include providing hedging and financing opportunities to producers and delivering harvested coffee to the Company’s mills. In March 2019, this advance was converted to a $5,000,000 loan agreement as a note receivable and bears interest at 9.00% per annum and is due and payable by H&H Export at the end of each year’s harvest season, but no later than October 31 for any harvest year. In October 2019, CLR and H&H Export amended the March 2019 agreement in terms of the maturity date such that all outstanding principal and interest was due and payable at the end of the 2020 harvest (or when the 2020 season’s harvest was exported and collected), but never to be later than November 30, 2020.
Management reviewed the security against the loan and the impact of the underlying COVID crisis and determined that the full amount of the note receivable including interest of approximately $5,452,000 and $5,340,000 was not collected at March 31, 2020 and December 31, 2019, respectively, and therefore the full amounts were recognized as an allowance for collectability at the end of each respective period.
Mill Construction Agreement between CLR and H&H
In January 2019, to accommodate CLR’s green coffee purchase contract, CLR entered into a mill construction agreement with H&H and H&H Export, Mr. Hernandez and Ms. Orozco (together with H&H, collectively referred to as the “Nicaraguan Partner”), pursuant to which the Nicaraguan Partner agreed to transfer a 45-acre tract of land in Matagalpa, Nicaragua (the “Matagalpa Property”) to be owned 50% by the Nicaraguan Partner and 50% by CLR. In consideration for the land acquisition the Company issued to H&H Export, 153,846 shares of common stock. The fair value atof the shares issued was $1,200,000 and was based on the stock price on the date of acquisitionissuance of the shares. In addition, the Nicaraguan Partner and CLR agreed to contribute $4,700,000 each toward construction of a processing plant, office, and storage facilities on the Matagalpa Property (collectively the “Matagalpa Mill”) for processing coffee in Nicaragua. The addition of the mill will accommodate CLR’s green coffee contract commitments.
For the three months ended March 31, 2020 and 2019, CLR made payments of approximately $300,000 and $1,350,000, respectively, towards the construction of the Matagalpa Mill project.
At March 31, 2020, CLR contributed a total of $3,350,000 towards the construction of the Matagalpa Mill project, which is included in construction in process within property and equipment, net on the Company's consolidated balance sheets, and paid a total of $391,000 for operating equipment. At March 31, 2020, the Nicaraguan Partner contributed a total of $2,513,000 towards the Matagalpa Mill project. At the filing date of this Quarterly Report on Form 10-Q, the Matagalpa Mill was $920,000 as determined by management using a discounted cash flow methodology. The acquisition related costs, such as legal costsstill incomplete for total operations.
In January 2019, the Company issued 295,910 shares of common stock to H&H Export to pay for certain working capital, construction and other professional feespayables. In connection with the issuance, the Company over issued 121,649 shares of common stock, resulting in the net issuance of common stock to settle payables of 174,261 shares. H&H Export agreed to reimburse CLR for the over issuance of the 121,649 shares of common stock in cash. At March 31, 2020 and December 31, 2019, the value of the shares was approximately $85,000 and $397,000, respectively, based on the stock price at the respective periods. Management reviewed the amount due in conjunction with the impact of the underlying COVID crisis and has determined that the full receivable balances were minimal more than likely to be uncollected at March 31, 2020 and expensedDecember 31, 2019, and therefore the full amount was recognized as incurred. an allowance for collectability at the respective periods.
Amended Operating and Profit-Sharing Agreement between CLR and H&H
In January 2019, CLR entered into an amendment to the March 2014 operating and profit-sharing agreement with the owners of H&H. In addition, CLR and H&H, Mr. Hernandez and Ms. Orozco restructured their profit-sharing agreement in regard to profits from green coffee sales and processing that increased CLR’s profit participation by an additional 25%. Under the new terms of the agreement with respect to profit generated from green coffee sales and processed from La Pita or the Matagalpa Mill, now will provide for a split of profits of 75% to CLR and 25% to the Nicaraguan Partner, after certain conditions are met. Profit-sharing income for the three months ended March 31, 2020 was approximately $115,000 and profit-sharing expense for the three months ended March 31, 2019 was $243,000, which was included in accrued expenses on the Company’s balance sheets.
Other Agreements between CLR, H&H and H&H Export
In January 2019, H&H Export sold to CLR its espresso brand Café Cachita in consideration of the issuance of 100,000 shares of the Company’s common stock. The shares of common stock issued were valued at $7.50 per share.
In May 2017, CLR entered a settlement agreement, as amended, with Mr. Hernandez who was issued a warrant for the purchase of 75,000 shares of the Company’s common stock at a price of $2.00 with an expiration date of three years, in lieu of an obligation due from CLR to H&H as relates to a sourcing and supply agreement with H&H and H&H Export. The warrants were outstanding at both March 31, 2020 and December 31, 2019 and expired in May 2020.
Other Related Party Transactions
Richard Renton
Richard Renton was a member of the board of directors until February 11, 2020 and owns and operates WVNP, Inc., a supplier of certain inventory items sold by the Company. The Company made purchases from WVNP Inc. of approximately $56,000 and $8,000 for the three months ended March 31, 2020 and 2019, respectively. In addition, Mr. Renton is a distributor of the Company and was paid distributor commissions of $81,000 and $94,000 for the three months ended March 31, 2020 and 2019, respectively.
Carl Grover (Estate of Carl Wilford Grover)
Carl Grover was the sole beneficial owner of in excess of 5% of the Company’s outstanding common shares at March 31, 2020 and December 31, 2019.
At March 31, 2020 and December 31, 2019, the balance of the borrowing, net of debt discounts, from the credit agreement the Company entered into with Mr. Grover in December 2018 was approximately $4,294,000 and $4,085,000, respectively. (See Note 6)
In July 2019, Mr. Grover acquired 600,242 shares of the Company's common stock upon the partial exercise at $4.60 per share of a 2014 warrant to purchase 782,608 shares of common stock held by him. In connection with such exercise, the Company received approximately $2,761,000 from Mr. Grover, issued to Mr. Grover 50,000 shares of restricted common stock as an inducement fee and agreed to extend the expiration date of the July 2014 warrant held by him to December 15, 2020, and the exercise price of the warrant was adjusted to $4.75 with respect to 182,366 shares of common stock remaining for exercise thereunder.
Paul Sallwasser
Mr. Paul Sallwasser is a member of the board directors, and prior to joining the Company’s board of directors he acquired in the Company’s 2014 private placement a note in the principal amount of $75,000 convertible into 10,714 shares of common stock and a warrant exercisable for 14,673 shares of common stock. Mr. Sallwasser additionally acquired in the Company’s 2017 private placement a note in the principal amount of $38,000 convertible into 8,177 shares of common stock and a warrant issued to purchase 5,719 shares of common stock. Mr. Sallwasser also acquired, as part of the 2017 private placement in exchange for the 2015 note that he acquired in the Company’s 2015 private placement, an additional 2017 note in the principal amount of $5,000 convertible into 1,087 shares of common stock and a 2017 warrant exercisable for 543 shares of common stock.
In March 2018, the Company completed its Series B offering and in accordance with the terms of the 2017 notes, Mr. Sallwasser’s 2017 notes converted to 9,264 shares of the Company’s common stock. Mr. Sallwasser’s 2017 warrants of to purchase an aggregate 6,262 shares of common stock expire between July and August during 2020.
In August 2019, Mr. Sallwasser acquired 14,673 shares of the Company's common stock upon the exercise of his 2014 warrant. In connection with the exercise, Mr. Sallwasser applied approximately $67,000 of the proceeds of his 2014 note due to him from the Company as consideration for the warrant exercise. The warrant exercise proceeds to the Company would have been approximately $67,000. The Company paid the balance owed to him under his 2014 note including accrued interest of approximately $8,000.
At March 31, 2020 and 2019, Mr. Sallwasser owned 76,924 shares of common stock and options to purchase an aggregate of 116,655 shares of common stock, which are exercisable.
Daniel Mangless
Daniel Mangless became a beneficial owner of in excess of 5% of the Company’s outstanding common stock upon consummation of a securities purchase agreement transaction in March 2020.
In February 2019, the Company entered into a securities purchase agreement with Mr. Mangless pursuant to which the Company sold 250,000 shares of common stock at an offering price of $7.00 per share. Pursuant to the purchase agreement, the Company also issued Mr. Mangless a three-year warrant to purchase 250,000 shares of common stock at an exercise price of $7.00. The Company received proceeds of $1,750,000 from the stock offering. (See Note 10)
In June 2019, the Company entered into a second securities purchase agreement with Mr. Mangless pursuant to which the Company sold 250,000 shares of common stock at an offering price of $5.50 per share. The Company received proceeds of $1,375,000 from the stock offering. (See Note 10)
In March 2020, the Company entered into a securities purchase agreement with Mr. Mangless, pursuant to which the Company issued a senior secured promissory note in the principal amount of $1,000,000 which matured in December 2020. In addition, the Company has assumed certain liabilitiesissued 50,000 shares of common stock in accordanceconnection with the agreement.
In April 2021, the Company determined thatentered into a settlement agreement with Mr. Mangless related to the initial estimated fair valuepayment schedule of the acquisition should be reducedsenior secured promissory note issued in March 2020. In addition, as part of the settlement agreement the Company issued Mr. Mangless 1,000,000 shares of common stock. (See Note 13)
In February 2021, Mr. Mangless liquated some of his Youngevity common stock and is no longer a beneficial owner of in excess of 5% of the outstanding shares of common stock. (See Note 13)
2400 Boswell LLC
2400 Boswell, LLC (“2400 Boswell”) is the owner and lessor of the building occupied by $222,000 from $920,000 to $698,000.
JJL Equipment Holding, LLC
In connection with the acquisition of Khrysos Global, the Company held a deposit from JJL Equipment Holding, LLC (“JJL Equipment”) for an equipment purchase of approximately $230,000 and $233,000 on March 31, 2020 and December 31, 2019, respectively. Leigh Dundore is a percentagemember and part owner of royalty revenue derivedJJL Equipment. The deposit is to be applied to future machinery and equipment orders from sales of Ricolife products untilJJL Equipment and was recorded in other current liabilities in the earlierconsolidated balance sheet.
Youngevity Be the Change Foundation
Youngevity Be the Change Foundation (the “Youngevity Foundation”) was formed in 2013 as a 501 c 3 charitable organization. The Company’s Chief Executive Officer and its President and Chief Investment Officer both serve as officers and directors of the date that is twelve (12) years from the closing date or such timeYoungevity Foundation, as well as the Company has paid to Ricolife aggregate cash paymentsCompany’s Chief Operating Officer and the wife of the Ricolife distributor revenue and royalty revenue equal toChief Investment Officer who both serve as a predetermined maximum aggregate purchase price.
Daniel Briskie and distributor organization intangible are being amortized over their estimated useful life of ten (10) years usingMaida Briskie
Daniel Briskie and Maida Briskie, the straight-line method which is believed to approximate the time-line within which the economic benefitfather and mother of the underlying intangible asset will be realized.
Douglas Briskie
Douglas Briskie, the Legacy for Life distributors and customers have gained access to products offered by the Company. The Company purchased certain inventories and assumed certain liabilities. The Company is obligated to make monthly payments based on a percentage of the Legacy for Life distributor revenue derived from salesbrother of the Company’s products and a percentage of royalty revenue derived from sales of the Legacy for Life products until the earlier of the date that is fifteen (15) years from the closing date or such time as the Company has paid to Legacy for Life aggregate cash payments of Legacy for Life distributor revenue and royalty revenue equal to a predetermined maximum aggregateChief Investment Officer, entered into note purchase price.
Note 4.Revenues
The following table summarizes disaggregated revenue impact from the Legacy for Life acquisition, includedby segment (in thousands):
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
| (unaudited) | (unaudited) | |||||||
Direct selling | $ | 31,156 | $ | 33,420 | ||||
Commercial coffee: | ||||||||
Processed green coffee | 519 | 100 | ||||||
Milling and processing services | 168 | 4,826 | ||||||
Roasted coffee and other | 3,372 | 2,779 | ||||||
Total commercial coffee | 4,059 | 7,705 | ||||||
Commercial hemp | 316 | 67 | ||||||
Total | $ | 35,531 | $ | 41,192 | ||||
Contract Balances
On March 31, 2020 and December 31, 2019, deferred revenues were approximately $5,535,000 and $3,569,000, respectively. Deferred revenues in the consolidated statement of operations fordirect selling segment related to customer deposits were $1,925,000 and $1,626,000 on March 31, 2020 and December 31, 2019, respectively. Deferred revenues in the three and nine months ended September 30, 2016 was approximately $137,000.
Deferred revenues in the commercial coffee segment related to customer deposits were $618,000 on March 31, 2020. The commercial coffee segment did not available.
The commercial hemp segment did not have a deferred revenue balance at March 31, 2020 or December 31, 2019.
The following table summarizes the classification of deferred revenues balances on the balance sheets (in thousands):
March 31, 2020 | December 31, 2019 | |||||||
(unaudited) | ||||||||
Deferred revenue | $ | 3,173 | $ | 1,943 | ||||
Other current liabilities | 1,925 | 1,626 | ||||||
Deferred revenue, current portion | 5,098 | 3,569 | ||||||
Other long-term liabilities | 437 | 0 | ||||||
Deferred revenue, total | $ | 5,535 | $ | 3,569 | ||||
Of the deferred revenue balance on December 31, 2019, the Company entered into an agreementrecognized revenue of approximately $369,000 from the Heritage Makers product line and the remaining balance from the Company’s convention and distributor events during the three months ended March 31, 2020.
At March 31, 2020 and December 31, 2019, the balance in deferred costs related to acquire certain assetsprepaid commissions from Heritage Makers was approximately $227,000 and $254,000, respectively.
Note 5.Selected Consolidated Balance Sheet Information
Accounts Receivable, net
March 31, 2020 | December 31, 2019 | |||||||
| (unaudited) | ||||||||
Accounts receivable | $ | 11,159 | $ | 11,142 | ||||
Allowance for doubtful accounts | (8,210 | ) | (8,240 | ) | ||||
Accounts receivable, net | $ | 2,949 | $ | 2,902 | ||||
On March 31, 2020 and December 31, 2019, CLR's accounts receivable balance for customer related revenue by H&H Export was approximately $8,707,000, of September 1, 2016. Nature’s Pearl is a direct-sales company that produces nutritional supplements and skin and personal care products usingwhich the muscadine grape grown infull amounts were past due at the southeastern region of the United States that are deemed to be rich in antioxidants.respective periods. As a result, of this acquisition, the Company’s distributors and customers have accessCompany reserved $7,871,000 as bad debt related to the unique lineaccounts receivable balances for both periods, which was net of Nature’s Pearl products and Nature’s Pearl distributors and customers have gained access to products offered by the Company. The Company is obligated to make monthly payments based on a percentage of Nature’s Pearl distributor revenue derived from salescollections through December 31, 2020.
Inventory, net
Inventories consist of the Company’s productsfollowing (in thousands):
March 31, 2020 | December 31, 2019 | |||||||
| (unaudited) | ||||||||
Finished goods | $ | 13,499 | $ | 14,890 | ||||
Raw materials | 13,155 | 11,694 | ||||||
Total inventory | 26,654 | 26,584 | ||||||
Reserve for excess and obsolete | (3,911 | ) | (3,878 | ) | ||||
Inventory, net | $ | 22,743 | $ | 22,706 | ||||
Property and a percentage of royalty revenue derived from sales of Nature’s Pearl products until the earlierEquipment, net
Property and equipment consist of the date that is ten (10) years fromfollowing (in thousands):
March 31, 2020 | December 31, 2019 | |||||||
| (unaudited) | ||||||||
Buildings | $ | 4,346 | $ | 4,789 | ||||
Leasehold improvements | 3,054 | 2,948 | ||||||
Land | 2,254 | 3,307 | ||||||
Land improvements | 606 | 606 | ||||||
Producing coffee trees | 553 | 553 | ||||||
Manufacturing equipment | 10,069 | 9,568 | ||||||
Furniture and other equipment | 2,191 | 2,050 | ||||||
Computer software | 1,442 | 1,420 | ||||||
Computer equipment | 2,651 | 2,648 | ||||||
Vehicles | 362 | 326 | ||||||
Assets held for sale (1) | 1,496 | 0 | ||||||
Construction in process | 6,843 | 6,562 | ||||||
Total property and equipment, gross | 35,867 | 34,777 | ||||||
Accumulated depreciation | (12,131 | ) | (11,461 | ) | ||||
Total property and equipment, net | $ | 23,736 | $ | 23,316 | ||||
(1) | Assets held for sale at March 31, 2020 consisted of approximately $1,053,000 in land and $443,000 in building related to the commercial hemp segment. (See Note 13) |
Depreciation expense totaled approximately $673,000 and $475,000 for the closing date or such time as the Company has paid to Nature’s Pearl aggregate cash paymentsthree months ended March 31, 2020 and 2019, respectively.
Operating and royalty revenue equal to a predetermined maximum aggregate purchase price. Financing Leases
The Company paid approximately $200,000 for certain inventories, which payment was applied against the maximum aggregate purchase price.
March 31, 2020 | December 31, 2019 | |||||||
(unaudited) | ||||||||
Assets | ||||||||
Operating lease right-of-use assets | $ | 7,818 | $ | 8,386 | ||||
Finance lease right-of-use assets (1) | 907 | 1,052 | ||||||
Total leased assets | $ | 8,725 | $ | 9,438 | ||||
Liabilities | ||||||||
Operating lease liabilities, current portion | $ | 1,547 | $ | 1,740 | ||||
Finance lease liabilities, current portion | 726 | 736 | ||||||
Total leased liabilities, current portion | 2,273 | 2,476 | ||||||
Operating lease liabilities, net of current portion | 6,473 | 6,646 | ||||||
Finance lease liabilities, net of current portion | 258 | 408 | ||||||
Total lease liabilities | $ | 9,004 | $ | 9,530 | ||||
(1) | Finance lease right-of-use assets are recorded within property and equipment, net of accumulated amortization of approximately $1,548,000 and $1,367,000 at March 31, 2020 and December 31, 2019, respectively. |
The weighted-average remaining lease term and weighted-average discount rate used to calculate the Company were recognized at their estimated fair values as of the acquisition date. The acquisition related costs, such as legal costs and other professional fees were minimal and expensed as incurred.
March 31, 2020 | December 31, 2019 | |||||||
(unaudited) | ||||||||
Weighted-average remaining lease term (in years) | ||||||||
Operating leases | 6.7 | 6.8 | ||||||
Finance leases | 1.4 | 1.6 | ||||||
Weighted-average discount rate | ||||||||
Operating leases | 5.45 | % | 5.47 | % | ||||
Finance leases | 4.57 | % | 4.57 | % | ||||
Operating and the Company determined that the purchase price should be reduced by $266,000 to $1,209,000.
Three Months Ended March 31, | |||||||||
Lease Cost | Classification | 2020 | 2019 | ||||||
| (unaudited) | (unaudited) | ||||||||
Operating lease cost | Sales and marketing, general and administrative | $ | 550 | $ | 271 | ||||
Finance lease cost: | |||||||||
Amortization of leased assets | Depreciation and amortization | 181 | 96 | ||||||
Interest on lease liabilities | Interest expense, net | 24 | 37 | ||||||
Total operating and finance lease cost | $ | 755 | $ | 404 | |||||
Intangible Assets and Goodwill
Intangible assets consist of the following (in thousands):
September 30, 2017 | December 31, 2016 | |||||
Cost | Accumulated Amortization | Net | Cost | Accumulated Amortization | Net | |
| Distributor organizations | $14,757 | $8,059 | $6,698 | $12,930 | $7,162 | $5,768 |
| Trademarks and trade names | 6,994 | 1,109 | 5,885 | 5,394 | 815 | 4,579 |
| Customer relationships | 9,951 | 4,422 | 5,529 | 7,846 | 3,642 | 4,204 |
| Internally developed software | 720 | 433 | 287 | 720 | 357 | 363 |
| Intangible assets | $32,422 | $14,023 | $18,399 | $26,890 | $11,976 | $14,914 |
March 31, 2020 (unaudited) | December 31, 2019 | |||||||||||||||||||||||
Cost | Accumulated Amortization | Net | Cost | Accumulated Amortization | Net | |||||||||||||||||||
Distributor organizations | $ | 15,735 | $ | 10,644 | $ | 5,091 | $ | 15,735 | $ | 10,418 | $ | 5,317 | ||||||||||||
Trademarks and trade names | 8,430 | 2,716 | 5,714 | 8,430 | 2,539 | 5,891 | ||||||||||||||||||
Customer relationships | 10,442 | 6,587 | 3,855 | 10,442 | 6,413 | 4,029 | ||||||||||||||||||
Internally developed software | 720 | 682 | 38 | 720 | 657 | 63 | ||||||||||||||||||
Non-compete agreement | 277 | 29 | 248 | 277 | 11 | 266 | ||||||||||||||||||
Intangible assets | $ | 35,604 | $ | 20,658 | $ | 14,946 | $ | 35,604 | $ | 20,038 | $ | 15,566 | ||||||||||||
Amortization expense related to intangible assets was approximately $712,000$620,000 and $537,000$670,000 for the three months ended September 30, 2017 March 31, 2020 and 2016,2019, respectively. Amortization expense related to intangible assets was
At March 31, 2020 and December 31, 2019, approximately $2,047,000 and $1,746,000 for the nine months ended September 30, 2017 and 2016, respectively.
Goodwill
Goodwill is recorded as the excess, if any, of the aggregate fair value of consideration exchanged for an acquired business over the fair value (measured as of the acquisition date) of total net tangible and identified intangible assets acquired. In accordance with Financial Accounting Standards Board (“FASB”) ASC Topic 350,
Direct Selling | Commercial Coffee | Commercial Hemp | Total | |||||||||||||
Balance at December 31, 2019 | $ | 3,678 | $ | 3,314 | $ | – | $ | 6,992 | ||||||||
Balance at March 31, 2020 (unaudited) | $ | 3,678 | $ | 3,314 | $ | – | $ | 6,992 | ||||||||
Note 6.Notes Payable and Other Debt
Credit Note
In December 2018, CLR entered into a credit agreement with Mr. Grover pursuant to which CLR borrowed $5,000,000 from Mr. Grover and in exchange issued to him a $5,000,000 credit note (the “Credit Note”). In addition, Siles, as guarantor, executed a separate guaranty agreement. The Credit Note is secured by CLR’s green coffee inventory, subordinate to certain debt owed to Crestmark Bank and pari passu with certain holders of notes issued by the borrowers of the company in 2014. At both March 31, 2020 and December 31, 2019, the outstanding principal balance of the Credit Note was $5,000,000.
The Credit Note accrues interest at a rate of 8.00% per annum and in accordance with the Credit Note is paid quarterly. The credit note contains customary events of default including the Company or Siles failure to pay its obligations, commencing bankruptcy or liquidation proceedings, and breach of representations and warranties. Upon the occurrence of an event of default, the unpaid balance of the principal amount of the Credit Note together with all accrued but unpaid interest thereon, may become, or may be declared to be, due and payable by Mr. Grover and shall bear interest from the due date until such amounts are paid at the rate of 10.00% per annum. In connection with the credit agreement, the Company issued to Mr. Grover a four-year warrant to purchase 250,000 shares of its common stock, exercisable at $6.82 per share, and a four-year warrant to purchase 250,000 shares of its common stock, exercisable at $7.82 per share.
In connection with the Credit Note, the Company also entered into an advisory agreement with a third party not affiliated with Mr. Grover, pursuant to which the Company agreed to pay to the advisor a 3.00% fee on the transaction with Mr. Grover and issued to the advisor’s designee a four-year warrant to purchase 50,000 shares of the Company’s common stock, exercisable at $6.33 per share.
The Company recorded debt discounts of approximately $1,469,000 related to the fair value of warrants issued in the transaction and $175,000 of transaction issuance costs both of which are amortized to interest expense over the life of the Credit Note. The Company recorded amortization of approximately $209,000 and $154,000 related to the debt discount and issuance cost during the three months ended March 31, 2020 and 2019, respectively. At March 31, 2020 and December 31, 2019, the combined remaining balance of the debt discounts and issuance cost was approximately $706,000 and $915,000, respectively.
In December 2020, the Credit Note became payable and due in accordance with its terms. CLR did not make the payment due upon the maturity date of the Credit Note. At the filing date of this Quarterly Report on Form 10-Q, the Company was in default of the terms of settlement of the Credit Note and the Credit Note remains outstanding; however no formal demand for repayment has been made.
2019 Promissory Notes
In March 2019, the Company entered into a two-year secured promissory note (the “2019 Promissory Notes”) with two accredited investors that had a substantial pre-existing relationship with the Company pursuant to which the Company raised cash proceeds in the aggregate of $2,000,000. The 2019 Promissory Notes bear interest at a rate of 8.00% per annum and interest is paid quarterly in arrears with all principal and unpaid interest due at maturity on March 18, 2021. The 2019 Promissory Notes are secured by all equity in KII. At both March 31, 2020 and December 31, 2019, the outstanding principal balance of the 2019 Promissory Notes was $2,000,000.
In conjunction with the 2019 Promissory Notes, the Company also issued 40,000 shares of the Company’s common stock and five-year warrants to purchase 40,000 shares of the Company’s common stock. (See Note 10)
The Company recorded debt discounts of approximately $212,000 related to transaction issuance costs and $139,000 related to the fair value of warrants issued in the transaction both of which are amortized to interest expense over the life of the 2019 Promissory Notes. The Company recorded amortization of approximately $43,000 and $5,000 related to the debt discount and issuance cost related to the 2019 Promissory Notes during the three months ended March 31, 2020 and 2019, respectively. At March 31, 2020 and December 31, 2019, the combined remaining balance of the debt discount and issuance costs was approximately $185,000 and $228,000, respectively.
In February 2021, the Company entered into amendment agreements extending the 2019 Promissory Notes and increasing the interest rate. At the filing date, the Company was in default of the terms of the amended agreements. (See Note 13)
September 30, 2017 | December 31, 2016 | |
| Goodwill, commercial coffee | $3,314 | $3,314 |
| Goodwill, direct selling | 3,009 | 3,009 |
| Total goodwill | $6,323 | $6,323 |
Mangless Note
In March 2020, the Company entered into a securities purchase agreement with Daniel Mangless pursuant to which the Company issued a senior secured promissory note in the principal amount of $1,000,000 (the “Mangless Note”) which matured in December 2020, bearing interest at 18.00% per annum. In December 2020, the Company defaulted on the settlement of the Mangless Note.
The Mangless Note provided the Company with an option to prepay at any time without permission or penalty. The Mangless Note is secured pursuant to the terms of a pledge and security agreement, entered into by the Company and CLR with Mr. Mangless, whereby the Mangless Note is secured by a first priority lien granted by CLR in its rights under the pledge and security agreement, by and between H&H, H&H Export and CLR to receive certain payments (the “Mangless Pledge and Security Agreement”).
In addition, the Company issued 50,000 shares of common stock in connection with Mangless Note. (See Note 10)
The Company recognized debt discounts of approximately $65,000 resulting from the allocated portion of offering proceeds to the separable common stock issuance. The debt discount was amortized to interest expense over the term of the Mangless Note. During the three months ended March 31, 2020, the Company recorded approximately $2,000 of amortization related to the debt discounts. At March 31, 2020, the remaining balance of the debt discount was approximately $63,000.
In April 2021, the Company entered into a settlement agreement with Mr. Mangless related to the payment schedule of the Mangless Note issued in March 2020. In addition, as part of the settlement agreement the Company issued Mr. Mangless 1,000,000 shares of common stock. (See Note 13)
2400 Boswell Mortgage Note
The Company’s mortgage for its corporate office and warehouse in Chula Vista, California, is payable over 25 years with an interest rate set at the prime rate plus 2.50%. The lender will adjust the interest rate on the first calendar day of each change period. The Company and its Chief Executive Officer and Chairman and Chief Operating Officer are guarantors of the mortgage. On March 31, 2020 and December 31, 2019, the interest rate was 7.25% and 7.50%, respectively. On March 31, 2020 and December 31, 2019, the balance on the mortgage was approximately $3,122,000 and $3,143,000, respectively.
The Company’s corporate office’s mortgage qualified for the mortgage payment program for a period of six months under the Small Business Administration (“SBA”) lenders program. (See Note 13)
Khrysos Mortgage Notes
In conjunction with the Company’s acquisition of Khrysos Global, the Company assumed an interest only mortgage for properties located in Mascotte, Florida in the amount of $350,000 and interest paid monthly at a rate of 8.00% per annum. In September 2021, the mortgage was amended to extend the maturity date by one year to the earlier of September 2022 or the date of the sale of the property. In addition, the Company assumed a mortgage of approximately $177,000 for properties located in Clermont, Florida with all unpaid principal due in June 2023 and interest paid monthly at a rate of 7.00% per annum.
At March 31, 2020 and December 31, 2019, the aggregate outstanding principal balance on the mortgages was approximately $521,000 and $528,000, respectively.
In February 2019, KII purchased a 45-acre tract of land in Groveland, Florida for $750,000. The Company paid $300,000 as a down payment and assumed a mortgage of $450,000. All unpaid principal was due in February 2024 and interest was paid monthly at a rate of 6.00% per annum. At March 31, 2020 and December 31, 2019, the remaining mortgage balance was approximately $437,000 and $440,000, respectively.
In February 2021, the Company determined that KII’s original plan for use of certain properties was not viable for its future as KII had shifted its focus back to its primary core business of extraction of cannabinoids and the production of products for sale with the cannabinoids. As a result, the Khrysos Mortgage Notes were subsequently sold. (See Note 13)
Lending Agreements
In July 2018, the Company entered into lending agreements with three separate entities and received loans in the total amount of $1,907,000, net of loan fees to be paid back over an eight-month period on a monthly basis. Payments were made monthly and comprised of principal and accrued interest with an effective interest rate between 15% and 20%. The loans were paid in full in the first quarter of 2019.
M2C Purchase Agreement
In March 2007, the Company entered into an agreement to purchase certain assets of M2C Global, Inc., a Nevada corporation, for $4,500,000. The agreement required payments totaling $500,000 in 3 installments during 2007, followed by monthly payments in the amount of 10.00% of the sales related to the acquired assets until the entire note balance is paid. On March 31, 2020 and December 31, 2019, the carrying value of the liability was approximately $1,016,000 and $1,027,000, respectively.
Other Notes
The Company’s other notes relate to loans for commercial vans at CLR in the amount of $66,000 and $71,000 on March 31, 2020 and December 31, 2019, respectively, which expire at various dates through 2023.
Line of Credit
The Company’s loan and security agreement with Crestmark Bank (“Crestmark”) provides for a line of credit related to accounts receivables resulting from sales of certain products that includes borrowings to be advanced against acceptable eligible inventory related to CLR. Under the loan and security agreement the maximum overall borrowing limit on the line of credit is $6,250,000. The line of credit may not exceed an amount which is the lesser of (a) $6,250,000 or (b) the sum of up (i) to 85% of the value of the eligible accounts; plus, (ii) the lesser of $1,000,000 or 50% of eligible inventory or 50% of the amount calculated in (i) above, plus (iii) the lesser of $250,000 or eligible inventory or 75% of certain specific inventory identified within the agreement.
The agreement contains certain financial and nonfinancial covenants with which the Company must comply to maintain its borrowing availability and avoid penalties. At the filing date of this Quarterly Report on Form 10-Q, the Company was not in compliance with the covenants under the terms of the agreement.
In January 2022, the Company entered into the second amendment to the Crestmark loan and security agreement which reduced the maximum overall borrowing limit on the line of credit to $3,000,000. In February 2022, the Company received a notice of default related to the loan and security agreement from Crestmark. In April 2022, The Company entered into a forbearance agreement with Crestmark. (See Note 13)
The outstanding principal balance of the line of credit bears interest based upon a 360-day year with interest charged for each day the principal amount is outstanding including the date of actual payment. The interest rate is a rate equal to the prime rate plus 2.50% with a floor of 6.75%. On March 31, 2020 and December 31, 2019, the interest rate was 6.75% and 7.25%, respectively. In addition, other fees are incurred for the maintenance of the loan in accordance with the agreement. Other fees may be incurred in the event the minimum loan balance of $2,000,000 is not maintained. The agreement was effective beginning in November 2017 and will continue to be effective until June 30, 2022, the termination date agreed upon in the forbearance agreement entered in April 2022.
The Company and Stephan Wallach entered into a corporate guaranty and personal guaranty, respectively, with Crestmark guaranteeing payments in the event that the Company’s commercial coffee segment CLR were to default. In addition, David Briskie, the Company’s president and chief financial officer, personally entered into a guaranty of validity representing the Company’s financial statements so long as the indebtedness is owed to Crestmark, maintaining certain covenants and guarantees.
The Company’s outstanding line of credit liability with Crestmark was approximately $2,025,000 and $2,011,000 at March 31, 2020 and December 31, 2019, respectively.
Note 6. Debt
Total convertible notes payable, as of September 30, 2017 and December 31, 2016, net of debt discount outstanding consisted of the amount set forth in the following table (in thousands):
September 30, 2017 | December 31, 2016 | |
| 8% Convertible Notes due July and August 2019 (2014 Notes) | $4,750 | $4,750 |
| Debt discount | (1,921) | (2,707) |
| Carrying value of 2014 Notes | 2,829 | 2,043 |
| 8% Convertible Notes due October and November 2018 (2015 Notes) | 3,000 | 7,188 |
| Debt discount | (224) | (904) |
| Carrying value of 2015 Notes | 2,776 | 6,284 |
| 8% Convertible Notes due July and August 2020 (2017 Notes) | 7,254 | - |
| Fair value of bifurcated embedded conversion option of 2017 Notes | 330 | - |
| Debt discount | (2,423) | - |
| Carrying value of 2017 Notes | 5,161 | - |
| Total long-term carrying value of convertible notes payable | $10,766 | $8,327 |
March 31, 2020 | December 31, 2019 | |||||||
| (unaudited) | ||||||||
6.00% Convertible Notes (2019 PIPE Notes), principal | $ | 3,090 | $ | 3,090 | ||||
Debt discounts | (331 | ) | (415 | ) | ||||
Carrying value of 2019 PIPE Notes | 2,759 | 2,675 | ||||||
8.00% Convertible Notes (2014 PIPE Notes), principal | 25 | 25 | ||||||
Debt discounts | 0 | 0 | ||||||
Carrying value of 2014 PIPE Notes | 25 | 25 | ||||||
Total carrying value of convertible notes payable | $ | 2,784 | $ | 2,700 | ||||
Unamortized debt discounts and issuance costs are included with convertible notes payable, net of debt discount on the consolidated balance sheets.
2019 PIPE Notes
Between February and July 2019, the Company closed five tranches related to the 2019 private placement debt offering, pursuant to which the Company offered for sale up to $10,000,000 in principal amount of notes (the “2019 PIPE Notes”), with each investor receiving 2,000 shares of common stock for each $100,000 invested.
The Company entered into subscription agreements with thirty-one accredited investors, that had a substantial pre-existing relationship with the Company, pursuant to which the Company issued the 2019 PIPE Notes in the aggregate principal amount of $3,090,000. Each 2019 PIPE Note matures 24 months after issuance, bears interest at a rate of 6.00% per annum which is paid quarterly, and the outstanding principal is convertible into shares of common stock at any time after the 180th day anniversary of the issuance of the 2019 PIPE Notes, at a conversion price of $10.00 per share, subject to adjustment for stock splits, stock dividends and reclassification of the common stock. The 2019 PIPE Notes are secured by all equity in KII. At March 31, 2020 and December 31, 2019, the 2019 PIPE Notes remained outstanding.
Upon issuance of the 2019 PIPE Notes, the Company recognized debt discounts of approximately $671,000, resulting from the allocated portion of offering proceeds to the separable common stock issuance. The debt discount will be amortized to interest expense over the term of the 2019 PIPE Notes. During the three months ended March 31, 2020, the Company recorded approximately $84,000 of amortization related to the debt discounts. At March 31, 2020 and December 31, 2019, the remaining balance of the debt discount was approximately $331,000 and $415,000, respectively.
In February and March 2021, the 2019 PIPE Notes that were maturing were extended by one year by way of an amendment with certain note holders of an aggregate $2,440,000 in principal amount. At the filing date of this Quarterly Report on Form 10-Q, the Company was in default of the terms of settlement set forth in the amendments. (See Note 13)
2014 PIPE Notes
Between July and September 2014, Private Placement
The Notes are secured by Company pledged assets and rank senior to all debt of the Company other than certain senior debt that has been previously identified as senior to the convertible notes. Additionally, Stephan Wallach, the Company’s Chief Executive Officer, has also personally guaranteed the repayment of the Notes, subject to the terms of a Guaranty Agreement executed by him with all principalthe investors. In addition, Mr. Wallach has agreed not to sell, transfer or pledge 1.5 million shares of the common stock that he owns so long as his personal guaranty is in effect.
In September 2019, the Company extended the maturity date of one holder of a 2014 PIPE Note with a balance of $25,000 for one year, with interest being paid under the original terms of 8.00% per annum and unpaid interest due between July paid quarterly in arrears. At March 31, 2020 and September 2019. As of September 30, 2017 and December 31, 2016 2019, the principal amountoutstanding balance of $4,750,000 remains outstanding.
In 2014, the Company initially recorded debt discounts of $4,750,000 related to the beneficial conversion feature of $1,053,000 and $3,697,000 related to the detachable warrants. The beneficial conversion feature discount and the detachable warrants discount are amortized to interest expense over the life of the 2014 PIPE Notes. As of September 30, 2017 and December 31, 2016 the remaining balance ofThe unamortized debt discounts recognized with the debt discounts isexchange was approximately $1,741,000 and $2,454,000, respectively.$679,000. The quarterlyCompany recorded approximately $31,000 of amortization of the debt discounts is approximately $238,000 and is recorded as interest expense.
In 2014, the Company paid approximately $490,000 in expenses including placement agent fees.fees relating to issuance costs with the 2014 private placement. The unamortized issuance costs recognized with the debt exchange was approximately $63,000. The issuance costs arewere amortized to interest expense over the term of the 2014 PIPE Notes. AsThe Company recorded approximately $3,000 of September 30, 2017 and December 31, 2016 the remaining balance of the issuance costs is approximately $180,000 and $253,000, respectively. The quarterly amortization of the issuance costs is approximately $25,000 and is recorded as interest expense.
Note 7. 8.Derivative Liability
Warrants
The Company recognizes and measures the warrants and the embedded conversion features issued in conjunction with our July 2017, November 2015, and July 2014 Private Placements in accordance with ASC Topic 815,
Increases or decreases in the fair value of the derivative liability are included as a component of total other expense in the accompanying condensed consolidated statements of operations for the respective period. The changes to the derivative liability for warrants resulted in a decrease to the liability of approximately $1,519,000$1,489,000 and $1,486,000 for the three months ended September 30, 2017 compared to decrease in the liabilityMarch 31, 2020 and 2019, respectively.
The estimated fair value of the warrants werewas computed as of September 30, 2017 at March 31, 2020 and as of December 31, 2016 2019 using Black-Scholes andthe Monte Carlo option pricing models, usingmodel with the following assumptions:
September 30, 2017 | December 31, 2016 | ||||||||
| Stock price volatility | 63.32 | % | 60% - 65 | % | |||||
| Risk-free interest rates | 1.38%-1.51 | % | 1.34%-1.70 | % | |||||
| Annual dividend yield | 0 | % | 0 | % | |||||
| Expected life | 1.7-3.0 years | 2.6-3.9 years | |||||||
March 31, 2020 | December 31, 2019 | |||||||||||
| (unaudited) | ||||||||||||
Stock price volatility | 96.7 | % | 64.10 | % | ||||||||
Risk-free interest rates | 0.12% | – | 0.16 | % | 1.59% | – | 1.60 | % | ||||
Annual dividend yield | 0 | 0 | ||||||||||
Expected life (in years) | 0.3 | – | 0.7 | 0.6 | – | 1.0 | ||||||
In addition, management assessed the probabilities of future financing assumptions in the valuation models.
Balance at Issuance | Net unrealized (gain)/loss | Balance at September 30, 2017 |
$330,000 | $0.00 | $330,000 |
Note 8. 9.Fair Value of Financial Instruments
The following table details the fair value measurement within the fair value hierarchy of the Company’s financial instruments, which includes the Level 3 liabilities (in thousands):
Fair Value at September 30, 2017 | ||||
Total | Level 1 | Level 2 | Level 3 | |
| Liabilities: | ||||
| Contingent acquisition debt, current portion | $422 | $- | $- | $422 |
| Contingent acquisition debt, less current portion | 11,405 | - | - | 11,405 |
Warrant derivative liability | 4,128 | - | - | 4,128 |
| Embedded conversion option derivative | 330 | 330 | ||
| Total liabilities | $16,255 | $- | $- | $16,255 |
Fair Value at December 31, 2016 | ||||
Total | Level 1 | Level 2 | Level 3 | |
| Liabilities: | ||||
| Contingent acquisition debt, current portion | $628 | $- | $- | $628 |
| Contingent acquisition debt, less current portion | 7,373 | - | - | 7,373 |
| Warrant derivative liability | 3,345 | - | - | 3,345 |
| Total liabilities | $11,346 | $- | $- | $11,346 |
Fair Value at March 31, 2020 (unaudited) | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Liabilities: | ||||||||||||||||
Contingent acquisition debt, current portion | $ | 1,382 | $ | 0 | $ | 0 | $ | 1,382 | ||||||||
Contingent acquisition debt, less current portion | 6,759 | 0 | 0 | 6,759 | ||||||||||||
Warrant derivative liability | 53 | 0 | 0 | 53 | ||||||||||||
Total derivative liabilities | $ | 8,194 | $ | 0 | $ | 0 | $ | 8,194 | ||||||||
Fair Value at December 31, 2019 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Liabilities: | ||||||||||||||||
Contingent acquisition debt, current portion | $ | 1,263 | $ | 0 | $ | 0 | $ | 1,263 | ||||||||
Contingent acquisition debt, less current portion | 7,348 | 0 | 0 | 7,348 | ||||||||||||
Warrant derivative liability | 1,542 | 0 | 0 | 1,542 | ||||||||||||
Total derivative liabilities | $ | 10,153 | $ | 0 | $ | 0 | $ | 10,153 | ||||||||
The following table reflects the activity for the Company’s warrant derivative liability associated with the Company’s private placements measured at fair value ofusing Level 3 inputs (in thousands):
Balance at December 31, 2019 | $ | 1,542 | ||
Adjustments to estimated fair value | (1,489 | ) | ||
Balance at March 31, 2020 (unaudited) | $ | 53 |
The following table reflects the activity for the Company’s contingent acquisition liabilities are evaluated each reporting period using projected revenues, discount rates, and projected timing of revenues. Projected contingent payment amounts are discounted back to the current period using a discount rate. Projected revenues are based on the Company’s most recent internal operational budgets and long-range strategic plans. Increases in projected revenues will result in highermeasured at fair value measurements. Increases inusing Level 3 inputs (in thousands):
Balance at December 31, 2019 | $ | 8,611 | ||
Liabilities settled | (109 | ) | ||
Adjustments to liabilities included in net loss | (361 | ) | ||
Balance at March 31, 2020 (unaudited) | $ | 8,141 |
The weighted-average discount rates and the timerate used to payment will result in lower fair value measurements. Increases (decreases) in any of those inputs in isolation may result in a significantly lower (higher) fair value measurement. During the three and nine months ended September 30, 2017 the net adjustment todetermine the fair value of the contingent acquisition debt was a decrease of $340,00018.50% and $1,020,000, respectively. During the three 18.42% at March 31, 2020 and nine months ended September 30, 2016 the net adjustment to the fair value of the contingent acquisition debt was a decrease of $315,000 and a decrease of $1,185,000, December 31, 2019, respectively.
Note 9. Stockholders’10.Stockholders’ Equity
The Company’s ArticlesCertificate of Incorporation, as amended, authorizeauthorizes the issuance of two classes of stock to be designated “Common Stock”“common stock” and “Preferred Stock”“preferred stock”.
At March 31, 2017, 2020, the Board of Directors of the Company authorized a reverse stock split in order to meet certain criteria in preparation for the Company’s uplisting on the NASDAQ Capital Market.
The Company’s common stock is traded on the OTC Pink Market operated by OTC Markets under the symbol “YGYI”. From June 2017 until November 2020, the Company’s common stock was traded on Nasdaq Capital Market under the symbol “YGYI.” From June 2013 until June 2017, the Company’s common stock was traded on the OTCQX Marketplace operated by OTC Markets under the symbol “YGYI”. Previously, the common stock was quoted on the OTC Markets OTC Pink market system under the symbol “JCOF”.
The Company’s 9.75% Series D Cumulative Redeemable Perpetual Preferred Stock, $0.001 par value $.001 per share (“Series A Convertible Preferred”)is traded on OTC Pink market operated by OTC Markets Group under the symbol “YGYIP”.
Shelf Registration
In May 2018, the SEC declared the Company’s shelf registration statement on Form S-3 effective to register shares of September 30, 2017,the Company’s common stock for sale of up to $75,000,000 giving the Company the opportunity to raise funding when considered appropriate at prices and on terms to be determined at the time of any such offerings. The Company’s ability to sell securities registered on its registration statement on Form S-3 (the “Shelf”) was limited until such time the market value of its voting securities held by non-affiliates is $75 million or more. At December 31, 2016 2019, the Company raised net proceeds under the Shelf in the aggregate of approximately $12,371,000 from the issuance of the Company’s preferred stock series D offering and the ATM noted below. The Company is no longer eligible to use the Shelf.
Common Stock
At March 31, 2020 and December 31, 2019 there were 19,723,28530,712,432 and 19,634,34530,274,601 shares of Common Stockcommon stock outstanding, respectively.
Stock Offerings
March 2020 Private Placement
In March 2020, the Company closed one tranche of its March 2020 private placement debt offering, pursuant to which the Company offered of up to an aggregate of $5,000,000 in principal amount together with up to 250,000 shares of common stock with each investor receiving 50,000 shares of common stock for each $1,000,000 invested. In March 2020, the Company entered into a securities purchase agreement with Daniel Mangless pursuant to which the Company received proceeds of $1,000,000 and issued the Mangless Note. Mr. Mangless received 50,000 shares of the Company’s common stock in connection with his investment.
In April 2021, the Company entered into a settlement agreement with Daniel Mangless related to the Mangless Note issued in March 2020. In addition, pursuant to the settlement agreement, the Company issued Mr. Mangless 1,000,000 shares of its common stock. (See Note 13)
2019 Share Purchase Agreements
In June 2019, the Company entered into a securities purchase agreement with Daniel Mangless pursuant to which the Company sold 250,000 shares of common stock at an offering price of $5.50 per share. There were 0 fees related to this agreement. The Company received proceeds of $1,375,000.
In February 2019, the Company entered into a securities purchase agreement with Daniel Mangless pursuant to which the Company sold 250,000 shares of common stock at an offering price of $7.00 per share. Pursuant to the purchase agreement, the Company also issued to Mr. Mangless a three-year warrant to purchase 250,000 shares of common stock at an exercise price of $7.00. The Company received gross proceeds of $1,750,000. Consulting fees to the placement agent for arranging the purchase agreement included the issuance of 5,000 shares of restricted shares of the Company’s common stock with a fair value of $7.00 per share, and three-year warrants to purchase 100,000 shares of common stock expiring in February 2022 which were priced at $10.00 per share. The Company used the Black-Scholes option-pricing model to estimate the fair value of the warrants issued to the selling agent to be $324,000 at the time of issuance as direct issuance costs and recorded in equity. NaN cash commissions were paid.
2019 Promissory Notes
In March 2019, the Company entered into 2019 Promissory Notes and raised cash proceeds in the aggregate of $2,000,000. In consideration of the 2019 Promissory Notes, the Company issued 20,000 shares of common stock and five-year warrants to purchase 20,000 shares of common stock at a price per share of $6.00 for each $1,000,000 invested. The Company issued in the aggregate 40,000 shares of common stock and 40,000 warrants with the 2019 Promissory Notes. The Company used the Black-Scholes option-pricing model to estimate the aggregate fair value of the warrants issued to be $138,000 at the time of issuance as direct issuance costs and recorded as a debt discount and is being amortized as expense over the life of the 2019 Promissory Notes. The aggregate fair value of the shares issued was based on the closing price of the Company’s common stock on the closing date was approximately $212,000 was recorded as a debt discount and was amortized as expense over the life of the 2019 Promissory Notes.
In February 2021, the Company entered into amendment agreements extending the 2019 Promissory Notes and increasing the interest rate. At the filing date, the Company was in default of the terms of the amended agreements. (See Note 13)
2019 Private Placement - Convertible Notes
Between February and July 2019, the Company closed five tranches related to the 2019January private placement debt offering, pursuant to which the Company offered the 2019 PIPE Notes, with each investor receiving in addition to the 2019 PIPE Notes, 2,000 shares of common stock for each $100,000 invested. The Company issued an aggregate of 61,800 shares of common stock as a result of the 2019 private placement. The placement agent received 15,450 shares of common stock for the closed tranches. The aggregate fair value of the shares issued based on the closing price of the Company’s common stock on the closing date was approximately $451,000 which was recorded as a debt discount and was amortized as expense over the life of the promissory notes.
In February and March 2021, the 2019 PIPE Notes that were maturing were extended by one year by way of an amendment with certain note holders of an aggregate $2,440,000 in principal amount. In connection with the foregoing, the Company issued to the holders of the amended 2019 PIPE Notes an aggregate of 366,000 shares of its restricted common stock as an inducement to enter into the amendments. At the filing date of this Quarterly Report on Form 10-Q, the Company was in default of the terms of settlement set forth in the amendments. (See Note 13)
At-the-Market Equity Offering Program
In January 2019, the Company entered into the “ATM agreement with the Benchmark Company LLC (“Benchmark”) pursuant to which the Company may sell from time to time, at the Company’s option, shares of its common stock through Benchmark as sales agent, for the sale of up to $60,000,000 of shares of the Company’s common stock. The Company is not obligated to make any sales of common stock under the ATM agreement and the Company cannot provide any assurances that it will continue to issue any shares pursuant to the ATM agreement. During the year ended December 31, 2019, the Company sold 17,524 shares of common stock under the ATM agreement and received net proceeds of approximately $102,000. The Company paid the Benchmark 3.0% commission of the gross sales proceeds. The Company is not currently eligible to register the offer and sale of the Company’s securities using a registration statement on Form S-3 and therefore cannot make sales under the ATM agreement until such time that the Company once again becomes S-3 eligible.
2018 Private Placement
Between August 2018 and October 2018, the Company completed its 2018 private placement and entered into securities purchase agreements with nine investors with whom the Company had a substantial pre-existing relationship pursuant to which the Company sold an aggregate of 630,526 shares of common stock at an offering price of $4.75 per share. In addition, the Company issued the investors an aggregate of 150,000 additional shares of common stock as an advisory fee and issued the investors three-year warrants to purchase an aggregate of 630,526 shares of common stock at an exercise price of $4.75 per share. The fair value of the warrants as issuance date was approximately $1,689,000. During the year ended December 31, 2019, investors exercised a portion of the 2018 warrants into 182,106 shares of common stock. The 2018 warrants to purchase 448,420 shares of common stock remained outstanding at March 31, 2020 and December 31, 2019.
The Company adopted ASU No.2017-11 effective January 1, 2019 and determined that the 2018 warrants should no longer be classified as a derivative. As a result of the adoption and subsequent change in classification of the 2018 warrants, the Company reclassed approximately $1,494,000 of warrant derivative liability to equity.
2014 Convertible Note – Debt Exchange
In October 2018, the Company entered into an agreement with Carl Grover to exchange all amounts owed under the 2014 Note held by him in the principal amount of $4,000,000 which matured in July 2019, for 747,664 shares of the Company’s common stock at a conversion price of $5.35 per share, and a four-year warrant to purchase 631,579 shares of common stock at an exercise price of $4.75 per share. The agreement was subject to shareholder approval which was received in December 2018. The warrant to purchase 631,579 shares of common stock remained outstanding at March 31, 2020 and December 31, 2019.
A FINRA broker dealer acted as the Company’s advisor in connection with the debt exchange. Upon the closing of the debt exchange, the Company subsequently received shareholder approval to issue the broker dealer 30,000 shares of common stock, a four-year warrant to purchase 80,000 shares of common stock at an exercise price of $5.35 per share and a four-year warrant to purchase 70,000 shares of common stock at an exercise price of $4.75 per share. The warrants to purchase an aggregate 150,000 shares remained outstanding at March 31, 2020 and December 31, 2019.
Preferred Stock
Series A Preferred Stock
The Company had 161,135 shares of Series A Convertible Preferred Stockpreferred stock outstanding as of September 30, 2017 at both March 31, 2020 and December 31, 2016, 2019 and accrued dividends of approximately $121,000$153,000 and $112,000,$150,000, respectively.
The holders of the Series A Convertible Preferred Stockpreferred stock are entitled to receive a cumulative dividend at a rate of 8.0%8.00% per year, payable annually either in cash or shares of the Company's Common Stockcommon stock at the Company's election. Shares of Common Stock paid as accrued dividends are valued at $10.00 per share. Each share of Series A Convertible Preferredpreferred stock is convertible into two sharescommon stock at a conversion rate of the Company's Common Stock.one-tenth of a share. The holders of Series A Convertible Preferredpreferred stock are entitled to receive payments upon liquidation, dissolution or winding up of the Company before any amount is paid to the holders of Common Stock.common stock. The holders of Series A Convertible Preferredpreferred stock have no voting rights, except as required by law.
Series B Preferred Stock
In March 2018, the Company authorized acompleted the Series B offering, pursuant to which the Company sold 381,173 shares of Series B preferred stock at an offering price of $9.50 per share. Each share repurchase program to repurchase up to 750,000of Series B preferred stock is initially convertible at any time, in whole or in part, at the option of the Company'sholders, at a conversion price of $4.75 per share, into 2 shares of common stock and automatically converts into 2 shares of common stock on its two-year anniversary of issuance.
In connection with the Series B offering, the Company issued the placement agent 38,117 warrants as compensation, exercisable at $5.70 per share and expire in February 2023. The Company determined that the warrants should be classified as equity instruments and used Black-Scholes to estimate the fair value of the warrants issued to the placement agent of $75,000 at the issuance date. At March 31, 2020 and December 31, 2019, 6,098 warrants issued to the placement agent remained outstanding.
The Company had 129,332 shares of Series B preferred stock outstanding at December 31, 2019. In March 2020, all outstanding shares of CommonSeries B preferred stock automatically converted into 2 shares of common stock on the two-year anniversary date of the issuance of the Series B preferred stock, pursuant to the automatic conversion feature of the Series B preferred stock. A total of 129,332 shares of Series B preferred stock outstanding automatically converted into 258,664 shares of common stock.
During the year ended December 31, 2019, the Company received notice of conversion for 105 shares of Series B preferred stock which converted to 210 shares of common stock.
Pursuant to the certificate of designation, the Company paid cumulative dividends on the Series B preferred stock from the date of original issue at a rate of 5.0% per annum payable quarterly in arrears on or about the last day of March, June, September and December of each year, ending in March 2020.
At December 31, 2019, accrued dividends for Series B preferred stock were approximately $15,000. During the three months ended March 31, 2020 and 2019, a total of approximately $32,000 and $11,000, respectively, of dividends was paid to the holders of the Series B preferred stock. All dividends related to the Series B preferred stock were paid in full at March 31, 2020. The Series B preferred stock ranked senior to the Company’s outstanding Series A preferred stock and the common stock with respect to dividend rights and rights upon liquidation, dissolution or winding up. Holders of the Series B preferred stock had no voting rights.
Series C Preferred Stock
In connection with the Series C offering in 2018, the Company issued the placement agent 116,867 warrants as compensation, exercisable at $4.75 per share. At December 31, 2019, 0 Series C preferred stock remained outstanding. During the year ended December 31, 2019, the placement agent exercised a portion of the warrants into 99,143 shares of common stock. The remaining warrants expire in December 2020.
Series D Preferred Stock
In September and December 2019, the Company closed two tranches of its Series D offering (the “Series D Offering”), pursuant to which the Company issued and sold a total of 578,898 shares of its 9.75% Series D cumulative preferred stock at a weighted average price to the public of $24.05 per share, less underwriting discounts and commissions, pursuant to the terms of the underwriting agreements that the Company entered into with Benchmark, as representative of the several underwriters. The 578,898 shares of Series D preferred stock that were sold included 43,500 shares sold pursuant to the overallotment option that the Company granted to the underwriters. At December 31, 2019, 36,809 overallotment shares were unissued and available for purchase by the underwriters within 45 days from December 17, 2019.
In January 2020, the Company issued an additional 11,375 shares of Series D preferred stock upon the partial exercise by the underwriters in the Company’s public offering of Series D preferred stock of the overallotment option granted to such underwriters. The overallotment shares were sold at a price to the public of $22.75 per share, generating additional gross proceeds of approximately $259,000.
The Series D preferred stock was approved for listing on the Nasdaq Capital Market under the symbol “YGYIP,” and trading the Series D preferred stock on Nasdaq commenced in September 2019. The net proceeds to the Company from the Series D Offering were approximately $12,269,000 after deducting underwriting discounts and commissions and expenses which were paid by the Company.
At March 31, 2020, a total of 650,000 shares of the preferred stock was designated as Series D preferred stock. At March 31, 2020, the Company has available for issuance an additional 59,727 shares of Series D preferred stock.
The Series D preferred stock does not have a stated maturity date and is not subject to any sinking fund or mandatory redemption provisions. The holders of the Series D preferred stock are entitled to cumulative dividends from the first day of the calendar month in which the Series D preferred stock is issued and payable on the fifteenth day of each calendar month, when, as and if declared by the Company's board of directors. The Company’s board of directors has declared an annual cash dividend of $2.4375 per share, or a monthly dividend of $0.203125 per share, on the Series D preferred stock.
At March 31, 2020 and December 31, 2019, accrued dividends were approximately $120,000 and $118,000, respectively. During the three months ended March 31, 2020, the Company paid $358,000 in cash dividends to holders of Series D preferred stock. At March 31, 2020, accrued dividends payable to holders of record at March 31, 2020 were paid in April 2020.
At March 31, 2020 and December 31, 2019, the Company had 590,273 and 578,898 shares, respectively, of Series D preferred stock outstanding.
Upon liquidation, dissolution or winding up of the Company, each holder of Series D preferred stock would be entitled to receive a distribution, to be paid in an amount equal to $25.00 per share held by the holders of Series D preferred stock, plus all accrued and unpaid dividends in preference to any distribution or payments made or any asset distributed to the holders of common stock, the Series A preferred stock, the Series B preferred stock, the Series C preferred stock or any other class or series of stock ranking junior to the Series D preferred stock.
The Series D preferred stock is not redeemable by the Company prior to September 23, 2022, except upon a change of control (as defined in the certificate of designations). On and after such date, the Company may, at its option, redeem the Series D preferred stock, in whole or in part, at any time or from time to time, for cash at a redemption price equal to $25.00 per share, plus any accumulated and unpaid dividends to, but not including, the redemption date. Upon the occurrence of a change of control, the Company may, at its option, redeem the Series D preferred stock, in whole or in part, within 120 days after the first date on which such change of control occurred, for cash at a redemption price of $25.00 per share, plus any accumulated and unpaid dividends to, but not including, the redemption date. Holders of the Series D preferred stock generally have no voting rights.
Advisory Agreements
The Company records the fair value of common stock issued in conjunction with advisory service agreements based on the open market or via private transactions through block trades. A totalclosing stock price of 196,594 shares have been repurchased to-datethe Company’s common stock on the measurement date. The stock issuance expense associated with the amortization of advisory fees was recorded as equity compensation expense and was included in general and administrative expense on the Company’s consolidated statements of September 30, 2017 at a weighted-average cost of $5.30. There were no repurchases during the nine months ended September 30, 2017. The remaining number of shares authorized for repurchase under the plan as of September 30, 2017 is 553,406.
Capital Resources Group, LLC.
In July 2018, the Company entered into an agreement with ProActive CapitalResources Group, Market Solutions, LLC (“PCG”Capital Market”), pursuant to which PCGCapital Market agreed to provide investor relations services for six (6)a period of 18 months in exchange for fees100,000 shares of restricted common stock which were issued in advance of the service period. In addition, the Company agreed to pay a cash base fee of $300,000 of which $50,000 was paid in cashAugust 2018 and the remaining balance was to be paid monthly in the amount of $6,000 per month and 5,000$25,000. The Company subsequently extended the term of the Capital Market agreement for an additional 24 months through December 31, 2021. The Company also issued an additional 100,000 shares of restricted common stock to be issued upon successfully meeting certain criteriaCapital Market in accordance withadvance of the agreement. Subsequent to September 1, 2015 this agreement has been extended under the same terms with the monthly cash payment remaining at $6,000 per monthservice period and 5,000 shares of restricted common stockpaid $125,000 for every six (6) months of service performed.
In January 2019, the Capital Market agreement was amended pursuant to bewhich the aggregate base fee increased to $525,000 and the Company issued are recorded as prepaid advisory fees and are included in prepaid expenses and other current assets onan additional 75,000 of restricted common stock, with a fair value of $417,000. In addition, the Company issued to Capital Market a four-year warrant to purchase 925,000 shares of the Company’s condensed consolidated balance sheets common stock at $6.00 per share, vesting 50% at issuance, 25% vesting in January 2020 and is amortized on a pro-rata basis over the term of the respective periods. 25% vesting in January 2021.
During the three months ended September 30, 2017 March 31, 2020 and 2016,2019, the Company recorded expense of approximately $14,000 and $15,000, respectively and $42,000 and $46,000, during$129,000 in connection with amortization of the ninestock issuance expense. During the three months ended September 30, 2017 March 31, 2019, the Company recorded expense of approximately $50,000 in connection with the base fee. During the three months ended March 31, 2020 and 2016,2019, the Company recorded expense of approximately $92,000 and $1,656,000, respectively, in connection with amortization of equity issuance expense related to fair value of the vested portion of the warrant.
Corinthian Partners, LLC
In August 2019, the Company issued 600 shares of restricted common stock to Corinthian Partners, LLC, the initial placement agent for the issuance of the 2018 warrants which represented 10% of the shares issued to certain investors. The fair value of the shares issued of approximately $3,000 was fully expensed in 2019.
Greentree Financial Group, Inc.
In March 2018, the Company entered into an agreement with Greentree Financial Group, Inc. (“Greentree”), pursuant to which Greentree agreed to provide investor relations services through December 31, 2019 in exchange for 75,000 shares of restricted common stock which were issued in advance of the service period. The fair value of the shares issued was approximately $311,000. During the three months ended March 31, 2019, the Company recorded expense of approximately $44,000 in connection with amortization of the stock issuance.
I-Bankers Securities Incorporated
In April 2019, the Company entered into an agreement with I-Bankers Securities Incorporated (“I-Bankers”), pursuant to which I-Bankers agreed to provide financial advisory services for a period of September 30, 2017, twelve months ending in March 2020 in exchange for 100,000 shares of restricted common stock which were issued in advance of the service period. The fair value of the shares issued was approximately $571,000. During the three months ended March 31, 2020, the Company recorded expense of approximately $143,000 in connection with amortization of the stock issuance.
In addition, the Company agreed to pay in cash a base fee for debt arrangements and equity offerings in conjunction with any transactions I-Bankers closes with the Company in accordance with the agreement. The Company did not engage in any financing activity with I-Bankers through March 31, 2020.
Ignition Capital, LLC
In April 2018, the Company entered into an agreement with Ignition Capital, LLC (“Ignition”), pursuant to which Ignition agreed to provide investor relations services through December 31, 2019 in exchange for 50,000 shares of restricted common stock which were issued in advance of the service period. The fair value of the shares issued was approximately $208,000. During the three months ended March 31, 2019, the Company recorded expense of approximately $30,000 in connection with amortization of the stock issuance.
In March 2019, the Ignition agreement was amended to provide additional compensation of 55,000 shares of the Company’s common stock for advisory fees and additionally 5,000 shares of the Company’s common stock were issued in conjunction with one of the Company’s equity transactions. Under the amended Ignition agreement, the Company also issued a warrant convertible upon exercise of 100,000 shares of the Company’s common stock exercisable at $10.00 per share for a period of three years for services provided by Ignition at the amendment date. The fair value of the shares issued was approximately $384,000 and the fair value of the warrant issued was approximately $414,000 and was fully expensed as equity issuance cost and recorded as equity in 2019.
Ivan Gandrud Chevrolet, Inc.
In March 2020, the Company entered into an agreement with Ivan Gandrud Chevrolet, Inc. (“IGC”), pursuant to which IGC agreed to provide consulting services for the Company’s commercial hemp segment in exchange for 125,000 shares of restricted common stock which were issued as fully earned. The fair value of the shares issued was approximately $158,000. In addition, the Company issued a 5-year warrant exercisable for 250,000 shares of the Company’s common stock at an exercise price of $4.75. The warrant is deemed fully earned. The fair value of the warrant issued was approximately $167,000. During the three months ended March 31, 2020, the Company fully amortized $325,000 of the issuance costs in connection this agreement.
IGC is 100% owned by Daniel Mangless, who was the beneficial owner of in excess of 5% of the Company’s outstanding common stock at March 31, 2020.
The Benchmark Company, LLC
In August 2019, the board of directors approved the issuance of 20,000 shares of restricted common stock to Benchmark for investment banking services provided to the Company. The fair value of shares issued was approximately $91,000 and was fully expensed in 2019.
Warrants
At March 31, 2020 and December 31, 2019, warrants to purchase 2,710,0666,488,182 and 6,238,182, respectively, of shares of the Company's common stock at prices ranging from $2.00 to $10.00 were outstanding. AllAt March 31, 2020, 6,314,743 warrants arewere exercisable as of September 30, 2017 and expire at various dates through November 2020 March 2025 and have a weighted average remaining term of approximately 2.371.6 years and are included in the table below as of September 30, 2017.
The fairintrinsic value of the warrant was $232,000 and was recorded in general and administrative in the condensed consolidated statements of operations.
The Company uses the Black-Scholesa combination of option-pricing model (“Black-Scholes model”)models to estimate the fair value of the warrants.
A summary of the warrant activity for the nine months ended September 30, 2017 is presented in the following table:
Number of Warrants | ||||
Outstanding at December 31, | 6,238,182 | |||
Issued | 250,000 | |||
Outstanding at March 31, 2020 (unaudited) | 6,488,182 | |||
Stock-based Compensation
Stock-based compensation expense related to stock options and restricted stock units included in the consolidated statements of operations was charged as follows (in thousands):
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
| (unaudited) | (unaudited) | |||||||
Cost of revenues | $ | 5 | $ | 77 | ||||
Sales and marketing | 31 | 497 | ||||||
General and administrative | 224 | 10,770 | ||||||
Total stock-based compensation | $ | 260 | $ | 11,344 | ||||
Stock Options
A summary of the Plan stock option activity for the ninethree months ended September 30, 2017 March 31, 2020 is presented in the following table:
Number of Shares | Weighted Average Exercise Price | Aggregate Intrinsic Value (in thousands) | |
| Outstanding December 31, 2016 | 1,660,964 | $4.74 | $1,346 |
| Issued | 21,624 | 4.53 | |
| Canceled / expired | (79,711) | 4.35 | |
| Exercised | (6,885) | 4.28 | - |
| Outstanding September 30, 2017 | 1,595,932 | $4.76 | $503 |
| Exercisable September 30, 2017 | 878,657 | $4.55 | $339 |
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contract Life (years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||
Outstanding December 31, 2019 | 4,637,642 | $ | 5.63 | 7.8 | $ | 0 | ||||||||||
Granted | 0 | 0 | 0 | |||||||||||||
Canceled / expired | (5,718 | ) | 4.32 | 0 | ||||||||||||
Exercised | 0 | 0 | 0 | |||||||||||||
Outstanding March 31, 2020 (unaudited) | 4,631,924 | $ | 5.63 | 7.6 | $ | 0 | ||||||||||
Exercisable March 31, 2020 (unaudited) | 4,188,717 | $ | 5.73 | 7.6 | $ | 0 | ||||||||||
The weighted-average fair value per share of the granted stock options for the ninethree months ended September 30, 2017 and 2016 March 31, 2019 was approximately $3.05 and $1.80, respectively.
At March 31, 2020, there was approximately $1,702,000$1,109,000 of total unrecognized compensation expense related to unvested stock options granted under the 2012Plan. The expense is expected to be recognized over a weighted-average period of 3.681.6 years.
Restricted Stock Units
In August 2019, the Company usesissued 50,000 restricted stock units to one of its consultants. Vesting occurs monthly over a three-year period with the Black-Scholes option-pricing model (“Black-Scholes model”) to estimatefirst vesting period commencing one month from the grant date. The fair value of the restricted stock options. The use of a valuation model requiresunits issued to the Company to make certain assumptions with respect to selected model inputs. Expected volatility is calculatedconsultant was based on the historical volatility of the Company’sgrant date closing stock price of $4.55 and is recognized as stock-based compensation expense over the expectedvesting term of the option. The expected life is based on the contractual life of the option and expected employee exercise and post-vesting employment termination behavior. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of the grant.
In August 9, 2017, the Company issued restricted stock units for an aggregate of 500,000 shares of common stock to its employees board members and consultants. These shares of common stock will be issued upon vesting of the restricted stock units. VestingFull vesting occurs on the sixth year-year anniversary of the grant date, over a six-year period, with 10% vesting on the third-year,third-year, 15% on the fourth-year,fourth-year, 50% on the fifth-yearfifth-year and 25% on the sixth-yearsixth-year anniversary of the vesting commencement date.
The Company adopted ASU 2018-07 on January 1, 2019 and the stock-based compensation expense overfor non-employee grants was based on the vesting termclosing price of the award. RestrictedCompany’s common stock based compensation expense includedof $5.72 per share on December 31, 2018, which was the last business day before we adopted ASU 2018-07.
A summary of restricted stock unit activity is presented in the condensed consolidated statements of operations was $32,000 for the three and nine months ended September 30, 2017.
Number of Shares | ||||
Balance at December 31, 2019 | 451,944 | |||
Issued | 0 | |||
Canceled | (5,000 | ) | ||
Vested | (4,167 | ) | ||
Balance at March 31, 2020 (unaudited) | 442,777 | |||
At March 31, 2020, total unrecognized stock-based compensation expense related to restricted stock units to employees and consultants was approximately $1,309,000$1,230,000, which will be recognized over a weighted average period of 5.863.4 years.
Note 10. 11. Commitments and Contingencies
Credit Risk
The Company maintains cash balances at various financial institutions primarily located in the U.S. Accounts held at the U.S. institutions are secured, up to certain limits, by the Federal Deposit Insurance Corporation. At times, balances may exceed federally insured limits. The Company has not experienced any losses in such accounts. There is credit risk related to the Company’s ability to collect on its accounts receivables from its major customers. Management believes that the Company is not exposed to any significant credit risk with respect to its cash and cash equivalent balances and accounts receivables.
Litigation
The Company is party to litigation at the present time and may become party to litigation in the future. In general, litigation claims can be expensive, and time consuming to bring or defend against and could result in settlements or damages that could significantly affect financial results. However, it is not possible to predict the final resolution of any litigation to which the Company is, or may be party to, and the impact of certain of these matters on the Company’s business, results of operations, and financial condition could be material. At both March 31, 2020 and December 31, 2019, the Company believed that existing litigation had no merit and was not likely that the Company would incur any losses with respect to litigation.
Vendor Concentration
For the three months ended March 31, 2020, the Company’s direct selling segment made purchases from 2 vendors, Global Health Labs, Inc., and Michael Schaffer, LLC., that individually comprised more than 10% of total segment purchases and in aggregate approximated 41% of total segment purchases. For the three months ended March 31, 2019, the Company’s direct selling segment made purchases from 2 vendors, Global Health Labs, Inc. and Icelandic Water Holdings, that individually comprised more than 10% of total segment purchases and in aggregate approximated 44% of total segment purchases.
For the three months ended March 31, 2020, the Company’s commercial coffee segment made purchases from 2 vendors, H&H and StoneX Commodity Solutions, LLC, that individually comprised more than 10% of total segment purchases and in aggregate approximated 49% of total segment purchases. For the three months ended March 31, 2019, the Company’s commercial coffee segment made purchases from 1 vendor, H&H, that approximated 71% of total segment purchases.
For the three months ended March 31, 2020, the Company’s commercial hemp segment made purchases from 2 vendors, BioProcessing Corp and Xtraction Services, Inc., that individually comprised more than 10% of total segment purchases and in aggregate approximated 64% of total segment purchases. For the three months ended March 31, 2019, the Company’s commercial hemp segment made purchases from 2 vendors, Labfirst Scientific and industrial and Xian Toption Instrument Co., LTD, that individually comprised more than 10% of total segment purchases and in aggregate approximated 79% of total segment purchases.
Customer Concentration
For the three months ended March 31, 2020, the Company’s commercial coffee segment had 4 customers, Carnival Cruise Lines, Rothfos Corporation, Super Store Industries and Topco Associates, LLC, that individually comprised more than 10% of segment revenue and in aggregate approximated 58% of total segment revenue. For the three months ended March 31, 2019, the Company’s commercial coffee segment had 1 customer, H&H Export, that approximated 63% of total segment revenue.
At March 31, 2020 and December 31, 2019, CLR's accounts receivable balance for customer related revenue by H&H Export was approximately $8,707,000 of which the full amount was past due at the corresponding periods. As a result, the Company reserved $7,871,000 as bad debt related to the accounts receivable balances for both periods, which was net of collections through December 31, 2020.
The Company has purchase obligations related to minimum future purchase commitments for green coffee to be used in the Company’s commercial coffee segment within its roasting operations. Each individual contract requires the Company to purchase and take delivery of certain quantities at agreed upon prices and delivery dates. The contracts have minimum future purchase commitments of approximately $8,957,000 at March 31, 2020. The contracts contain provisions whereby any delays in taking delivery of the purchased product will result in additional charges related to the extended warehousing of the coffee product. The Company has not incurred fees however fees can average approximately $0.01 per pound for every month of delay.
For the three months ended March 31, 2020, the Company’s commercial hemp segment had 2 customers, Just Hemp, LLC and Vash Holdings, LLC, that individually comprised more than 10% of segment revenue and in aggregate approximated 41% of total segment revenue. For the three months ended March 31, 2019, the Company’s commercial hemp segment had 2 customers, Air Spec, Inc. and Xtraction Services, that individually comprised more than 10% of segment revenue and in aggregate approximated 65% of total segment revenue.
Note 12.Segment and Geographical Information
The Company is a leading omni-direct lifestyle company offering a hybrid of the direct selling business model that also offers e-commerce and the power of social selling. Assembling a virtual Main Street of products and services under one corporate entity, Youngevity offers products from top selling retail categories: health/nutrition, home/family, food/beverage (including coffee), spa/beauty, apparel/jewelry, as well as innovative services. The Company operates in two3 segments: the direct selling segment where products are offered through a global distribution network of preferred customers and distributors, and the commercial coffee segment where roasted and green coffee bean products are sold directly to businesses.
The Company’s segments reflect the manner in which the business is managed and how the Company allocates resources and assesses performance. The Company’s chief operating decision maker is the Chief Executive Officer. The Company’s chief operating decision maker evaluates segment performance primarily based on revenue and segment operating income.income (loss). The principal measures and factors the Company considered in determining the number of reportable segments were revenue, gross margin percentage, sales channel, customer type and competitive risks. In addition, each reporting segment has similar products and customers, similar methods of marketing and distribution and a similar regulatory environment.
The accounting policies of the segments are consistent with those described in the summary of significant accounting policies. Segment revenue excludes intercompany revenue eliminated in the consolidation.
The following tables present certainselected financial information for each segment (in thousands):
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
| (unaudited) | (unaudited) | |||||||
Revenues | ||||||||
Direct selling | $ | 31,156 | $ | 33,420 | ||||
Commercial coffee | 4,059 | 7,705 | ||||||
Commercial hemp | 316 | 67 | ||||||
Total revenues | $ | 35,531 | $ | 41,192 | ||||
Gross profit (loss) | ||||||||
Direct selling | $ | 20,675 | $ | 22,755 | ||||
Commercial coffee | (564 | ) | 4,067 | |||||
Commercial hemp | (324 | ) | 27 | |||||
Total gross profit | $ | 19,787 | $ | 26,849 | ||||
Operating income (loss) | ||||||||
Direct selling | $ | (2,642 | ) | $ | (12,309 | ) | ||
Commercial coffee | (1,771 | ) | 884 | |||||
Commercial hemp | (2,264 | ) | (516 | ) | ||||
Total operating loss | $ | (6,677 | ) | $ | (11,941 | ) | ||
Net income (loss) | ||||||||
Direct selling | $ | (2,618 | ) | $ | (13,377 | ) | ||
Commercial coffee | (895 | ) | 1,633 | |||||
Commercial hemp | (2,278 | ) | (516 | ) | ||||
Total net loss | $ | (5,791 | ) | $ | (12,260 | ) | ||
Capital expenditures | ||||||||
Direct selling | $ | 156 | $ | 17 | ||||
Commercial coffee | 346 | 2,572 | ||||||
Commercial hemp | 606 | 1,384 | ||||||
Total capital expenditures | $ | 1,108 | $ | 3,973 | ||||
Capital expenditures acquired through acquisition | ||||||||
Direct selling | $ | 0 | $ | 0 | ||||
Commercial coffee | 0 | 0 | ||||||
Commercial hemp | 0 | 1,133 | ||||||
Total capital expenditures acquired through acquisitions | $ | 0 | $ | 1,133 | ||||
Three months ended | Nine months ended | |||
September 30, | September 30, | |||
2017 | 2016 | 2017 | 2016 | |
| Revenues | ||||
| Direct selling | $37,954 | $38,576 | $106,734 | $110,393 |
| Commercial coffee | 6,441 | 4,986 | 17,921 | 13,871 |
| Total revenues | $44,395 | $43,562 | $124,655 | $124,264 |
| Gross profit | ||||
| Direct selling | $25,472 | $26,233 | $71,522 | $74,690 |
| Commercial coffee | 292 | 135 | 210 | 472 |
| Total gross profit | $25,764 | $26,368 | $71,732 | $75,162 |
| Operating income (loss) | ||||
| Direct selling | $(1,233) | $1,171 | $(2,392) | $4,903 |
| Commercial coffee | (584) | (595) | (2,501) | (1,640) |
| Total operating income | $(1,817) | $576 | $(4,893) | $3,263 |
| Net (loss) income | ||||
| Direct selling | $(1,311) | $822 | $(2,958) | $1,912 |
| Commercial coffee | 243 | (755) | (2,899) | (1,803) |
| Total net (loss) income | $(1,068) | $67 | $(5,857) | $109 |
| Capital expenditures | ||||
| Direct selling | $223 | $590 | $697 | $1,339 |
| Commercial coffee | 110 | 145 | 391 | 863 |
| Total capital expenditures | $333 | $735 | $1,088 | $2,202 |
As of | ||
September 30, 2017 | December 31, 2016 | |
| Total assets | ||
| Direct selling | $47,020 | $40,127 |
| Commercial coffee | 26,977 | 25,881 |
| Total assets | $73,997 | $66,008 |
March 31, 2020 | December 31, 2019 | |||||||
| (unaudited) | ||||||||
Total assets | ||||||||
Direct selling | $ | 40,584 | $ | 43,221 | ||||
Commercial coffee | 34,927 | 34,348 | ||||||
Commercial hemp | 11,825 | 12,122 | ||||||
Total assets | $ | 87,336 | $ | 89,691 | ||||
Total tangiblenet property and equipment assets net located outside the United StatesU.S. were approximately $5.3 million$7,671,000 and $5.4 million as of September 30, 2017 $7,787,000 at March 31, 2020 and December 31, 2016, 2019, respectively.
The Company conducts its operations primarily in the United States.U.S. For the three months ended September 30, 2017 March 31, 2020 and 20162019, approximately 12%17% and 9%13%, respectively, of the Company’s sales were derived from sales outside the United States. For the nine months ended September 30, 2017 and 2016 approximately 11% and 9%, respectively, of the Company’s sales were derived from sales outside the United States.
The following table displays revenues attributable to the geographic location of the customer (in thousands):
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
| (unaudited) | (unaudited) | |||||||
Revenues | ||||||||
United States | $ | 29,599 | $ | 35,782 | ||||
International | 5,932 | 5,410 | ||||||
Total revenues | $ | 35,531 | $ | 41,192 | ||||
Three months ended | Nine months ended | |||
September 30, | September 30, | |||
2017 | 2016 | 2017 | 2016 | |
| Revenues | ||||
| United States | $39,013 | $39,630 | $111,524 | $113,332 |
| International | 5,382 | 3,932 | 13,131 | 10,932 |
| Total revenues | $44,395 | $43,562 | $124,655 | $124,264 |
Note 11. 13.Subsequent Events
Line of Credit
In January 2022, the Company entered into the second amendment to the Crestmark loan and security agreement which reduced the maximum overall borrowing limit on the line of credit to $3,000,000. Under the second amendment to the Crestmark loan and security agreement, the line of credit may not exceed an amount which is the lesser of (a) $3,000,000 or (b) the sum of up (i) to 85% of the value of the eligible accounts; plus, (ii) the lesser of $1,000,000 or 50% of eligible inventory or 50% of the amount calculated in (i) above.
In February 2022, the Company received a notice of default related to the loan and security agreement from Crestmark. The default includes the Company’s failure to provide quarterly financial statements for the quarters ended September 30, 2021 and December 31, 2021, as set forth in the loan agreement. As a result of this default, Crestmark has the right to charge a higher rate, to accelerate the indebtedness, and to enforce any other right or remedy set forth in the loan agreement.
In April 2022, the Company entered into a forbearance agreement with Crestmark. The forbearance agreement provides that Crestmark agreed to forbear from collection action under the loan documents until the termination date of June 30, 2022, provided the Company is in compliance with the terms of the forbearance agreement. At the filing date of this Quarterly Report on Form 10-Q, the Company is not currently in compliance with the terms of the forbearance agreement. On June 17, 2022, the balance of the line of credit was approximately $1,718,000.
Daniel Mangless - Settlement Agreement
Effective February 2021, the beneficial ownership in the Company’s common stock for Mr. Mangless dropped below 5% to sole ownership of 176,000 shares of common stock based on information contained in a Schedule 13G filed with the SEC in March 2021.
In April 2021, the Company entered into a Settlement Agreement (the “Settlement Agreement”) by and among the Company, CLR, and Daniel Mangless to settle all claims related to a lawsuit filed by Mr. Mangless against the Company and CLR in February 2021, for the alleged breach by the Company and CLR of their obligations under the Mangless Note and the Mangless Pledge and Security Agreement (See Mangless v. Youngevity International, Inc. and CLR Roasters LLC, Case No.2021-CA-996-O (Fla. Cir. Ct.)) (the “Lawsuit”). Pursuant to the Settlement Agreement, Mr. Mangless has agreed to dismiss the lawsuit, with prejudice within five days of the Company making all of the payments required under the Settlement Agreement.
Pursuant to the Settlement Agreement, the Company made a payment of approximately $195,000 to Mr. Mangless in April 2021 and made payments of approximately $102,000 per month to Mr. Mangless beginning in May 2021, and on every month thereafter through and including January 2022. In addition, pursuant to the Settlement Agreement, the Company agreed to issue Mr. Mangless 1,000,000 shares of its common stock (the “Settlement Shares”). The Company also agreed that following the date the Company has completed the audit of its financial statements for the years ended December 31, 2020, if it is then necessary to register the Settlement Shares with the SEC to allow Mr. Mangless to resell the Settlement Shares in the open market, to file a registration statement on Form S-1 within 60 days after bringing its audit filings up to date. The promissory note, including interest was paid, and the shares were issued in accordance with the terms of the settlement agreement.
Finance Lease
In August 2020, the Company entered into a lease for assorted CBD oil extraction equipment that included processing equipment, modular buildings, assorted laboratory equipment, refrigeration equipment with Varilease Finance, Inc. (“VFI”). The value of the equipment at the lease date was approximately $2,006,000. The monthly lease payments are $79,000 over a period of 24 months, with an advance payment of $79,000 to be applied to the last rental payment date. At the filing date of this Quarterly Report on Form 10-Q, the VFI lease was in default.
Small Business Administration – Paycheck Protection Program Loan
In April 2020, the Company’s three segments participated in “The Coronavirus Aid, Relief, and Economic Security Act and the Paycheck Protection Program due to losses caused by the COVID-19 pandemic. In April 2020, the Company received cash in the aggregate of approximately $3,763,000 from qualified Small Business Administration (“SBA”) lenders. Under the SBA loans, the Company received $2,508,000 related to its direct selling segment, $633,000 related to its commercial coffee segment and $623,000 related to its commercial hemp segment of which $613,000 was forgiven in November 2020 and the remaining $10,000 was unforgiven.
In July 2020, the Company’s commercial coffee segment received a second loan in the amount of $150,000 from SBA lenders.
Under the SBA loans, the Company’s direct selling segment qualified for mortgage assistance, whereby the Company’s corporate office’s mortgage had been paid directly from the SBA lenders. The Company qualified for the mortgage payment program for a period of six months. During 2020, the SBA paid approximately $142,000 in principal and interest directly to the Company’s mortgage holder.
In February 2021, the Company was notified that it had qualified for an additional mortgage relief of approximately $18,000 for the months of March and April 2021 which do not require repayment.
In April 2021, the Company’s commercial coffee segment received a third loan in the amount of approximately $633,000 with an annual interest rate of 1% from SBA lenders, payable within 60 months if relief for the loan is not granted.
In June 2021, the SBA lenders forgave approximately $3,141,000 which represented loan proceeds the Company received in 2020 of $2,508,000 related to its direct selling segment and $633,000 related to its commercial coffee segment.
At the filing date of this Quarterly Report on Form 10-Q, the Company was in communication with the SBA lenders regarding the potential liability the Company will incur (if any) in respect for repayment of the remaining unforgiven loans and consideration of any portion of loan forgiveness of the debt.
2019 PIPE Note Amendments
In February 2021, the Company entered into note amendments (the “2019 PIPE Note Amendments”) with certain holders of an aggregate of $1,000,000 in principal amount of the 2019 PIPE Notes issued by the Company to such investors in February 2019. The 2019 PIPE Notes had been in default and the 2019 PIPE Note Amendments extended the maturity date of the 2019 PIPE Notes by one year to February 2022 and increased the interest rate to 16%. In connection with the foregoing, as an inducement to enter into the 2019 PIPE Note Amendments, the Company issued to certain holders of the 2019 PIPE Notes an aggregate of 150,000 shares of its restricted common stock. At the filing date of this Quarterly Report on Form 10-Q, the Company was in default of the terms of settlement set forth in the 2019 PIPE Note Amendments.
In March 2021, the Company entered into note amendments (the “2019 PIPE Note Amendments”) with certain note holders of an aggregate of $1,440,000 in principal amount of the 2019 PIPE Notes issued by the Company to such investors in February and March 2019. The 2019 PIPE Notes had been in default and the 2019 PIPE Note Amendments extend the maturity date of the 2019 PIPE Notes by one year to February and March 2022, as applicable, and increased the interest rate to 12%. In connection with the foregoing, as an inducement to enter into the 2019 PIPE Note Amendments, the Company issued to the holders of the 2019 PIPE Notes an aggregate of 216,000 shares of its restricted common stock. At the filing date of this Quarterly Report on Form 10-Q, the Company was in default of the terms of settlement set forth in the 2019 PIPE Note Amendments.
2019 Promissory Notes Amendments
In February 2021, the Company entered into note amendments (the “2019 Promissory Notes Amendments”) with the holders of an aggregate of $2,000,000 in principal amount of the 2019 Promissory Notes, issued by the Company in March 2019. The 2019 Promissory Notes Amendments extend the maturity date of the 2019 Promissory Notes held by the investors to May 2022, and increase the interest rate to 16%. In connection with the foregoing, as an inducement to enter into the 2019 Promissory Notes Amendments, the Company issued to certain holders of the 2019 Promissory Notes an aggregate of 400,000 shares of its restricted common stock. In addition, the Company issued one of the note holders a two-year warrant to purchase 150,000 shares of the Company’s common stock at a price per share of $1.00. At the filing date of this Quarterly Report on Form 10-Q, the Company was in default of the terms of settlement set forth in the 2019 Promissory Notes Amendments
Lending Agreements
In May 2022, CLR and KII entered into a lending agreement and received a loan in the amount of approximately $2,000,000, net of loan fees with a stated interest rate of 18.15% through the term of the loan. Principal and interest payments are scheduled weekly through January 2024. The Company used $1,595,000 of the proceeds to pay off the existing balance with the lender. In addition, David Briskie, the Company’s President and Chief Investment Officer, personally guaranteed the Company’s indebtedness with the lender.
In September 2021, the Company entered into a lending agreement and received a loan in the amount of approximately $1,965,000, net of loan fees with a stated interest rate of 23.17% through the term of the loan. Principal and interest payments are scheduled weekly through November 2022. The Company used $465,000 of the proceeds to pay off the existing balance with the lender. In addition, David Briskie, the Company’s President and Chief Investment Officer, personally guaranteed the Company’s indebtedness with the lender.
In December 2020, the Company and CLR entered into lending agreements with two separate entities and received loans aggregating approximately $2,075,000, net of loan fees to be paid back over various periods under one year. Payments are made weekly and are comprised of principal and accrued interest with a stated interest rate between 20% and 25%. The Company’s Chief Executive Officer and Chief Investment Officer are both co-guarantors of the lending agreements.
In December 2020, KII entered into a lending agreement with an entity and received a loan in the amount of approximately $240,000 to be paid back over one year. Payments are made monthly and are comprised of principal and accrued interest with an effective interest rate of approximately 31%. The Company is a guarantor of the lending agreement. At the filing date of this Quarterly Report on Form 10-Q, this lending agreement was in default.
Joint Venture Agreement in Nicaragua for Hemp Processing Center between the CLR and KII and Nicaraguan partner
In April and July 2020, CLR and KII (the U.S. Partners) entered into agreements (the “Hemp Joint Venture Agreements”) with H&H Export and Fitracomex, Inc. (“Fitracomex”) (collectively “The Nicaraguan JV Partners”) and established the Nicaraguan Hemp Grow and Extractions Group joint venture (the “Hemp Joint Venture”). Fitracomex is indirectly related the Company due to its relationship with H&H and is being treated as a related party.
In accordance with the terms of the Hemp Joint Venture Agreements, H&H Export will contribute the 2,200-acre Chaguitillo Farms in Sebaco-Matagalpa, Nicaragua which will be owned by H&H Export and the U.S. Partners on a 50/50 basis separate from the Hemp Joint Venture should the Hemp Joint Venture determine to sell the land in the future.
The Nicaraguan JV Partners will contribute the excavation and preparation for hemp growth of the 2,200 acres, installation of electrical service, and the construction of 45,000 square feet of buildings to be used for office, processing, storage, drying and green house space.
The U.S. Partners will contribute all the necessary extraction equipment to convert hemp to crude oil and will also provide the feminized hemp seeds for the pilot grow program, along with their expertise in the hemp business. The U.S. Partners will also provide all necessary working capital as required.
In July 2020, the Company issued 1,500,000 shares of restricted common stock to Fitracomex in accordance with the April 2020 Hemp Joint Venture Agreements. The fair value of the shares at issuance was approximately $2,490,000. The Company also agreed to issue warrants to Fitracomex for the purchase 5,000,000 shares of the Company’s common stock at an exercise price of $1.50, exercisable for a term of five years after completion of the construction and upon the approval of the Company’s stockholders. At December 31, 2020, the Company reserved the full amount of the investment issued to Fitracomex.
The U.S. Partners and H&H Export will serve as the managing partners and all business decisions will require prior consent and agreement of both parties. The net profits and net losses for each fiscal period shall be allocated twenty five percent to the Nicaraguan JV Partners and seventy five percent to the U.S. Partners. At the filing date of this Quarterly Report on Form 10-Q, the Hemp Joint Venture is currently being assessed for changing market conditions related to the hemp industry, and as a result of the fluctuating indicators the Company is considering the timing of entering the market space in regard to the launch of this project.
Cannooba Joint Venture
In April 2021, CLR and KII (collectively, the “Manufacturing Partner”) entered into a joint venture agreement (the “Cannooba Joint Venture”) with GROWTH by Sabir, Inc. (the “Web Marketing Partner”) for the purpose of selling hemp-derived components such as gummies, tinctures, gel caps, and topicals focused on strong scientific efficacy and extraordinary quality and will primarily be marketed via e-commerce. The Manufacturing Partner will be primarily responsible for manufacturing and operations while the Web Marketing Partner will be primarily responsible for marketing and sales. The net profit and losses will be allocated equally between the Manufacturing Partner and the Web Marketing Partner and will be distributed annually as soon as practicable after each year end. At the time of this filing, the Cannooba Joint Venture was in the pre-launch phase and is expected to launch by the end of the second quarter of 2022.
H&H MA Agreement
In March 2021, CLR entered into a Master Relationship Agreement (the “MA Agreement”) with H&H, H&H Export and the owners of H&H and H&H Export in order to memorialize the various agreements and modifications to those agreements. Additionally, certain events have occurred that have kept the parties from complying with the terms of each of the original agreements and have caused there to be an imbalance with the respect to the funds owed by one party to the other; therefore this MA Agreement also sets forth a detailed accounting of the different business relationships and reconciles the monetary obligations between each party through the end of fiscal year 2020.
The MA Agreement memorialized the key settlement terms and established that H&H owes CLR approximately $10,700,000 that is composed of:
● | past due accounts receivable owed to CLR from H&H Export for 2019 and 2020; |
● | the $5,000,000 note due to CLR plus accrued interest on the note; |
● | CLR lost profits in 2019 and 2020; |
● | the return of working capital provided by CLR for the 2019 and 2020 green coffee program. |
The agreement also includes an offset against amounts owed by H&H to CLR consisting of:
● | H&H’s 25% profit sharing participation for 2019 and 2020; |
● | and an offset of H&H’s open payables owed by CLR to H&H in the amount of approximately $243,000. |
The MA Agreement provides that approximately $10,700,000 is owed to CLR by H&H Export and H&H agrees to satisfy this obligation by providing CLR a minimum of 20 containers (approximately 825,000 pounds) of strictly high grown coffee per month, commencing at the end of March 2021 and continuing monthly until the aforesaid amount is paid in full. The MA Agreement stipulates that the parties have agreed that the coffee to be provided to CLR by H&H for the shipments described above, that in order to satisfy H&H Exports’ debt to CLR, shall not be produced on any plantation that the parties have a joint interest in. CLR has recorded allowances of $7,871,000 related to the H&H Export trade accounts receivable and $5,789,000 related to the H&H Export notes receivable during the year ended December 31, 2020 due to H&H Export’s repayment history and risks associated with redemption of the receivable in coffee.
Properties Sold and Held for Sale
In February 2021, the Company determined that KII’s original plan for use of certain properties was not viable for its future as KII had shifted its focus back to its primary core business of extraction of cannabinoids and the production of products for sale with the cannabinoids.
As a result, the following transactions occurred:
| ● | The Groveland property was sold in May 2021 for $800,000, |
| ● | the Mascotte facility was sold in October 2021 for $975,000, and |
| ● | the Clermont property was sold in February 2022 for $375,000. |
The remaining balances of the notes payable associated with the above properties were paid off at the time of sale.
Location Shutdowns
During 2021, the Company’s direct selling segment voluntarily shut down its locations in Jamaica, Russia and Malaysia based on non-performance. The Company determined it was no longer economically viable to continue to do business in these markets.
Restricted Stock Units
In August 2020, the Company issued in aggregate 39,750 shares of common stock, of which 9,632 shares of common stock were withheld for tax obligations, due to partial vesting of restricted stock units issued to certain employees and consultants of the Company from the August 2017 issuance.
In August 2021, the Company issued in aggregate 54,000 shares of common stock, of which 12,575 shares of common stock were withheld for tax obligations, due to partial vesting of restricted stock units issued to certain employees and consultants of the Company from the August 2017 issuance.
Dividends
During the last nine months of 2020, the Company declared a regular monthly dividend of $0.203125 per share of its 9.75% Series D Cumulative Redeemable Perpetual Preferred Stock (OTCM:YGYIP) for each calendar month end to holders of record as of the last day of the calendar month for the last nine months of 2020. The dividend is payable on approximately the fifteenth day of the following calendar month from date of record. The Company paid cash dividends in the last nine months of 2020 of approximately $1,078,000.
During 2021, the Company declared a regular monthly dividend of $0.203125 per share of its 9.75% Series D Cumulative Redeemable Perpetual Preferred Stock (OTCM:YGYIP) for each calendar month end to holders of record as of the last day of the calendar month in 2021. The dividend is payable on approximately the fifteenth day of the following calendar month from date of record. At the filing date of this Quarterly Report on Form 10-Q, the Company paid cash dividends in 2021 of approximately $1,440,000.
During 2022, the Company declared a regular monthly dividend of $0.203125 per share of its Series D preferred stock for the calendar month end to holders of record (i) as of the last day of December 2021, which was paid in January 2022, (ii) as of the last day of January 2022, which was paid in February 2022, (iii) as of the last day of February 2022, which was paid in March 2022, (iv) as of the last day of March 2022, which was paid in April 2022, (v) as of the last day of April 2022, which was paid in May 2022, and (vi) as of the last day of May 2022, which was paid June 15, 2022. At the filing date of this quarterly report, the Company paid cash dividends of approximately $719,000 during 2022.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operation in this Quarterly Report on Form 10-Q contains forward-looking statements. The words “expects,” “anticipates,” “believes,” “intends,” “plans” and similar expressions identify forward-looking statements. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. We undertake no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this Form 10-Qfor the three months ended March 31, 2020 (the “March 2020 10-Q”) should be read in conjunction with the Securitiesaudited consolidated financial statements and Exchange Commission. These forward-looking statementsrelated notes, which are subject to risks and uncertainties, including, without limitation, those risks and uncertainties discussed in Part I, Item 1A, “Risk Factors” andincluded in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual reportAnnual Report on Form 10-K/A10-K for the year ended December 31, 2019 (the “2019 10-K”), as filed with the Securities and Exchange Commission on August 14, 2017 and herein and as reported under Part II Other Information, Item 1A. Risk Factors.June 25, 2021. In addition newto historical information, the following discussion contains certain forward-looking statements that involve risks, emerge from timeuncertainties and assumptions. Where possible, we have tried to time and it is not possible for management to predict allidentify these forward-looking statements by using words such risk factorsas “anticipate,” “believe,” “intends,” or to assess the impact of such risk factors on our business. Accordingly, our futuresimilar expressions. Our actual results maycould differ materially from historical results or from those discussedanticipated expressed or implied by thesethe forward-looking statements. Given thesestatements due to important factors and risks including, but not limited to, those set forth under “Risk Factors” in Part I, Item 1A of the 2019 10-K.
Unless the context requires otherwise, references to “we,” “us,” “our,” the “Company” and uncertainties, the reader should not place undue reliance on these forward-looking statements.
Overview
We operate in twothree segments: (i) the direct selling segment, where products are offered through a global distribution network of preferred customers and distributors, and(ii) the commercial coffee segment, where products are sold directly to businesses.
Three months ended | Nine months ended | |||
September 30, | September 30, | |||
2017 | 2016 | 2017 | 2016 | |
| Revenues | ||||
| Direct selling | $37,954 | $38,576 | $106,734 | $110,393 |
| As a % of Revenue | 85% | 89% | 86% | 89% |
| Commercial coffee | 6,441 | 4,986 | 17,921 | 13,871 |
| As a % of Revenue | 15% | 11% | 14% | 11% |
| Total revenues | $44,395 | $43,562 | $124,655 | $124,264 |
For the three months ended September 30, 2017 and 2016 approximately 12% and 9%, respectively, of the Company’s sales were derived from sales outside the United States. For the nine months ended September 30, 2017 and 2016 approximately 11% and 9%, respectively, of the Company’s sales were derived from sales outside the United States.
We conduct our operations primarily in the United States (“U.S.”). For the three months ended March 31, 2020 and 2019 approximately 17% and 13%, respectively, of our revenues were derived from sales outside the U.S.
Overview of Significant Events
Public Offering. Between September and December 2019, we closed two tranches of our Series D offering, pursuant to which we issued and sold a total of 578,898 shares of our 9.75% Series D preferred stock at a weighted average price to the public of $24.05 per share, less underwriting discounts and commissions, pursuant to the terms of the underwriting agreement that we entered into with the Benchmark Company, LLC (“Benchmark”) as representative of the several underwriters. The 578,898 shares of Series D preferred stock that were sold included 43,500 shares sold pursuant to the overallotment option that we granted to the underwriters that was exercised in full. In January 2020, we issued an additional 11,375 shares of Series D preferred stock upon the partial exercise by the underwriters.
The Series D preferred stock was approved for listing on The Nasdaq Capital Market under the symbol “YGYIP,” and had commenced trading on September 20, 2019. The net proceeds from this offering were approximately $12,269,000 after deducting underwriting discounts and commissions and expenses which were paid by us. Trading in the Series D preferred stock was suspended on the Nasdaq Capital Market on November 20, 2020, and on February 2, 2021, the Series D preferred stock was removed from listing on Nasdaq Capital Market, effective at the opening of the trading session on February 12, 2021. Our Series D preferred stock is now traded on OTC Pink market under the same symbol YGYIP.
Stock Offerings. In February 2019, we entered into a securities purchase agreement with one accredited investor that had a substantial pre-existing relationship with us pursuant to which we sold 250,000 shares of our common stock at an offering price of $7.00 per share. Pursuant to the purchase agreement, we also issued to the investor a three-year warrant to purchase 250,000 shares of common stock at an exercise price of $7.00. We received proceeds of $1,750,000 from the stock offering. Consulting fees for arranging the purchase agreement include the issuance of 5,000 shares of restricted shares of our common stock and a three-year warrant priced at $10.00 per share convertible into 100,000 shares of our common stock upon exercise.
In June 2019, we entered into a securities purchase agreement with Daniel Mangless, with whom we had a pre-existing relationship, pursuant to which we sold 250,000 shares of common stock at an offering price of $5.50 per share. We received proceeds of $1,375,000 from the stock offering.
At-the-Market Equity Offering Program. In January 2019, we entered into an at-the-market offering agreement (the “ATM agreement”) with Benchmark pursuant to which we may sell from time to time, at our option, shares of our common stock through Benchmark, as sales agent, for the sale of up to $60,000,000 of shares of our common stock. We are not obligated to make any sales of common stock under the ATM agreement and we cannot provide any assurances that we will issue any shares pursuant to the ATM agreement. During the year ended December 31, 2019, we received approximately $102,000 from the sale of 17,524 shares of common stock under the ATM agreement. We are not currently eligible to register the offer and sale of our securities using a registration statement on Form S-3 and therefore cannot make sales under the ATM agreement until such time as we once again become S-3 eligible.
Convertible Notes. Between February and July 2019, we closed five tranches related to the January 2019 private placement debt offering, pursuant to which we offered for sale up to $10,000,000 in principal amount of notes (the “2019 PIPE Notes”), with each investor receiving 2,000 shares of common stock for each $100,000 invested. We entered into subscription agreements with thirty-one accredited investors that had a substantial pre-existing relationship with us pursuant to which we received aggregate gross proceeds of $3,090,000 and issued 2019 PIPE Notes in the aggregate principal amount of $3,090,000 and an aggregate of 61,800 shares of common stock. The placement agent received 15,450 shares of common stock for the closed tranches as compensation. Each 2019 PIPE Note matures 24 months after issuance, bears interest at a rate of 6.00% per annum, and the outstanding principal is convertible into shares of common stock at any time after the 180th day anniversary of the issuance of the 2019 PIPE Notes, at a conversion price of $10.00 per share, subject to adjustment for stock splits, stock dividends and reclassification of the common stock. The 2019 PIPE Notes are secured by all equity in KII.
In February and March 2021, the 2019 PIPE Notes that were maturing were amended to extend the maturity dates by one year with certain note holders of an aggregate total of $2,440,000 in principal amount. At the filing date of this Quarterly Report on Form 10-Q, we were in default of the terms of settlement set forth in the amendments. (See Note 13 to the condensed consolidated financial statements.)
Promissory Notes. In March 2019, we entered into 2019 Promissory Notes with two accredited investors with whom we had a substantial pre-existing relationship with and from whom we raised cash proceeds in the aggregate of $2,000,000. The 2019 Promissory Notes are secured by all equity in KII. In consideration of the 2019 Promissory Notes, we issued 20,000 shares of our common stock for each $1,000,000 invested as well as for each $1,000,000 invested five-year warrants to purchase 20,000 shares of our common stock at a price per share of $6.00. The 2019 Promissory Notes paid interest at a rate of 8.00% per annum and interest was paid quarterly in arrears with all principal and unpaid interest due at maturity in March 2021. We issued in the aggregate 40,000 shares of common stock and 40,000 warrants with the 2019 Promissory Notes.
In February 2021, we entered into amendment agreements extending the 2019 Promissory Notes and increasing the interest rate. (See Note 13 to the condensed consolidated financial statements.)
In March 2020, we closed one tranche of our March 2020 private placement debt offering, pursuant to which we received proceeds of $1,000,000 and we issued a senior secured promissory note in the principal amount of $1,000,000 which matured in December 2020 and 50,000 shares of our common stock in connection with this senior secured promissory note. The promissory note and common stock were issued in our private placement pursuant to which we offered up to an aggregate of $5,000,000 in principal amount together with up to 250,000 shares of common stock with each investor receiving 50,000 shares of common stock for each $1,000,000 invested. The senior secured promissory notes interest rate was 18.00% per annum.
In April 2021, we entered into a settlement agreement with Mr. Mangless related to the payment schedule of the senior secured promissory note issued in March 2020. (See Note 13 to the condensed consolidated financial statements.)
Small Business Administration – Paycheck Protection Program Loan. Our three segments participated in “The Coronavirus Aid, Relief, and Economic Security Act, and the Paycheck Protection Program due to losses caused by the COVID-19 pandemic. In April 2020, we received cash in the aggregate of approximately $3,763,000 from qualified Small Business Administrators (“SBA”) lenders. Under the SBA loans, we received $2,508,000 related to our direct selling segment, $633,000 related to our commercial coffee segment and $623,000 related to our commercial hemp segment of which $613,000. In July 2020, our commercial coffee segment received a second loan in the amount of $150,000 from SBA lenders. Our direct selling segment qualified for mortgage assistance, whereby our corporate office’s mortgage was paid directly from the SBA lenders for a period of six months in 2020 and an additional two months in 2021. In November 2020, the SBA lenders forgave approximately $613,000 of the loan proceeds received related to our commercial hemp segment. In April 2021, our commercial coffee segment received a third loan in the amount of approximately $633,000 from SBA lenders. In June 2021, the SBA lenders forgave approximately $3,141,000 which represented loan proceeds we received in 2020. (See Note 13 to the condensed consolidated financial statements.)
H&H transactions
Mill Construction Agreement
In January 2019, to accommodate CLR’s green coffee purchase contract, CLR entered into an agreement with H&H and H&H Export, Mr. Hernandez and Ms. Orozco, collectively referred to as the Nicaraguan Partner, pursuant to which the Nicaraguan Partner agreed to transfer the Matagalpa Property to be owned 50% by the Nicaraguan Partner and 50% by CLR. In consideration for the land acquisition we issued to H&H Export, 153,846 shares of common stock. The fair value of the shares issued was $1,200,000 and was based on the stock price on the date of issuance of the shares. In addition, the Nicaraguan Partner and CLR agreed to contribute $4,700,000 each toward construction of a processing plant, office, and storage facilities on the Matagalpa Property for processing coffee in Nicaragua. The addition of the mill will accommodate CLR’s green coffee contract commitments. For the three months ended March 31, 2020 and 2019, CLR made payments of approximately $300,000 and $1,350,000, respectively, towards the construction of the Matagalpa Mill project. At March 31, 2020, CLR contributed a total of $3,350,000 towards the construction of the Matagalpa Mill project, and paid a total of $391,000 for operating equipment. At March 31, 2020, the Nicaraguan Partner contributed a total of $2,513,000 towards the Matagalpa Mill project. At the filing date of this Quarterly Report on Form 10-Q, the Matagalpa Mill was still incomplete for total operations.
In January 2019, we issued 295,910 shares of our common stock to H&H Export to pay for certain working capital, construction and other payables. In connection with the issuance, we over issued 121,649 shares of common stock, resulting in the net issuance of common stock to settle payables of 174,261 shares. H&H Export agreed to reimburse CLR for the over issuance of the 121,649 shares of common stock in cash. At March 31, 2020 and December 31, 2019, the value of the shares was approximately $85,000 and $397,000, respectively, based on the stock price at the respective periods. Management has reviewed the amount due and in conjunction with the impact of the underlying COVID crisis and has determined that the full receivable balances was more than likely to be uncollected at March 31, 2020 and 2019, respectively, and therefore the full amount was recognized as an allowance for collectability at the respective periods.
Amendment to Operating and Profit-Sharing Agreement between CLR and H&H
In January 2019, CLR entered into an amendment to the March 2014 operating and profit-sharing agreement with the owners of H&H. In addition, CLR and H&H, Mr. Hernandez and Ms. Orozco restructured their profit-sharing agreement in regard to profits from green coffee sales and processing that increased CLR’s profit participation by an additional 25%. Under the new terms of the agreement with respect to profit generated from green coffee sales and processed from La Pita or the Matagalpa Mill. now will provide for a split of profits of 75% to CLR and 25% to the Nicaraguan Partner, after certain conditions are met. Profit-sharing income for the three months ended March 31, 2020 was approximately $115,000 compared to profit-sharing expense of $243,000 for the three months ended March 31, 2019.
Joint Venture Agreement in Nicaragua for Hemp Processing Center between the CLR and KII and Nicaraguan partner
In April and July 2020, CLR and KII (the U.S. Partners) entered into agreements (the “Hemp Joint Venture Agreements”) with H&H Export and Fitracomex, Inc. (“Fitracomex”) (collectively “The Nicaraguan JV Partners”) and established the Nicaraguan Hemp Grow and Extractions Group joint venture (the “Hemp Joint Venture”). Fitracomex is indirectly related to us due to its relationship with H&H and is being treated as a related party.
In accordance with the terms of the Hemp Joint Venture Agreements, H&H Export will contribute the 2,200-acre Chaguitillo Farms in Sebaco-Matagalpa, Nicaragua which will be owned by H&H Export and the U.S. Partners on a 50/50 basis separate from the Hemp Joint Venture should the Hemp Joint Venture determine to sell the land in the future.
The Nicaraguan JV Partners will contribute the excavation and preparation for hemp growth of the 2,200 acres, installation of electrical service, and the construction of 45,000 square feet of buildings to be used for office, processing, storage, drying and green house space.
The U.S. Partners will contribute all the necessary extraction equipment to convert hemp to crude oil and will also provide the feminized hemp seeds for the pilot grow program, along with their expertise in the hemp business. The U.S. Partners will also provide all necessary working capital as required.
In July 2020, we issued 1,500,000 shares of restricted common stock to Fitracomex in accordance with the April 2020 Hemp Joint Venture Agreements. The fair value of the shares at issuance was approximately $2,490,000. We also agreed to issue warrants to Fitracomex for the purchase 5,000,000 shares of our common stock at an exercise price of $1.50, exercisable for a term of five years after completion of the construction and upon the approval of our stockholders. At December 31, 2020, we reserved the full amount of the investment issued to Fitracomex.
The U.S. Partners and H&H Export will serve as the managing partners and all business decisions will require prior consent and agreement of both parties. The net profits and net losses for each fiscal period shall be allocated twenty five percent to the Nicaraguan JV Partners and seventy five percent to the U.S. Partners. At the filing date of this Quarterly Report on Form 10-Q, the Hemp Joint Venture is currently being assessed for changing market conditions related to the hemp industry, and as a result of the fluctuating indicators we are considering the timing of entering the market space in regard to the launch of this project.
Master Relationship Agreement
In March 2021, CLR entered into a Master Relationship Agreement (“MA Agreement”) with the owners of H&H in order to memorialize the various agreements and modifications to those agreements. Additionally, certain events have occurred that have kept the parties from complying with the terms of each of the original agreements and have caused there to be an imbalance with the respect to the funds owed by one party to the other; therefore this MA Agreement also sets forth a detailed accounting of the different business relationships and reconciles the monetary obligations between each party through the end of fiscal year 2020.
This MA Agreement memorialized the key settlement terms and established that H&H owes CLR approximately $10,700,000 that is composed of:
● | past due accounts receivable owed to CLR from H&H for 2019 and 2020; |
● | the $5,000,000 note due to CLR plus accrued interest on the note; |
● | CLR lost profits in 2019 and 2020; |
● | the return of working capital provided by CLR for the 2019 and 2020 green coffee program. |
The agreement also includes an offset against amounts owed by H&H to CLR consisting of:
● | H&H’s 25% profit sharing participation for 2019 and 2020; |
● | and an offset of H&H’s open payables owed by CLR to H&H in the amount of approximately $243,000. |
The MA Agreement provides that approximately $10,700,000 is owed to CLR by H&H and H&H agrees to satisfy this obligation by providing CLR a minimum of 20 containers (approximately 825,000 pounds) of strictly high grown coffee per month, commencing at the end of March 2021 and continuing monthly until the aforesaid amount is paid in full. The MA Agreement stipulates that the parties have agreed that the coffee to be provided to CLR by H&H for the shipments described above, that in order to satisfy H&H’s debt to CLR, shall not be produced on any plantation that the parties have a joint interest in. CLR has recorded allowances of $7,871,000 related to the H&H trade accounts receivable and $5,789,000 related to the H&H note receivable during the year ended December 31, 2020 due to H&H’s repayment history and risks associated with redemption of the receivable in coffee.
Acquisitions
In November 2019, we acquired certain assets of BeneYOU. BeneYOU is a nutritional and beauty product company that brings customers and distributors of brands of Jamberry which offers a line of nail products, the brand Avisae which focuses on gut health and the brand M.Global which delivers hydration products. (See Note 2 to the condensed consolidated financial statements.)
In February 2019, KII acquired the assets of Khrysos Global and all the outstanding equity of INXL and INXH. The collective business manufactures proprietary systems to provide end-to-end extraction and processing that allow for the conversion of hemp feed stock into hemp oil and hemp extracts. For the three months ended March 31, 2019, commercial hemp revenues represented transactions beginning from the date of acquisition of Khrysos Global. (See Note 2 to the condensed consolidated financial statements.)
Going Concern
The accompanying condensed consolidated financial statements have been prepared and presented on a basis assuming we will continue as a going concern. At March 31, 2020, we had a significant accumulated deficit and had experienced significant losses and incurred negative cash flows for the last few years. We sustained significant net losses during the three months ended March 31, 2020 and 2019 of approximately $5,791,000 and $12,260,000, respectively. Net cash used in operating activities was $681,000 and $4,831,000 for the three months ended March 31, 2020 and 2019, respectively. We anticipate similar continued results for the year 2021.
Management has assessed our ability to continue as a going concern and concluded that additional capital will be required during the twelve-months subsequent to the filing date of this Quarterly Report on Form 10-Q. The timing of when the additional capital will be required is uncertain and highly dependent on factors discussed below. There can be no assurance that we will be able to execute license or purchase agreements or to obtain equity or debt financing, or on terms acceptable to it. Factors within and outside our control could have a significant bearing on its ability to obtain additional financing. As a result, management has determined that there are material uncertainties that raise substantial doubt upon our ability to continue as a going concern.
At March 31, 2020, cash and cash equivalents totaled approximately $3,243,000. We have and continue to take actions to alleviate the cash used in operations. During the three months ended March 31, 2020, we reported total revenue of approximately $35,531,000 a decrease of approximately 13.7% compared to the same period a year ago. We continue to focus on revenue growth, but we cannot make assurances that revenues will grow. Additionally, we have plans to make the necessary cost reductions and to reduce non-essential expenses, including international operations that are not performing well to help alleviate the cash used in operating activities.
The outbreak of COVID-19 and resulting pandemic resulted in significant contraction of economies around the world and interrupted global supply chains as many governments issued stay-at-home orders to combat COVID-19. The outbreak of COVID-19 also impacted our ability to properly staff and maintain our domestic and international warehousing operations due to stay-at-home orders issued within various locations where we operate warehouse and shipping operations. We took actions to mitigate the impact but cannot assert that future stay-at-home orders or further restrictive orders will not have an impact on future operations. We experienced changes in product mix demand, with demand increasing toward health-oriented products and weakening for non-health related products. Such changes in demand may have a significant impact on revenues, margins and net operating profit in the future. The outbreak has also impacted our ability to obtain some ingredients and packaging as well as ship products in some markets. Our supply chain and logistics have incurred some interruptions and cost impacts to date, and we could experience more significant interruptions and cost impacts. Our suppliers of raw material and supplies have and could continue to be impacted by geopolitical events, such as the war in Ukraine, thus interrupting our supply chain. Additionally, our customers may experience interruptions from other suppliers that could cause a customer to delay or cancel orders. These factors and other events have negatively impacted our sales and operations and will likely continue to negatively affect our business and financial results. We are unable to predict the possible future effect on the demand for products sold by the Company, and the related revenues, margins and operating profit due to these events.
In addition, the outbreak of the COVID-19 coronavirus has disrupted our operations due to absenteeism by infected or ill members of management or other employees, or absenteeism by members of management and other employees who elect not to come to work due to the illness affecting others in our office or other workplace, or due to quarantines. COVID-19 illness could also impact members of our board of directors resulting in absenteeism from meetings of the directors or committees of directors and making it more difficult to convene the quorums of the full board of directors or its committees needed to conduct meetings for the management of the Company’s affairs.
We continue to seek and obtain equity or debt financing on terms that are acceptable to the Company. Depending on market conditions, there can be no assurance that additional capital will be available when needed or that, if available, it will be obtained on terms favorable to us and our stockholders.
These financial statements have been prepared on a going concern basis, which asserts the Company has the ability in the near term to continue to realize its assets and discharge its liabilities and commitments in a planned manner giving consideration to the above and expected possible outcomes. The financial statements do not include any adjustments that might be necessary from the outcome of this uncertainty. Within the current operating environment due to the declared national emergency, related to COVID 19 combined with the management plans described above the Company cannot assert that the doubt of the Company’s ability to continue as a going concern has been substantially alleviated, Conversely, if the going concern assumption is not appropriate, adjustments to the carrying amounts of the Company’s assets, liabilities, revenues, expenses and balance sheet classifications may be necessary, and these adjustments could be material.
Results of Operations
Three months ended March 31, 2020 compared to three months ended March 31, 2019
Revenues
For the three months ended March 31, 2020, our revenues decreased approximately $5,661,000 or 13.7% to approximately $35,531,000 as compared to $41,192,000 for the three months ended March 31, 2019. During the three months ended March 31, 2020, we derived 87.7% of our revenue from our direct selling sales, 11.4% of our revenue from our commercial coffee sales and approximately 0.9% from our hemp segment.
For the three months ended March 31, 2020, direct selling segment revenues decreased by $622,000approximately $2,264,000 or 1.6%6.8% to $37,954,000$31,156,000 as compared to $38,576,000$33,420,000 for the three months ended September 30, 2016. ThisMarch 31, 2019. The decrease was primarily attributed to a decreasethe continued impact of $5,366,000COVID-19 that has disrupted various supply chains affecting product availability and the year-over-year decline in revenues from existing business offset by additional revenuesthe number of $4,744,000 deriveddistributors resulting from the Company’s 2016inability to hold distributor events and 2017 acquisitions compared to the prior period. The decrease in existing business was primarily due to reduction in revenues related to key management and distributors moving to another direct selling company. training.
For the three months ended September 30, 2017,March 31, 2020, commercial coffee segment revenues increaseddecreased by $1,455,000approximately $3,646,000 or 29.2%47.3% to $6,441,000$4,059,000 as compared to $4,986,000$7,705,000 for the three months ended September 30, 2016. ThisMarch 31, 2019. The decrease in revenue was attributed to decreases in revenues from milling and processing services of $4,658,000, partially offset by an increase in our roasted coffee business of $593,000 and an increase in green coffee sales of $419,000. The decrease in milling and processing services and the increase in green coffee sales reflects the Company’s strategic shift in moving from mill processing revenues, primarily billed to H&H Export, to sales of green coffee, primarily sold to Rothfos.
For the three months ended March 31, 2020, commercial hemp segment revenues increased by $249,000 to $316,000 as compared to $67,000 for the three months ended March 31, 2019 which represented a partial quarter of revenue. The increase was primarily attributed to increased revenues in our green coffee business.
The following table summarizes our revenue in thousands by segment:
For the three months ended September 30, | Percentage | ||
| Segment Revenues | 2017 | 2016 | change |
| Direct selling | $37,954 | $38,576 | (1.6)% |
| Commercial coffee | 6,441 | 4,986 | 29.2% |
| Total | $44,395 | $43,562 | 1.9% |
Three Months Ended March 31, | Percentage | |||||||||||
2020 | 2019 | Change | ||||||||||
Direct selling | $ | 31,156 | $ | 33,420 | (6.8 | )% | ||||||
As a % of Revenue | 87.7 | % | 81.1 | % | 6.6 | % | ||||||
Commercial coffee: | ||||||||||||
Processed green coffee | 519 | 100 | 419.0 | % | ||||||||
As a % of Segment Revenue | 12.8 | % | 1.3 | % | 11.5 | % | ||||||
Milling and processing services | 168 | 4,826 | (96.5 | )% | ||||||||
As a % of Segment Revenue | 4.1 | % | 62.6 | % | (58.5 | )% | ||||||
Roasted coffee and other | 3,372 | 2,779 | 21.3 | % | ||||||||
As a % of Segment Revenue | 83.1 | % | 36.1 | % | 47.0 | % | ||||||
Total commercial coffee | 4,059 | 7,705 | (47.3 | )% | ||||||||
As a % of Revenue | 11.4 | % | 18.7 | % | (7.3 | )% | ||||||
Commercial hemp | 316 | 67 | 371.6 | % | ||||||||
As a % of Revenue | 0.9 | % | 0.2 | % | 0.7 | % | ||||||
Total | $ | 35,531 | $ | 41,192 | (13.7 | )% | ||||||
Cost of Revenues
For the three months ended September 30, 2017, overallMarch 31, 2020, cost of revenues increased approximately 8.4%9.8% to $18,631,000$15,744,000 as compared to $17,194,000$14,343,000 for the three months ended September 30, 2016. March 31, 2019.
The direct selling segment cost of revenues increased 1.1% whendecreased 1.7% to approximately $10,481,000 as compared to $10,665,000 for the same period last year as a result of product mix. three months ended March 31, 2019, primarily attributable to the decrease in revenues discussed above.
The commercial coffee segment cost of revenues increased 26.8%27.1% to approximately $4,623,000 as compared to $3,638,000 for the three months ended March 31, 2019, primarily attributable to the shift away from revenue for milling and processing services in 2020 when compared to 2019. As revenue for milling services does not contain a cost of goods sold component, the same period last year. Thisshift in revenue away from milling and processing services increased our cost of revenue year-over-year. Cost of revenues for processed green coffee for the three months ended March 31, 2020 increased 25.9% to $764,000 compared to $607,000 during the three months ended March 31, 2019. Cost of revenues for roasted coffee for the three months ended March 31, 2020 increased 27.3% to $3,859,000 compared to $3,031,000 during the three months ended March 31, 2019.
The commercial hemp segment cost of revenues increased to approximately $640,000 as compared to $40,000 for the three months ended March 31, 2019 which represented a partial quarter of cost of revenues. The increase was primarily attributable to
Gross Profit
For the three months ended September 30, 2017,March 31, 2020, gross profit decreased to approximately 2.3% to $25,764,000$19,787,000 as compared to $26,368,000$26,849,000 for the three months ended September 30, 2016. Overall grossMarch 31, 2019. Gross profit as a percentage of revenues decreased to 58.0%for the three months ended March 31, 2020 and 2019 was 55.7% and 65.2%, compared to 60.5% in the same period last year.respectively.
Gross profit in the direct selling segment decreased by 2.9% to $25,472,000approximately $20,675,000 from $26,233,000$22,755,000 for the three months ended March 31, 2019, primarily due to the decrease in the prior period as a result of the changes in revenues and costs discussed above.revenues. Gross profit as a percentage of revenues in the direct selling segment decreased by approximately 0.9% to 67.1% for the three months ended September 30, 2017, compared to 68.0% in the same period last year. ThisMarch 31, 2020 and 2019 was primarily due to increased social selling discounts offered in the current period.
Gross profitloss in the commercial coffee segment increased by 116% to $292,000was approximately $564,000 compared to $135,000 ingross profit of $4,067,000 for the prior period.three months ended March 31, 2019. Gross loss as a percentage of revenues for the three months ended March 31, 2020 was 13.9%. Gross profit as a percentage of revenues for the three months ended March 31, 2019 was 52.8%. The increasedecrease in gross profit in the commercial coffee segment was primarily due to the increasedecrease of $4,658,000 in revenue from the processing and milling of unprocessed green coffee that in turn drove lower gross profit results year-over-year combined with the year-over-year change in roasted coffee sales and cost of goods sold that increased negative gross profit by $235,000, partially offset with the changes in revenue and cost of goods sold from processed green coffee sales that generated a year-over-year decrease in negative gross profit of approximately $262,000.
Gross loss in the commercial hemp segment was approximately $324,000 compared to gross profit of $27,000 for the three months ended March 31, 2019 which represented a partial quarter of gross profit. Gross loss as a percentage of revenues discussed above.for the three months ended March 31, 2020 was 102.5%. Gross profit as a percentage of revenues for the three months ended March 31, 2019 was 40.3%. The increase in the commercial coffee segment increased by 1.8%gross loss was primarily attributable to 4.5% for the period ended September 30, 2017,cost of goods sold increasing at a higher rate than revenues in 2020 compared to 2.7% in the same period last year.
Below is a table of gross profit (loss) by segment (in thousands) and gross profit (loss) as a percentage of segment revenues:
For the three months ended September 30, | Percentage | ||
| Segment Gross Profit | 2017 | 2016 | change |
| Direct selling | $25,472 | $26,233 | (2.9)% |
| Gross Profit % of Revenues | 67.1% | 68.0% | (0.9)% |
| Commercial coffee | 292 | 135 | 116.3% |
| Gross Profit % of Revenues | 4.5% | 2.7% | 1.8% |
| Total | $25,764 | $26,368 | (2.3)% |
| Gross Profit % of Revenues | 58.0% | 60.5% | (2.5)% |
Three Months Ended March 31, | Percentage | |||||||||||
2020 | 2019 | Change | ||||||||||
Direct selling | $ | 20,675 | $ | 22,755 | (9.1 | )% | ||||||
Gross Profit % of Segment Revenues | 66.4 | % | 68.1 | % | (1.7 | )% | ||||||
Commercial coffee: | ||||||||||||
Processed green coffee | (245 | ) | (507 | ) | (51.7 | )% | ||||||
Gross Loss % of Segment Revenues | (6.0 | )% | (6.6 | )% | 0.5 | % | ||||||
Milling and processing services | 168 | 4,826 | (96.5 | )% | ||||||||
Gross Profit % of Segment Revenues | 4.1 | % | 62.6 | % | (58.5 | )% | ||||||
Roasted coffee and other | (487 | ) | (252 | ) | (93.3 | )% | ||||||
Gross Loss % of Segment Revenues | (12.0 | )% | (3.3 | )% | (8.7 | )% | ||||||
Total commercial coffee | (564 | ) | 4,067 | (113.9 | )% | |||||||
Gross Profit (Loss) % of Segment Revenues | (13.9 | )% | 52.8 | % | (66.7 | )% | ||||||
Commercial hemp | (324 | ) | 27 | (1,300.0 | )% | |||||||
Gross Profit (Loss)% of Segment Revenues | (102.5 | )% | 40.3 | % | (142.8 | )% | ||||||
Total | $ | 19,787 | $ | 26,849 | (26.3 | )% | ||||||
Gross Profit % of Revenues | 55.7 | % | 65.2 | % | (9.5 | )% | ||||||
Operating Expenses
For the three months ended September 30, 2017,March 31, 2020, our operating expenses increaseddecreased 31.8% to approximately 6.9% to $27,581,000$26,464,000 as compared to $25,792,000$38,790,000 for the three months ended September 30, 2016. IncludedMarch 31, 2019. The decrease included lower stock-based compensation and equity-based compensation for services of $11,012,000 and $1,170,000, respectively, in operating expense is2020 compared to 2019.
Distributor Compensation
For the three months ended March 31, 2020, the distributor compensation paid to our independent distributors in the direct selling segment. For the three months ended September 30, 2017, distributor compensationsegment decreased 3.9%5.6% to $17,391,000approximately $14,051,000 from $18,101,000$14,890,000 for the three months ended September 30, 2016. ThisMarch 31, 2019. The decrease was primarily attributable to the decrease in revenues and lower commissions paid on discounted items.revenues. Distributor compensation as a percentage of direct selling revenues decreased to 45.8%was 45.1% and 44.6% for the three months ended September 30, 2017 as comparedMarch 31, 2020 and 2019, respectively.
Sales and Marketing
For the three months ended March 31, 2020, total sales and marketing expense decreased by 13.6% to 46.9%approximately $3,473,000 from $4,019,000 for the three months ended September 30, 2016.
In the direct selling segment, sales and marketing expense for the three months ended March 31, 2020 decreased by 17.3% to approximately $3,074,000 from $3,715,000 for the same period last year. The decrease included lower stock-based compensation of $466,000 in 2020 compared to 2019 which represented 72.8% of the decrease in sales and marketing expenses. The remaining decrease was primarily due to decreases in expenses related to conventions and distributor events, wages and benefits related to temporary labor costs, partially offset by an increase in marketing expenses related to the rewards points programs.
In the commercial coffee segment, sales and marketing costs for the three months ended March 31, 2020 increased by 26.1% to approximately $367,000 from $291,000 for the same period last year. The increase was primarily due to higher marketing expenses.
In the commercial hemp segment, sales and marketing costs for the three months ended March 31, 2020 increased to approximately $32,000 from $13,000 for the same period last year which represented a partial quarter of sales and marketing expense.
General and Administrative
For the three months ended September 30, 2017, the salesMarch 31, 2020, total general and marketingadministrative expense increased 28.1%decreased to $4,074,000approximately $8,940,000 from $3,181,000$19,881,000 for the three months ended September 30, 2016March 31, 2019. The decrease was primarily due to expenses relatedlower stock-based compensation and equity-based compensation for services of $10,546,000 and $1,170,000, respectively, in 2020 compared to 2019.
In the Company’s twentieth anniversary convention held in Dallas, Texas in August 2017 and increase in wages and related benefits. Sales and marketing expenses also increased in the commercial coffeedirect selling segment, primarily due to increased wages and advertising expense related to the agreement with the Miami Marlins.
In the commercial coffee segment, general and extinguishment loss on debt.
In the commercial hemp segment, general and administrative costs for the three months ended September 30, 2016. Interest expense includes interest paymentsMarch 31, 2020 increased to $1,908,000 from $530,000 for the same period last year which represented a partial quarter of general and administrative expense. The decrease was primarily due to higher costs related to acquisitionsequity-based compensation for services of $325,000, salaries and otherprofessional fees.
Operating Loss
For the three months ended March 31, 2020, our operating debt, interest paymentsloss decreased by approximately $5,264,000 to investors associated with the 2014, 2015 and 2017 Private Placement transactions of $1,043,000 and related non-cash amortization costs of $710,000 and other non-cash costs of $8,000. Net interest expense also includes $9,000 in interest income.
Other Income (Expense), net
For the three months ended March 31, 2020, net other income increased by $890,000 to $869,000 as compared to $21,000 of net other expense for the three months ended September 30, 2016.March 31, 2019. The change was due to higher net interest expense and the change in the fair value of derivative liabilities.
Net interest expense decreased by $887,000 for the three months ended March 31, 2020 to $620,000, compared to $1,507,000 for the three months ended March 31, 2019. Interest income for the three months ended March 31, 2020 and 2019 was $113,000 and $5,000, respectively.
The change in fair value of derivative liabilities increased by $3,000 for the three months ended March 31, 2020 to $1,489,000 in other income compared to $1,486,000 for the three months ended March 31, 2019. Various factors are considered in the pricing models we use to value the warrants including our current stock price, the remaining life of the warrants, the volatility of our stock price, and the risk freerisk-free interest rate. Future changes in these factors may have a significant impact on the computed fair value of the warrant liability.Company’s derivative liabilities. As such, we expect future changes in the fair value of the warrants to continue and may vary significantly from yearperiod to yearperiod (see Note 7,Notes 8 & 9 to the condensed consolidated financial statements.)
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the effective date of the change. The Company has determinedAt December 31, 2019, we evaluated the realizability of the deferred tax asset, based upon achieved and estimated future results and through consideration of all positive and negative evidenceevidences and have determined that the US deferred tax assets areit is more likely than not tothat the deferred tax assets will not be realized. The Company does not have a valuation allowance in the US Federal tax jurisdiction. A valuation allowance remains on the U.S. state and foreign tax attributes that are likely to expire before realization. At December 31, 2019, we had approximately $75,000 in refundable credits, and we expect that a substantial portion will be refunded between 2020 and 2021. As such, we do not have a valuation allowance relating to the refundable AMT credit carryforward. We have recognized an income tax benefit of $1,290,000,$17,000 which is our estimated federal, state and foreign income tax benefit for the three months ended September 30, 2017.March 31, 2020. The income tax benefit fordifference between the three months ended September 30, 2016 was $68,000. The current effective tax rate forand the three months ended September 30, 2017 was 54.7% comparedfederal statutory rate of 21% is due to the Federal statutorypermanent differences, change in valuation allowance, state taxes (net of federal benefit), and foreign tax rate of 35%.
Net (Loss) Income
For the three months ended September 30, 2017,March 31, 2020, the Company reported a net loss of $1,068,000$5,791,000 as compared to net income of $67,000$12,260,000 for the three months ended September 30, 2016.March 31, 2019. The primary reason for the increasedecrease in net loss when compared to the prior period was due to a net loss before income taxes of $2,358,000 in 2017 compared to a net loss before income taxes in 2016 of $1,000.
For the nine months ended September 30, | Percentage | ||
| Segment Revenues | 2017 | 2016 | change |
| Direct selling | $106,734 | $110,393 | (3.3)% |
| Commercial coffee | 17,921 | 13,871 | 29.2% |
| Total | $124,655 | $124,264 | 0.3% |
For the nine months ended September 30, | Percentage | ||
| Segment Gross Profit | 2017 | 2016 | change |
| Direct selling | $71,522 | $74,690 | (4.2)% |
| Gross Profit % of Revenues | 67.0% | 67.7% | (0.7)% |
| Commercial coffee | 210 | 472 | (55.5)% |
| Gross Profit % of Revenues | 1.2% | 3.4% | (2.2)% |
| Total | $71,732 | $75,162 | (4.6)% |
| Gross Profit % of Revenues | 57.5% | 60.5% | (3.0)% |
Adjusted EBITDA
EBITDA (earnings before interest, income taxes, depreciation and amortization)
as adjusted to remove the effect ofManagement believes that Adjusted EBITDA, when viewed with our results under GAAP and the accompanying reconciliations, provides useful information about our period-over-period growth. Adjusted EBITDA is presented because management believes it provides additional information with respect to the performance of our fundamental business activities and is also frequently used by securities analysts, investors and other interested parties in the evaluation of comparable companies. We also rely on Adjusted EBITDA as a primary measure to review and assess the operating performance of our company and our management team.
Adjusted EBITDA is a non-GAAP financial measure. We calculate adjusted EBITDA by taking net income, and adding back the expenses related to interest, income taxes, depreciation, amortization, stock basedstock-based compensation expense, extinguishment loss onequity-based compensation for services expense, amortization of debt discounts and issuance costs, and the change in the fair value of the warrant derivative, as each of those elements are calculated in accordance with GAAP. Adjusted EBITDA should not be construed as a substitute for net income (loss) (as determined in accordance with GAAP) for the purpose of analyzing our operating performance or financial position, as Adjusted EBITDA is not defined by GAAP.
A reconciliation of our adjusted EBITDA to net income (loss)loss for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 is included in the table below (in thousands):
Three months ended | Nine months ended | |||
September 30, | September 30, | |||
2017 | 2016 | 2017 | 2016 | |
| Net (loss) income | $(1,068) | $67 | $(5,857) | $109 |
| Add/Subtract: | ||||
| Interest, net | 1,752 | 946 | 4,207 | 3,139 |
| Income taxes (benefit) provision | (1,290) | (68) | (2,763) | 550 |
| Depreciation | 419 | 341 | 1,183 | 1,119 |
| Amortization | 712 | 537 | 2,047 | 1,746 |
| EBITDA | 525 | 1,823 | (1,183) | 6,663 |
| Add/Subtract: | ||||
| Stock based compensation – options and warrant issuance | 327 | 166 | 812 | 292 |
| Change in the fair value of warrant derivative | (1,519) | (369) | (788) | (535) |
| Extinguishment loss on debt | 308 | - | 308 | - |
| Adjusted EBITDA | $(359) | $1,620 | $(851) | $6,420 |
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Net loss | $ | (5,791 | ) | $ | (12,260 | ) | ||
Add/Subtract: | ||||||||
Interest, net | 620 | 1,507 | ||||||
Income tax provision (benefit) | (17 | ) | 298 | |||||
Depreciation | 673 | 475 | ||||||
Amortization | 620 | 670 | ||||||
EBITDA (loss) | (3,895 | ) | (9,310 | ) | ||||
Add/Subtract: | ||||||||
Stock-based compensation | 260 | 11,344 | ||||||
Equity-based compensation for services | 689 | 1,859 | ||||||
Amortization of debt discounts and issuance costs | 337 | 199 | ||||||
Change in the fair value of derivatives | (1,489 | ) | (1,486 | ) | ||||
Adjusted EBITDA (loss) | $ | (4,098 | ) | $ | 2,606 | |||
Liquidity and Capital Resources
Sources of Liquidity
At September 30, 2017March 31, 2020 we had cash and cash equivalents of approximately $1,373,000$3,243,000 as compared to cash and cash equivalents of $869,000 as of$4,463,000 at December 31, 2016.
Cash Flows
Cashused in operatingactivities
. Net cash used in operating activities for theNet non-cash operating expenses in 2020 included $3,230,000$1,293,000 in depreciation and amortization, $471,000$260,000 in stock basedstock-based compensation, expense, $281,000 related to the amortization of deferred financing costs associated with our Private Placements, $799,000 related to the$689,000 in equity-based compensation for services, $337,000 in amortization of debt discounts, $172,000and $33,000 related to the amortization of warrant issuance costs, $200,000 for stock issued for services, $106,000increase in inventory reserves, $15,000 related to stock issuance costs associated with debt financing, $341,000 related to warrant issuance coststhe loss on disposal of property and equipment, $112,000 for other compensation, $308,000an allowance for notes receivables, $568,000 in extinguishment of debt and $42,000 in other non-cash items,operating lease expense, partially offset by $788,000$1,489,000 related to the change in the fair value of warrant derivative liability, $195,000$30,000 related to the decrease in expenses allocated in profit sharing agreement that relatesthe allowance for accounts receivable, $311,000 for an allowance related to contingent debt, $1,020,000the over issuance of shares which was recorded as other receivable, and $361,000 related to the change in the fair value of contingent acquisition debt.
Net non-cash operating expenses in 2019 included $1,145,000 in depreciation and amortization, $11,344,000 in stock-based compensation expense, $1,859,000 in equity-based compensation for services, $199,000 in amortization of debt discounts, $281,000 in stock issuance cost related to true-up shares and $2,846,000$159,000 in increase in inventory reserves, partially offset by $1,486,000 related to the change in deferred taxes.
Changes in operating assets and liabilities in 2020 were attributable to decreases in working capital, primarily related to changes in accounts receivable of $1,452,000and decrease in$17,000, inventory of $70,000, prepaid expenses and other current assets of $282,000.$416,000, other assets of $166,000, operating lease liabilities of $367,000, and other long-term liabilities of $1,678,000. Increases in working capital primarily related to changes in inventorythe income tax receivable of $440,000, changes in,$8,000, accounts payable of $2,143,000,$1,884,000, accrued distributor compensation of $515,000, changes in$1,378,000, deferred revenues of $129,000$1,230,000 and changes in accrued expenses and other liabilities of $1,480,000.
Changes in operating assets and liabilities in 2019 were attributable to decreases in working capital, primarily related to changes in accounts receivable of $3,369,000, inventory of $1,283,000, prepaid expenses and other current assets of $111,000, deferred revenues of $44,000 and accrued expenses and other liabilities of $2,173,000. Increases in working capital primarily related to changes in accounts payable of $54,000 and accrued distributor compensation of $854,000.
Cashusedin investingactivities
. Net cash used in investing activities for theCashprovided by financingactivities
. Net cash provided by financing activitiesFuture Liquidity Needs
The accompanying condensed consolidated financial statements have been prepared and presented on a basis assuming we will continue as a going concern. We have sustained significant operating losses forduring the ninethree months ended September 30, 2017March 31, 2020 and 2019 of $4,893,000, compared to operating income in the prior year of $3,263,000. The losses in the current year were primarily due to lower than anticipated revenues, increases in legal fees, distributor events$5,791,000 and sales and marketing costs.$12,260,000, respectively. Net cash used in operating activities was $1,783,000 in$681,000 and $4,831,000 for the current year.three months ended March 31, 2020 and 2019, respectively. Our cash and cash equivalents totaled $3,243,000 at March 31, 2020. We do not currently believe that our existing cash resources are sufficient to meet our anticipated needs over the next twelve months from the date hereof. Based on our current cash levels and our current rate of cash requirements, we will need to raise additional capital and we will need to significantlyfurther reduce our expenses from current levels to be ablelevels. These factors raise substantial doubt about our ability to continue as a going concern.
Historically, we have financed our operations primarily through revenue generated from sales of our products and the public and private sales of our securities and we expect to continue to seek to obtain required capital in a similar manner. We have already commencedspent, and expect to continue to spend, a substantial amount of funds in connection with implementing our business strategy. Additionally, we may seek to access the processpublic or private equity markets when conditions are favorable due to increase our long-term capital requirements. If we are unable to obtain additional capital (which is not assured at this time), our long-term business plan may not be met, and we may not be able to fulfill our debt obligations. Our ability to raise capital through the sale of securities may be limited by the rules of the SEC and Nasdaq that place limits on the number and dollar amount of securities that may be sold. We do not have any commitments from third parties for funding. A failure otherwise to raise additional funds when needed in the future could result in us being unable to complete planned operations, or forced to delay, discontinue or curtail product development, forego sales and marketing efforts, and forego licensing in attractive business opportunities. There can be no assurances that we will be able to raise the funds needed on favorable terms, if at all.
In January 2022, we entered into the second amendment to the Crestmark loan and security agreement which reduced the maximum overall borrowing limit on the line of credit duringto $3,000,000. Under the fourth quartersecond amendment to the Crestmark loan and security agreement, the line of credit may not exceed an amount which is the lesser of (a) $3,000,000 or (b) the sum of up (i) to 85% of the value of the eligible accounts; plus, (ii) the lesser of $1,000,000 or 50% of eligible inventory or 50% of the amount calculated in (i) above.
In February 2022, we received a notice of default related to the loan and security agreement from Crestmark Bank. The default includes our failure to provide quarterly financial statements for the quarters ended September 30, 2021 and December 31, 2021, as set forth in the loan agreement.
In April 2022, we entered into a forbearance agreement with Crestmark Bank. The agreement provides that Crestmark Bank agreed to forbear from collection action under the loan documents until the termination date of June 30, 2022, provided we are in compliance with the terms of the forbearance agreement. At the filing date of this year andQuarterly Report on Form 10-Q, we were not in compliance with the term of the forbearance agreement.
We do not believe that our existing cash resources are sufficient to meet our anticipated needs over the next twelve months from the date hereof. We are also considering multipleadditional alternatives, including, but not limited to additional equity financings and debt financings. Depending on market conditions, we cannot be sure that additional capital will be available when needed or that, if available, it will be obtained on terms favorable to us or to our stockholders.
Failure to raise additional funds from the issuance of equity securities and failure to implement cost reductions could adversely affect our ability to operate as a going concern. There can be no assurance that any cost reductions implemented will correct our going concern issue. The financial statements do not include any adjustments that might be necessary from the outcome of this uncertainty.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements as of September 30, 2017.
Contractual Obligations
At March 31, 2020, our total purchase obligations are related to our commercial coffee segment and were approximately $8,957,000 compared to $4,219,000 at December 31, 2019. The increase was primarily due to the filingaddition of our Annual Report for the year endednew contracts entered into after December 31, 2016, we have entered into Convertible Notes Payable by way of our 2017 Private Placement and contingent debt associated with the 2017 acquisitions; see Note 4 and Note 6, respectively, to the condensed consolidated financial statements. 2019.
There were no other material changes from thosethe other contractual obligations disclosed in in our most recent annual report.
Critical Accounting Policies
The unaudited interimcondensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America,U.S. (“GAAP”), which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the unaudited condensed consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Information with respect to our critical accounting policiesestimates which we believe could have the most significant effect on our reported results and require subjective or complex judgments by management is contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K/A10-K for the year ended December 31, 2016.
Recent Accounting Pronouncements
Recent accounting pronouncements are disclosed in this update are effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted for goodwill impairment tests performed after JanuaryNote 1 2017. We are evaluating the potential impact of this adoption on our consolidated financial statements.
ITEM 3. QuantitativeQuantitative and Qualitative Disclosures About Market Risk
As a Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item 3 of Part I.
ITEM 4. Controls and Procedures
Update on Prior Period Disclosure Controls and Procedures and Internal Control Over Financial Reporting
Commercial Coffee Segment
In April 2019, we filed our 2018 Form 10-K disclosing that during the fourth quarter of the year ended December 31, 2018, we identified a material weakness (“2018 Material Weakness”) for our commercial coffee segment with respect to certain operations in Nicaragua, relating to not having proper processes and controls in place to require sufficient documentation of significant agreements and arrangements in accounting for significant transactions. During the preparation of our financial statements for the year ended December 31, 2019, we identified material weaknesses in our internal control over financial reporting associated with revenue recognition within the coffee segment. These material weaknesses resulted in restatements to our financial statements for the quarters ended March 31, 2019, June 30, 2019, and September 30, 2019 related to revenue recognition within our coffee segment were required, which we filed the restatements for all three quarters of 2019 in September 2021.
During 2019, management implemented a remediation plan that included updating our current policies and implementing procedures and controls over the documentation of significant agreements and arrangements with respect to certain operations in our commercial coffee segment. This remediation plan was not fully in place and able to be tested for the three months ended March 31, 2020, therefore we determined that the controls were not operating effectively for the three months ended March 31, 2020. Management, therefore, has determined that these material weaknesses were not remediated and remained open at the time of this filing.
Commercial Hemp Segment
In February 2019, we completed the acquisition of Khrysos Global, detailed in Note 2 to the condensed consolidated financial statements. During our 2019 annual audit we determined that certain fixed assets acquired in the acquisition and the share price valuation for the common stock issued as consideration were not fairly valued at the closing date which resulted in a decrease to the net assets acquired including; a) $1,127,000 related to the certain fixed assets, and b) $1,351,000 related to a change in the fair value of common stock issuance resulting in an increase to goodwill of $2,478,000 acquired and an adjusted aggregate purchase price of $15,894,000. Our management concluded that we have a material weakness in our control procedures related to acquisitions.
These material weaknesses resulted in restatements to our financial statements for the quarters ended March 31, 2019, June 30, 2019, and September 30, 2019 related to the accounting for acquisitions within our commercial hemp segment, which we filed the restatements for all three quarters of 2019 in September 2021.
During 2020, management implemented a remediation plan that included updating our current policies and implementing procedures and controls over future acquisitions. Until the material weaknesses are remediated, and our associated disclosure controls and procedures improve, there is a risk that a material error could occur and not be detected.
Other
At the end of the second fiscal quarter 2020, we determined that the aggregate market value of our common stock held by non-affiliates was $24.9 million. This fell below the $60.0 million dollar threshold for an accelerated filer exiting the accelerated status and becoming a non-accelerated filer. As a result, we are not required to obtain an auditor’s attestation of management’s assessment of internal control over financial reporting required under Sarbanes-Oxley Act Section 404(b) for the year ending December 31, 2020.
(a)Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and withmaintaining adequate internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). With the participation of our Chief Executive Officer and Chief Financial Officer, management conducted an evaluation of the effectiveness of our internal control over financial reporting at March 31, 2020 based on the framework and criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control Integrated Framework (2013), and concluded that our disclosure controls and procedures were not effective at the end of the period covered by this quarterly report, as a result of material weaknesses in our internal control over financial reporting which is discussed further below.
Our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluatedhas determined that due to the underlying critical lack of automated reporting systems, trained accounting and information technology personnel, control designs and effectiveness, management was unable to review the risk assessment and the design of the organization's internal control systems to establish a baseline for ongoing and separate evaluations that includes assessment of fraud risk, therefore management does not expect that our disclosure controls and procedures and our internal control processes will prevent all errors and all fraud.
Based on the evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of September 30, 2017,at the end of the quarterly fiscal period covered by this quarterly report. Based onreport and upon that evaluation,discovery, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2017, suchthe end of the period covered by this report our disclosure controls and procedures were not effective in ensuringto ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act, of 1934, as amended, is (i) recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’sSEC’s rules and forms, and (ii)that such information is accumulated and communicated to our management, including our principal executive officerChief Executive Officer and principal financial officer,Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management has assessed these deficiencies and has determined that these deficiencies individually and in aggregate led to material weaknesses. These material weaknesses led to material misstatements in our financial statements for the periods ending March 31, 2019, June 30, 2019 and September 30, 2019 related to the recognition of revenue within our commercial coffee segment and our commercial hemp segment. In order to consider these material weaknesses fully remediated, we believe additional time is needed to demonstrate sustainability as it relates to the revised controls. There were seven general categories of deficiencies in our internal control over financial reporting.
Risk Assessment. We did not have an effective risk assessment process that defined clear financial reporting objectives and evaluated risks, including fraud risks, and risks resulting from changes in the external environment and business operations, at a sufficient level of detail to identify all relevant risks of material misstatement across the entity.
Deficiencies in the Overall Control Environment. We have not maintained an effective control environment to provide reasonable assurance relating to operations, reporting, and compliance for the purpose of meeting the requirements set forth in the 2013 COSO Framework. More specifically, we did not have (a) adequate segregation of duties and oversight over material agreements and arrangements entered into by the Company (b) adequate information technology systems required to develop controls and oversight over our existing operations and most recent acquisitions (c) a sufficient number of personnel with an appropriate level of US GAAP knowledge and experience to create the proper environment for effective internal control over financial reporting and to ensure that (i) there were adequate processes for oversight, and (ii) there was accountability for the performance of internal control over financial reporting responsibilities.
Deficiencies in the Controls over Monitoring. We have not maintained effective controls over monitoring to provide reasonable assurance relating to operations, reporting, and compliance for the purpose of meeting the requirements set forth in the 2013 COSO Framework. More specifically, we did not have adequate oversight processes and procedures that guide individuals in applying internal control and proper documentation to support reporting of certain transactions within the financial reporting and that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis.
Deficiencies pertaining to a lack of human resources within our finance and accounting functions. We have not maintained sufficient accounting personnel with the appropriate level of knowledge, experience and training commensurate with maintaining an effective control environment, within the current operational environment, to meet the financial reporting requirements of a publicly traded company with international operations. We did not have a sufficient number of trained resources with assigned responsibility and accountability for the design, operation and documentation of internal control over financial reporting in accordance with the 2013 COSO Framework. The result of the lack of sufficient accounting personnel has led to us not having effective and codified accounting policies and procedures throughout our Company, including our subsidiaries, which can lead to inconsistent accounting treatment of transactions. The lack of sufficient personnel has also resulted in a failure to maintain appropriate segregation of duties throughout the internal control over financial reporting process. We have had numerous instances where review and approval is performed by the same employee negating any monitoring or approval controls.
Deficiencies pertaining to the lack of controls or ineffectively designed controls impacting our financial reporting. Our control design analysis and process walkthroughs disclosed a number of instances where review approvals were not sufficiently documented and retained, where established policies and procedures were not defined, and controls were not in place to adequately (i) address relevant risks, (ii) provide evidence of performance, (iii) provide appropriate segregation of duties, or (iv) operate at a level of precision to identify all potentially material errors.
Deficiencies related to information technology control design and operating effectiveness weaknesses. The Company did not have formalized information technology policies and procedures which the lack thereof could result in (1) unauthorized system access, (2) application changes being implemented without adequate reliability testing, and (3) over reliance on spreadsheet applications without quality control assurances.
Deficiencies related to failures in operating effectiveness of the internal control over financial reporting. Certain internal control procedures were developed or enhanced during the latter part of 2019. When testing occurred to confirm the effectiveness of the internal control over financial reporting, controls were not operating effectively. Insufficient time remained to remediate these material weaknesses prior to year-end.
(b)Changes in Internal Control Over Financial Reporting
Management’s Remediation Efforts
Management has been implementing and continues to implement measures designed to ensure that control deficiencies contributing to the material weaknesses are remediated, such that these controls are designed, implemented, and operating effectively. The remediation measures include or are expected to include the following:
● | Implementing or enhancing the Company’s infrastructure to ensure appropriate software and reporting tools are in place to ensure financial reporting systems and processes are reporting effectively. These efforts have been delayed due to the Company’s ability to secure timely financial resources to acquire and implement such improvements within its reporting software and tools. |
● | Review and update, as necessary, documentation of relevant processes, policies and procedures, and design of relevant controls, with respect to the Company’s internal control over financial reporting. The Company identified during its 2019 and 2018 audits, deficiencies within its processes, policies and procedures. Implementation of the necessary changes required, as a result of these identified deficiencies, required to satisfy documentation requirements under Section 404 of the Sarbanes-Oxley Act has not occurred. For the three months ending March 31, 2020, because these deficiencies have not been remediated, we did not conduct an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, therefore, we have determined that our disclosure controls and procedures were not effective as of March 31, 2020. |
● | Seek to ensure that the Company’s internal control over financial reporting is properly designed, implemented, operating effectively, and appropriately documented by (i) enhancing the design of existing control activities and/or implementing additional control activities, as needed, (ii) monitoring the operating effectiveness of those controls, and (iii) ensuring that sufficient documentation exists to evidence the design, implementation, and operation of those controls. |
● | Execute and monitor the remediation plan, with appropriate executive sponsorship and with the assistance of outside consultants, to enhance the Company’s internal control over financial reporting and accomplish the goals of the remediation as set forth above. |
● | Continue to seek, train and retain individuals that have the appropriate skills and experience related to designing, operating and documenting internal controls. |
We intend to adopt additional remediation measures related to the identified control deficiencies as necessary as well as to evaluate our internal controls overon an ongoing basis in order to upgrade and enhance when appropriate. Our audit committee has taken an active role in reviewing and discussing the internal control deficiencies with our auditors and financial reportingmanagement. Our management and the audit committee will continue to actively monitor the implementation and effectiveness of the remediation efforts undertaken by our financial management. We believe that occurred during our third quarterthese actions will remediate material weaknesses. The material weaknesses will not be considered remediated, however, until the applicable controls operate for a sufficient period of fiscal year 2017time and management has concluded, through testing, that have materially affected, orthese controls are reasonably likely to materially affect, our internal controls over financial reporting.operating effectively.
PARTPART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are from time to time, the subject of claims and suits arising out of matters occurring during the operation ofrelated to our business. We are not presentlya party to any legal proceedingslitigation at the present time and may become party to litigation in the future. In general, litigation claims can be expensive, and time consuming to bring or defend against and could result in settlements or damages that if determined adverselycould significantly affect financial results. It is not possible to us, would individually or taken together have a material adverse effectpredict the final resolution of the current litigation to which we are party to, and the impact of certain of these matters on our business, operating results of operations, and financial condition or cash flows.could be material. Regardless of the outcome, litigation has adversely impacted our business because of defense costs, diversion of management resources and other factors.
ITEM 1A. RISKRISK FACTORS
Any investment in our common stock involves a high degree of risk. Investors should carefully consider the risks described in our Annual Report on Form 10-K/A10-K for the year ended December 31, 2019, as filed with the SEC on August 14, 2017,June 25, 2021, and all of the information contained in our public filings before deciding whether to purchase our common stock. The following information and updates should be read in conjunction with the information disclosed in Part 1, Item 1A, “Risk Factors,” contained in our Annual Report on Form 10-K/A as filed with10-K for the SEC on March 30, 2017.year ended December 31, 2019. Except as set forth below, there have been no material revisions to the “Risk Factors” as set forth in our Annual Report on Form 10-K/A as filed with10-K for the SEC on August 14, 2017.
We cannot assure you that theour common stock and preferred stock will regain listing on the Nasdaq Capital Market.
On February 2, 2021, The Nasdaq Stock Market LLC removed our common stock and 9.75% Series D Cumulative Redeemable Perpetual Preferred Stock from listing on The Nasdaq Capital Market effective at the opening of the trading session on February 12, 2021. We had been notified of the Nasdaq staff determination to de-list our securities on September 29, 2020 and had appealed the determination to a Nasdaq Hearing Panel on October 6, 2020. On November 18, 2020, upon review of the information provided by us, the Hearing Panel determined to deny our request to remain listed on the NASDAQThe Nasdaq Capital Market.
As a result of the NASDAQdelisting from the Nasdaq Capital Market, we cannot assure you that we will be able to maintain the continued listing standards of the NASDAQ Capital Market. If we fail to satisfy the continued listing requirements of the NASDAQ Capital Market, such as the corporate governance requirements, minimum bid price requirement or the minimum stockholder’s equity requirement, the NASDAQ Capital Market may take steps to de-list our common stock. If we are delisted from the NASDAQ Capital Market then our common stock will trade, if at all, onlytrades on the over-the-counter market, such as the OTC Bulletin Board securities market, and then only if one or more registered broker-dealer market makers comply with quotation requirements. In addition,Pink Market operated by OTC Markets. The delisting of our common stock could depresshas depressed our stock price, substantially limitlimited liquidity of our common stock and materially adversely affect our ability to raise capital on terms acceptable to us, or at all.terms. Delisting from the NASDAQNasdaq Capital Market could also continue to have other negative results, including the potential loss of confidence by suppliers and employees, the loss of institutional investor interest and fewer business development opportunities.
Our ability to obtain future financing has been, and will continue to be impacted by our inability to file our SEC reports.
We have failed to file the Quarterly Report on Form 10-Q for the quarterly periods ending March 31, 2021 and 2022, June 30, 2021 and September 30, 2021 and our financial statements for fiscal year ended December 31, 2021. Our failure to provide current information about our financial condition has hindered our ability to raise additional capital as many investors require current financial information in June 2017 may decrease the liquidity of the shares of the Common Stock.
There is substantial risk about our ability to continue as a going concern, which may hinder our ability to obtain future financing.
The accompanying condensed consolidated financial statements at March 31, 2020 have been prepared and presented on a basis assuming we will continue as a going concern. We haveThe Company has sustained significant operating losses induring the current yearthree months ended March 31, 2020 of $4,893,000, compared to operating income in the prior year of $3,263,000. The losses in the current year were primarily due to lower than anticipated revenues, increases in legal fees, distributor events and sales and marketing costs.$5,791,000. Net cash used in operating activities was $1,783,000 in$681,000 for the current year.three months ended March 31, 2020. The Company does not currently believe that its existing cash resources are sufficient to meet the Company’s anticipated needs over the next twelve months from the date hereof. Based on our current cash levels andat March 31, 2020, our current rate of cash requirements, we will need to raise additional capital and we will need to significantly reduce our expenses from current levels to be able to continue as a going concern. There can be no assurance that we can raise capital upon favorable terms, if at all, or that we can significantly reduce our expenses.
Our failure to comply with the terms of our outstanding Notes could resultnotes has resulted in a default under the terms of certain of the notes and, if uncured, it could potentially result in action against our pledged assets.
At the pledged assetsfiling date of CLR.
In March 2019, we issued to investors in November 2015 that are secured by certain of our assets and those of CLR other than its inventory and accounts receivable. We have also issued an additional $4,750,000aggregate $2,000,000 in principal amount of secured debt which related to two-year secured promissory notes (the “September 2014
In March 2020, we issued $1,000,000 in principal amount of a nine-month senior secured promissory note related to our March 2020 private placement debt offering with Daniel Mangless, which is secured by a first priority lien granted by CLR in effect. The November 2015 Notes mature in 2018,its rights under the September 2014 Notes mature in 2019pledge and security agreement, by and between H&H, H&H Export and CLR to receive certain payments. In April 2021, we entered into a settlement agreement with Mr. Mangless to include an agreed upon payment schedule of principal and interest payments and the 2017 notes mature in 2020. The November 2015 Notes and the September 2014 Notes require us, among other things, to maintain the security interest given by CLR for the notes and allissuance of the notes require us to make quarterly installments of interest, reserve a sufficient number of our shares of common stock for conversion requests and honor any conversion requests made by the investors to convert their notes into1,000,000 shares of our common stock. At the filing date of this Quarterly Report on Form 10-Q, the promissory note, including interest was paid, and the shares were issued in accordance with the terms of the settlement agreement. (See Note 13 to the condensed consolidated financial statements.)
In December 2018, CLR, entered into a credit agreement with one lender pursuant to which CLR borrowed $5,000,000 from Carl Grover and in exchange issued Mr. Grover a $5,000,000 credit note. In addition, Siles, as guarantor, executed a separate guaranty agreement. Stephan Wallach and Michelle Wallach, our Chief Operating Officer, pledged 1,500,000 shares of our common stock held by them to secure the credit note under a security agreement with Mr. Grover. The credit note matured in December 2020. At the filing date of this Quarterly Report on Form 10-Q, the balance remains outstanding; however, no formal demand for repayment had been made.
If we fail to comply with the terms of any of our outstanding debt, including the notes,terms of any amendment or extension of such debt, the note holders of the debt could declare a default under the notes or credit agreement and if the default were to remain uncured, asand any secured creditors they would have the right to proceed against the collateral secured by the loans. Any action by secured creditors to proceed against CLR assets, KII equity or our other assets would likely have a serious disruptive effect on our coffee and direct sellingbusiness operations.
ITEM 2. UNREGISTEREDUNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
All sales of unregistered securities duringour common stock that were not registered under the three months ended September 30, 2017Securities Act of 1933, as amended (the “Securities Act”) have been previously reporteddisclosed in our filings with the Securities and Exchange Commission except for the sales of unregistered securities set forth below.
In March 2020, we entered into an agreement with ProActive Capital Group, LLC or PCG Advisory GroupIvan Gandrud Chevrolet, Inc. (“PCG”IGC”), pursuant to which PCGIGC agreed to provide investor relationsconsulting services for six (6) monthsour commercial hemp segment in exchange for fees paid in cash of $6,000 per month and 5,000125,000 shares of restricted common stock to bewhich were issued upon successfully meeting certain criteria in accordance withas fully earned. The fair value of the agreement. Subsequent to September 1, 2015 this agreement has been extended under the same terms with the monthly cash payment remaining at $6,000 per month and 5,000shares issued was approximately $158,000. In addition, we issued a 5-year warrant exercisable for 250,000 shares of restricted common stock for every six (6) months of service performed. As of September 30, 2017, the Company has issued 15,000 shares of restricted common stock in connection with this agreement and accrued for the estimated per share value on each subsequent six (6) month periods based on the price of Company’sour common stock at each respective date.
The shares sold in the transaction with IGC set forth above were issued duringrelying on the three months ended September 30, 2017.
ITEM 3. DEFAULTSDEFAULTS UPON SENIOR SECURITIES
In December 2018, CLR entered into a credit agreement with Carl Grover pursuant to which CLR borrowed $5,000,000 from Mr. Grover and in exchange issued to him a $5,000,000 credit note (the “Credit Note”). Mr. Grover was the sole beneficial owner of in excess of 5% of our outstanding common shares at March 31, 2020 and December 31, 2019. In addition, Siles Plantation Family Group S.A. (“Siles”), as guarantor, executed a separate guaranty agreement. The Credit Note is secured by CLR’s green coffee inventory, subordinate to certain debt owed to Crestmark Bank and pari passu with certain holders of notes issued by CLR to certain lenders in 2014. At both March 31, 2020 and December 31, 2019, the outstanding principal balance of the Credit Note was $5,000,000.
The Credit Note accrues interest at a rate of 8.00% per annum and is paid quarterly. The Credit Note contains customary events of default including our or Siles failure to pay its obligations, commencing bankruptcy or liquidation proceedings, and breach of representations and warranties. Upon the occurrence of an event of default, the unpaid balance of the principal amount of the Credit Note together with all accrued but unpaid interest thereon, may become, or may be declared to be, due and payable by Mr. Grover and shall bear interest from the due date until such amounts are paid at the rate of 10.00% per annum. In connection with the credit agreement, we issued to Mr. Grover a four-year warrant to purchase 250,000 shares of our common stock, exercisable at $6.82 per share, and a four-year warrant to purchase 250,000 shares of our common stock, exercisable at $7.82 per share.
In connection with the Credit Note, we also entered into an advisory agreement with a third party not affiliated with Mr. Grover, pursuant to which we agreed to pay to the advisor a 3.00% fee on the transaction with Mr. Grover and issued to the advisor’s designee a four-year warrant to purchase 50,000 shares of our common stock, exercisable at $6.33 per share.
In December 2020, the Credit Note became payable and due in accordance with its terms. CLR did not make the payment due upon the maturity date of the Credit Note. At the filing date of this Quarterly Report on Form 10-Q, the Company was in default of the terms of settlement of the Credit Note and the Credit Note remains outstanding; however no formal demand for repayment has been made.
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The following exhibits are filed as part of this Report:
EXHIBIT INDEX
Exhibit No. | Exhibit | |
Certificate of | ||
Bylaws (Incorporated by reference to the Company’s Form 10-12G, File No. 000-54900, filed with the Securities and Exchange Commission on February 12, 2013) | ||
Certificate of Amendment to the Certificate of Incorporation dated June 5, 2017 (Incorporated by reference to the Company’s Form 8-K, | ||
Certificate of Designations for Series B Convertible Preferred Stock (Incorporated by reference to the Company’s Form 8-K, File No. 001-38116, filed with the Securities and Exchange Commission on March 8, 2018) | ||
Certificate of Correction to Certificate of Designation of Powers, Preferences and Rights of Series B Convertible Preferred Stock (Incorporated by reference to the Company’s Form 8-K, File No. 001-38116, filed with the Securities and Exchange Commission on March 16, 2018) | ||
Certificate of Designations for Series C Convertible Preferred Stock (Incorporated by reference to the Company’s Form 8-K, File No. 001-38116, filed with the Securities and Exchange Commission on August | ||
Certificate of | ||
Certificate of Designations, Rights and Preferences of the 9.75% Series D | ||
Certificate of | ||
Cannooba Joint Venture Agreement, dated April 19, 2021, with GROWTH by Sabir, Inc.* | ||
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * | ||
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * | ||
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * | ||
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * | ||
101.INS | Inline XBRL Instance | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document * | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document * | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document * | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document * | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document * | |
104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
* | Filed herewith |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
YOUNGEVITY INTERNATIONAL INC. | ||
(Registrant) | ||
Date: | /s/ Stephan Wallach | |
Stephan Wallach | ||
Chief Executive Officer | ||
(Principal Executive Officer) | ||
Date: | /s/ | |
William Thompson | ||
Chief Financial Officer | ||
(Principal Financial Officer) | ||