UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
☒ | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 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:
001-38116YOUNGEVITY INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 90-0890517 | |
(State or other jurisdiction of incorporation or organization) | (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:
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 [ ]☒ No [X]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 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 [X]☐ No [ ]
As of November 15, 2019,June 17, 2022, the issuer had
TABLE OF CONTENTS
Page | ||
Item 1. | ||
| 1 | ||
| 2 | ||
| 3 | ||
| 4 | ||
| 8 | ||
Notes to Condensed Consolidated Financial Statements (unaudited) | 9 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 46 |
Item 3. | 61 | |
Item 4. | 62 | |
Item 1. | 65 | |
Item 1A. | 65 | |
Item 2. | 66 | |
Item 3. | 66 | |
Item 4. | 66 | |
Item 5. | 67 | |
Item 6. | 67 | |
68 |
Item 1.
Youngevity International, Inc. and Subsidiaries
Condensed Consolidated BalanceSheets
(In thousands, except share amounts)
September 30, 2020 | December 31, 2019 | |||||||
ASSETS | (Unaudited) | |||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 1,238 | $ | 4,463 | ||||
Accounts receivable, trade | 3,043 | 2,902 | ||||||
Income tax receivable | 81 | 81 | ||||||
Inventory | 22,036 | 22,706 | ||||||
Prepaid expenses and other current assets | 5,432 | 3,982 | ||||||
Total current assets | 31,830 | 34,134 | ||||||
Property and equipment, net | 25,189 | 23,316 | ||||||
Operating lease right-of-use assets | 6,467 | 8,386 | ||||||
Deferred tax assets | 75 | 75 | ||||||
Intangible assets, net | 13,726 | 15,566 | ||||||
Goodwill | 6,992 | 6,992 | ||||||
Other assets | 1,279 | 1,222 | ||||||
Total assets | $ | 85,558 | $ | 89,691 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 9,405 | $ | 9,069 | ||||
Accrued distributor compensation | 4,167 | 3,164 | ||||||
Accrued expenses | 5,732 | 5,108 | ||||||
Deferred revenues | 8,527 | 1,943 | ||||||
Line of credit | 1,955 | 2,011 | ||||||
Other current liabilities | 3,018 | 2,664 | ||||||
Operating lease liabilities, current portion | 1,290 | 1,740 | ||||||
Finance lease liabilities, current portion | 1,703 | 736 | ||||||
Notes payable, net of debt discounts, current portion (Note 3) | 5,340 | 4,085 | ||||||
Notes payable, net of debt discounts, current portion | 2,108 | 191 | ||||||
Convertible notes payable, net of debt discounts, current portion | 2,927 | 25 | ||||||
| Short term loans | 3,923 | 0 | ||||||
Warrant derivative liability | 0 | 1,542 | ||||||
Contingent acquisition debt, current portion | 1,341 | 1,263 | ||||||
Total current liabilities | 51,436 | 33,541 | ||||||
Operating lease liabilities, net of current portion | 5,497 | 6,646 | ||||||
Finance lease liabilities, net of current portion | 1,081 | 408 | ||||||
Notes payable, net of debt discounts, net of current portion (Note 3) | 392 | 0 | ||||||
Notes payable, net of debt discounts, net of current portion | 4,883 | 6,790 | ||||||
Convertible notes payable, net of debt discounts, net of current portion | 0 | 2,675 | ||||||
Contingent acquisition debt, net of current portion | 5,455 | 7,348 | ||||||
Other long-term liabilities | 0 | 2,115 | ||||||
Total liabilities | 68,744 | 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 September 30, 2020 and December 31, 2019 | 0 | 0 | ||||||
Series B – 5% convertible preferred stock; zero and 129,332 shares issued and outstanding at September 30, 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 September 30, 2020 and December 31, 2019, respectively; $14,877 liquidation preference at September 30, 2020 | 0 | 0 | ||||||
Common stock, $0.001 par value: 50,000,000 shares authorized; 32,236,994 and 30,274,601 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively | 32 | 30 | ||||||
Additional paid-in capital | 268,390 | 265,825 | ||||||
Accumulated deficit | (251,154 | ) | (235,751 | ) | ||||
Accumulated other comprehensive income (loss) | (454 | ) | 64 | |||||
Total stockholders’ equity | 16,814 | 30,168 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 85,558 | $ | 89,691 | ||||
As of | ||
September 30, 2019 | December 31, 2018 | |
| ASSETS | (Unaudited) (Restated)* | |
| Current Assets | ||
| Cash and cash equivalents | $7,270 | $2,879 |
| Accounts receivable trade, net (Note 1) | 9,726 | 4,028 |
| Income tax receivable | 307 | 74 |
| Inventory | 23,109 | 21,776 |
| Advances (Note 1) | - | 5,000 |
| Prepaid expenses and other current assets | 5,925 | 5,263 |
| Total current assets | 46,337 | 39,020 |
| Property and equipment, net | 21,413 | 15,105 |
| Operating lease right-of-use assets | 7,443 | - |
| Deferred tax assets | 75 | 148 |
| Intangible assets, net | 22,083 | 15,377 |
| Goodwill | 13,154 | 6,323 |
| Note receivable (Note 1) | 5,146 | - |
| Other assets – notes receivable | 949 | - |
| Total assets | $116,600 | $75,973 |
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||
| Current Liabilities | ||
| Accounts payable | $8,414 | $8,478 |
| Accrued distributor compensation | 3,252 | 3,289 |
| Accrued expenses | 10,304 | 6,582 |
| Deferred revenues | 2,005 | 2,312 |
| Line of credit | 1,981 | 2,256 |
| Other current liabilities | 1,205 | 1,912 |
| Operating lease liabilities, current portion | 1,484 | - |
| Finance lease liabilities, current portion | 921 | 1,168 |
| Notes payable, current portion | 162 | 141 |
| Convertible notes payable, current portion | 25 | 647 |
| Warrant derivative liability | 2,699 | 9,216 |
| Contingent acquisition debt, current portion | 673 | 795 |
| Total current liabilities | 33,125 | 36,796 |
| Operating lease liabilities, net of current portion | 5,959 | - |
| Finance lease liabilities, net of current portion | 593 | 1,107 |
| Notes payable, net of current portion | 10,705 | 7,629 |
| Convertible notes payable, net of current portion | 2,592 | - |
| Contingent acquisition debt, net of current portion | 6,344 | 7,466 |
| Total liabilities | 59,318 | 52,998 |
| Commitments and contingencies (Note 1) | ||
| Stockholders’ Equity | ||
| Preferred Stock, $0.001 par value: 5,000,000 shares authorized | ||
| Series A – 8% Convertible Preferred Stock, par value $0.001 per share; 161,135 shares issued and outstanding at September 30, 2019 and December 31, 2018 | - | - |
| Series B – 6% Convertible Preferred Stock, par value $0.001 per shares; 129,332 and 129,437 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively; $1,244 liquidation preference as of September 30, 2019 | - | - |
| Series D – 9.75% Cumulative Redeemable Perpetual Preferred Stock, par value $0.001 per shares; 333,500 shares issued and outstanding at September 30, 2019 and zero at December 31, 2018; $8,405 liquidation preference as of September 30, 2019 | - | - |
| Common Stock, $0.001 par value: 50,000,000 shares authorized; 30,270,360 and 25,760,708 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively | 30 | 26 |
| Additional paid-in capital | 261,434 | 206,757 |
| Accumulated deficit | (204,186) | (183,763) |
| Accumulated other comprehensive loss (income) | 4 | (45) |
| Total stockholders’ equity | 57,282 | 22,975 |
Total Liabilities and Stockholders’ Equity | $116,600 | $75,973 |
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 September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Revenues | $ | 34,002 | $ | 33,380 | $ | 102,525 | $ | 112,789 | ||||||||
Cost of revenues | 14,248 | 13,642 | 42,938 | 40,522 | ||||||||||||
Gross profit | 19,754 | 19,738 | 59,587 | 72,267 | ||||||||||||
Operating expenses | ||||||||||||||||
Distributor compensation | 13,262 | 13,122 | 40,044 | 42,509 | ||||||||||||
Sales and marketing | 3,053 | 4,432 | 9,398 | 11,237 | ||||||||||||
General and administrative | 8,101 | 10,663 | 25,336 | 38,795 | ||||||||||||
Total operating expenses | 24,416 | 28,217 | 74,778 | 92,541 | ||||||||||||
Operating loss | (4,662 | ) | (8,479 | ) | (15,191 | ) | (20,274 | ) | ||||||||
Other income (expenses), net | ||||||||||||||||
Interest expense, net | (658 | ) | (1,109 | ) | (1,917 | ) | (3,678 | ) | ||||||||
Change in fair value of warrant derivative liability | 101 | 2,457 | 1,542 | 4,344 | ||||||||||||
Loss on modification of warrants | 0 | (876 | ) | 0 | (876 | ) | ||||||||||
Total other income (expenses), net | (557 | ) | 472 | (375 | ) | (210 | ) | |||||||||
Loss before income taxes | (5,219 | ) | (8,007 | ) | (15,566 | ) | (20,484 | ) | ||||||||
Income tax benefit | (147 | ) | (133 | ) | (163 | ) | (61 | ) | ||||||||
Net loss | (5,072 | ) | (7,874 | ) | (15,403 | ) | (20,423 | ) | ||||||||
Preferred stock dividends | (362 | ) | (85 | ) | (1,104 | ) | (127 | ) | ||||||||
Net loss attributable to common stockholders | $ | (5,434 | ) | $ | (7,959 | ) | $ | (16,507 | ) | $ | (20,550 | ) | ||||
Net loss per share, basic | $ | (0.17 | ) | $ | (0.27 | ) | $ | (0.52 | ) | $ | (0.71 | ) | ||||
Net loss per share, diluted (Note 1) | $ | (0.17 | ) | $ | (0.27 | ) | $ | (0.52 | ) | $ | (0.76 | ) | ||||
Weighted average shares outstanding, basic | 32,233,622 | 30,035,182 | 31,479,884 | 28,924,305 | ||||||||||||
Weighted average shares outstanding, diluted | 32,233,622 | 30,039,676 | 31,479,884 | 29,003,331 | ||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||
2019 | 2018 | 2019 | 2018 | |
(Restated)* | (Restated)* | |||
| Revenues | $33,380 | $39,082 | $112,789 | $126,331 |
| Cost of revenues | 13,642 | 15,370 | 40,522 | 52,225 |
| Gross profit | 19,738 | 23,712 | 72,267 | 74,106 |
| Operating expenses | ||||
| Distributor compensation | 13,122 | 15,076 | 42,509 | 47,141 |
| Sales and marketing | 4,432 | 3,962 | 11,237 | 10,537 |
| General and administrative | 10,663 | 3,880 | 38,795 | 14,957 |
| Loss on impairment of intangible assets | - | 2,200 | - | 2,200 |
| Total operating expenses | 28,217 | 25,118 | 92,541 | 74,835 |
| Operating loss | (8,479) | (1,406) | (20,274) | (729) |
| Interest expense, net | (1,109) | (1,407) | (3,678) | (4,668) |
| Change in fair value of warrant derivative liability | 2,457 | (5,538) | 4,344 | (4,634) |
| Loss on modification of warrants (Note 11) | (876) | - | (876) | - |
| Extinguishment loss on debt | - | - | - | (1,082) |
| Total other income (expense) | 472 | (6,945) | (210) | (10,384) |
| Loss before income taxes | (8,007) | (8,351) | (20,484) | (11,113) |
| Income tax (benefit) provision | (133) | 59 | (61) | 219 |
| Net loss | (7,874) | (8,410) | (20,423) | (11,332) |
| Preferred stock dividends | (85) | (92) | (127) | (137) |
| Accretion of discount from beneficial conversion feature on preferred stock | - | (1,386) | - | (1,386) |
| Net loss attributable to common stockholders | $(7,959) | $(9,888) | $(20,550) | $(12,855) |
| Net loss per share, basic | $(0.27) | $(0.46) | $(0.71) | $(0.61) |
| Net loss per share, diluted (Note 3) | $(0.27) | $(0.46) | $(0.76) | $(0.61) |
| Weighted average shares outstanding, basic | 30,035,182 | 21,686,085 | 28,924,305 | 20,986,151 |
| Weighted average shares outstanding, diluted | 30,039,676 | 21,686,085 | 29,003,331 | 20,986,151 |
See accompanying notes to condensed consolidated financial statements.
Unaudited Condensed Consolidated Statements of ComprehensiveLoss
(In thousands)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net loss | $ | (5,072 | ) | $ | (7,874 | ) | $ | (15,403 | ) | $ | (20,423 | ) | ||||
Foreign currency translation | (299 | ) | 9 | (518 | ) | 49 | ||||||||||
Total other comprehensive income (loss) | (299 | ) | 9 | (518 | ) | 49 | ||||||||||
Comprehensive loss | $ | (5,371 | ) | $ | (7,865 | ) | $ | (15,921 | ) | $ | (20,374 | ) | ||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||
2019 | 2018 | 2019 | 2018 | |
(Restated)* | ||||
| Net loss | $(7,874) | $(8,410) | $(20,423) | $(11,332) |
| Foreign currency translation | 9 | 105 | 49 | 334 |
| Total other comprehensive income | 9 | 105 | 49 | 334 |
| Comprehensive loss | $(7,865) | $(8,305) | $(20,374) | $(10,998) |
See accompanying notes to condensed consolidated financial statements.
Unaudited Condensed Consolidated Statements of Stockholders' Equity
(In thousands, except shares)
Three Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||
Preferred Stock | ||||||||||||||||||||||||||||||||||||||||||||||||
Series A | Series B | Series D |
Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | Total Stockholders' | |||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Loss | Deficit | Equity | |||||||||||||||||||||||||||||||||||||
Balance at June 30, 2020 | 161,135 | $ | 0 | 0 | $ | 0 | 590,273 | $ | 0 | 32,216,599 | $ | 32 | $ | 268,473 | $ | (155 | ) | $ | (246,082 | ) | $ | 22,268 | ||||||||||||||||||||||||||
Net loss | - | 0 | - | 0 | - | 0 | - | 0 | 0 | 0 | (5,072 | ) | (5,072 | ) | ||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | - | 0 | - | 0 | - | 0 | - | 0 | 0 | (299 | ) | 0 | (299 | ) | ||||||||||||||||||||||||||||||||||
Issuance of common stock for vesting of restricted stock units | 0 | 0 | 0 | 0 | 0 | 0 | 31,416 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Shares surrendered for tax obligations for employee restricted stock units | 0 | - | 0 | - | 0 | - | (9,632 | ) | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
Shares surrendered for prior year vesting due to forfeitures for non-employee restricted stock units | 0 | - | 0 | - | 0 | - | (1,389 | ) | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
Fair value of common stock issued related to advance for working capital (recorded in prepaid expenses and other current assets) | - | 0 | - | 0 | - | 0 | - | 0 | (101 | ) | 0 | 0 | (101 | ) | ||||||||||||||||||||||||||||||||||
Dividends on preferred stock | - | 0 | - | 0 | - | 0 | - | 0 | (362 | ) | 0 | 0 | (362 | ) | ||||||||||||||||||||||||||||||||||
Equity-based compensation for services | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 128 | 0 | 0 | 128 | ||||||||||||||||||||||||||||||||||||
Stock based compensation expense | - | 0 | - | 0 | - | 0 | - | 0 | 252 | 0 | 0 | 252 | ||||||||||||||||||||||||||||||||||||
Balance at September 30, 2020 | 161,135 | $ | 0 | 0 | $ | 0 | 590,273 | $ | 0 | 32,236,994 | $ | 32 | $ | 268,390 | $ | (454 | ) | $ | (251,154 | ) | $ | 16,814 | ||||||||||||||||||||||||||
Preferred Stock | Accumulated Other Comprehensive | |||||||||||
Series A | Series B | Series D | Common Stock | Income | Accumulated | Total Stockholders' | ||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Paid-in Capital | (Loss) (Restated)* | Deficit (Restated)* | Equity (Restated)* | |
| Balance at June 30, 2019 | 161,135 | $- | 129,437 | $- | - | $- | 29,316,445 | $29 | $247,935 | $(5) | $(196,312) | $51,647 |
| Net loss | - | - | - | - | - | - | - | - | - | - | (7,874) | (7,874) |
| Foreign currency translation adjustment | - | - | - | - | - | - | - | - | - | 9 | - | 9 |
| Issuance of common stock from exercise of stock options and warrants | - | - | - | - | - | - | 790,942 | 1 | 3,630 | - | - | 3,631 |
| Issuance of common stock, related to ATM Financing | - | - | - | - | - | - | 16,524 | - | 96 | - | - | 96 |
| Issuance of common stock for services | - | - | - | - | - | - | 75,600 | - | 478 | - | - | 478 |
| Issuance of warrants for services | - | - | - | - | - | - | - | - | 414 | - | - | 414 |
| Issuance of common stock for inducement shares | - | - | - | - | - | - | 64,250 | - | 478 | - | - | 478 |
| Preferred stock-Series D issued through Underwritten Registered Public Offering, net | - | - | - | - | 333,500 | - | - | - | 7,323 | - | - | 7,323 |
| Vesting of Restricted Stock Units | - | - | - | - | - | - | 1,389 | - | - | - | - | - |
| Warrant issued upon vesting for services | - | - | - | - | - | - | - | - | 270 | - | - | 270 |
| Issuance of common stock for conversion of Series B preferred stock | - | - | (105) | - | - | - | 210 | - | - | - | - | - |
| Issuance of common stock for convertible note financing, net of issuance costs | - | - | - | - | - | - | 5,000 | - | 23 | - | - | 23 |
| Release of warrant liability upon reclassification of liability to equity | - | - | - | - | - | - | - | - | 211 | - | - | 211 |
| Dividends on preferred stock | - | - | - | - | - | - | - | - | (85) | - | - | (85) |
| Stock based compensation expense | - | - | - | - | - | - | - | - | 661 | - | - | 661 |
| Balance at September 30, 2019 | 161,135 | $- | 129,332 | $- | 333,500 | $- | 30,270,360 | $30 | $261,434 | $4 | $(204,186) | $57,282 |
Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||
Preferred Stock | ||||||||||||||||||||||||||||||||||||||||||||||||
Series A | Series B | Series D |
Common Stock | Additional Paid-in | Accumulated Other Income | Accumulated | Total Stockholders' | |||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | (Loss) | 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 | (15,403 | ) | (15,403 | ) | ||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | - | 0 | - | 0 | - | 0 | - | 0 | 0 | (518 | ) | 0 | (518 | ) | ||||||||||||||||||||||||||||||||||
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 restricted stock units | 0 | 0 | 0 | 0 | 0 | 0 | 39,750 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Shares surrendered for tax obligations for employee restricted stock units | 0 | - | 0 | - | 0 | - | (9,632 | ) | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
Shares surrendered for prior year vesting due to forfeitures for non-employee restricted stock units | 0 | - | 0 | - | 0 | - | (1,389 | ) | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
Issuance of common stock for debt financing, net of issuance costs | 0 | 0 | 0 | 0 | 0 | 0 | 50,000 | 0 | 65 | 0 | 0 | 65 | ||||||||||||||||||||||||||||||||||||
Preferred stock-Series D issued 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 Nica Hemp Project | 0 | 0 | 0 | 0 | 0 | 0 | 1,500,000 | 1 | 2,489 | 0 | 0 | 2,490 | ||||||||||||||||||||||||||||||||||||
Fair value of common stock issued related to advance for working capital (recorded in prepaid expenses and other current assets) | - | 0 | - | 0 | - | 0 | - | 0 | (324 | ) | 0 | 0 | (324 | ) | ||||||||||||||||||||||||||||||||||
Dividends on preferred stock | - | 0 | - | 0 | - | 0 | - | 0 | (1,104 | ) | 0 | 0 | (1,104 | ) | ||||||||||||||||||||||||||||||||||
Equity-based compensation for services | 0 | 0 | 0 | 0 | 0 | 0 | 125,000 | 0 | 429 | 0 | 0 | 429 | ||||||||||||||||||||||||||||||||||||
Stock based compensation expense | - | 0 | - | 0 | - | 0 | - | 0 | 777 | 0 | 0 | 777 | ||||||||||||||||||||||||||||||||||||
Balance at September 30, 2020 | 161,135 | $ | 0 | 0 | $ | 0 | 590,273 | $ | 0 | 32,236,994 | $ | 32 | $ | 268,390 | $ | (454 | ) | $ | (251,154 | ) | $ | 16,814 | ||||||||||||||||||||||||||
Youngevity International, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Stockholders’Stockholders' Equity for the three and nine months ended September 30, 2019 has been restated. See Note 2.
(In thousands, except shares)
Three Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||
Preferred Stock | ||||||||||||||||||||||||||||||||||||||||||||||||
Series A | Series B | Series D | Common Stock | Additional Paid-in | Accumulated Other Comprehensive Income | Accumulated | Total Stockholders' | |||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | (Loss) | Deficit | Equity | |||||||||||||||||||||||||||||||||||||
Balance at June 30, 2019 | 161,135 | $ | 0 | 129,437 | $ | 0 | 0 | $ | 0 | 29,316,445 | $ | 29 | $ | 247,935 | $ | (5 | ) | $ | (196,312 | ) | $ | 51,647 | ||||||||||||||||||||||||||
Net loss | - | 0 | - | 0 | - | 0 | - | 0 | 0 | 0 | (7,874 | ) | (7,874 | ) | ||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | - | 0 | - | 0 | - | 0 | - | 0 | 0 | 9 | 0 | 9 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock from exercise of stock options and warrants | 0 | 0 | 0 | 0 | 0 | 0 | 790,942 | 1 | 3,630 | 0 | 0 | 3,631 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock, related to ATM Financing | 0 | 0 | 0 | 0 | 0 | 0 | 16,524 | 0 | 96 | 0 | 0 | 96 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock for services | 0 | 0 | 0 | 0 | 0 | 0 | 75,600 | 0 | 478 | 0 | 0 | 478 | ||||||||||||||||||||||||||||||||||||
Issuance of warrants for services | - | 0 | - | 0 | - | 0 | - | 0 | 414 | 0 | 0 | 414 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock for inducement shares | 0 | 0 | 0 | 0 | 0 | 0 | 64,250 | 0 | 478 | 0 | 0 | 478 | ||||||||||||||||||||||||||||||||||||
Preferred stock-Series D issued through Underwritten Registered Public Offering, net | 0 | 0 | 0 | 0 | 333,500 | 0 | 0 | 0 | 7,323 | 0 | 0 | 7,323 | ||||||||||||||||||||||||||||||||||||
Vesting of Restricted Stock Units | 0 | 0 | 0 | 0 | 0 | 0 | 1,389 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Warrant issued upon vesting for services | - | 0 | - | 0 | - | 0 | - | 0 | 270 | 0 | 0 | 270 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock for conversion of Series B preferred stock | 0 | 0 | (105 | ) | 0 | 0 | 0 | 210 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||
Issuance of common stock for convertible note financing, net of issuance costs | - | 0 | - | 0 | 0 | 0 | 5,000 | 0 | 23 | 0 | 0 | 23 | ||||||||||||||||||||||||||||||||||||
Release of warrant liability upon reclassification of liability to equity | - | 0 | - | 0 | - | 0 | - | 0 | 211 | 0 | 0 | 211 | ||||||||||||||||||||||||||||||||||||
Dividends on preferred stock | - | 0 | - | 0 | - | 0 | - | 0 | (85 | ) | 0 | 0 | (85 | ) | ||||||||||||||||||||||||||||||||||
Stock based compensation expense | - | 0 | - | 0 | - | 0 | - | 0 | 661 | 0 | 0 | 661 | ||||||||||||||||||||||||||||||||||||
Balance at September 30, 2019 | 161,135 | $ | 0 | 129,332 | $ | 0 | 333,500 | $ | 0 | 30,270,360 | $ | 30 | $ | 261,434 | $ | 4 | $ | (204,186 | ) | $ | 57,282 | |||||||||||||||||||||||||||
Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||
Preferred Stock | ||||||||||||||||||||||||||||||||||||||||||||||||
Series A | Series B | Series D | Common Stock | Additional Paid-in | Accumulated Other Comprehensive Income | Accumulated | Total Stockholders' | |||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | (Loss) | Deficit | Equity | |||||||||||||||||||||||||||||||||||||
Balance at December 31, 2018 | 161,135 | $ | 0 | 129,437 | $ | 0 | 0 | $ | 0 | 25,760,708 | $ | 26 | $ | 206,757 | $ | (45 | ) | $ | (183,763 | ) | $ | 22,975 | ||||||||||||||||||||||||||
Net loss | - | 0 | - | 0 | - | 0 | - | 0 | 0 | 0 | (20,423 | ) | (20,423 | ) | ||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | - | 0 | - | 0 | - | 0 | - | 0 | 0 | 49 | 0 | 49 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock from exercise of stock options and warrants | 0 | 0 | 0 | 0 | 0 | 0 | 1,164,102 | 2 | 5,371 | 0 | 0 | 5,373 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock, related to ATM Financing | 0 | 0 | 0 | 0 | 0 | 0 | 17,524 | 0 | 102 | 0 | 0 | 102 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock for services | 0 | 0 | 0 | 0 | 0 | 0 | 250,600 | 0 | 1,466 | 0 | 0 | 1,466 | ||||||||||||||||||||||||||||||||||||
Issuance of warrants for services | - | 0 | - | 0 | - | 0 | - | 0 | 414 | 0 | 0 | 414 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock for inducement shares | 0 | 0 | 0 | 0 | 0 | 0 | 64,250 | 0 | 478 | 0 | 0 | 478 | ||||||||||||||||||||||||||||||||||||
Preferred stock-Series D issued through Underwritten Registered Public Offering, net | 0 | 0 | 0 | 0 | 333,500 | 0 | 0 | 0 | 7,323 | 0 | 0 | 7,323 | ||||||||||||||||||||||||||||||||||||
Vesting of Restricted Stock Units | 0 | 0 | 0 | 0 | 0 | 0 | 1,389 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Warrant issued upon vesting for services | - | 0 | - | 0 | - | 0 | - | 0 | 2,196 | 0 | 0 | 2,196 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock for conversion of Series B preferred stock | 0 | 0 | (105 | ) | 0 | 0 | 0 | 210 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||
Issuance of common stock for true-up shares | - | 0 | - | 0 | 0 | 0 | 44,599 | 0 | 281 | 0 | 0 | 281 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock for debt financing, net of issuance costs | 0 | 0 | 0 | 0 | 0 | 0 | 40,000 | 0 | 350 | 0 | 0 | 350 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock, Private Placement, net of issuance costs | 0 | 0 | 0 | 0 | 0 | 0 | 505,000 | 0 | 3,125 | 0 | 0 | 3,125 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock for convertible note financing, net of issuance costs | - | 0 | - | 0 | 0 | 0 | 77,250 | 0 | 451 | 0 | 0 | 451 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock related to advance for working capital (note receivable) net of settlement of debt | - | 0 | - | 0 | 0 | 0 | 295,910 | 1 | 2,308 | 0 | 0 | 2,309 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock for related to purchase of land - H&H | - | 0 | - | 0 | 0 | 0 | 153,846 | 0 | 1,200 | 0 | 0 | 1,200 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock for related to purchase of trademark - H&H | - | 0 | - | 0 | 0 | 0 | 100,000 | 0 | 750 | 0 | 0 | 750 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock for acquisition of Khrysos | 0 | 0 | 0 | 0 | 0 | 0 | 1,794,972 | 1 | 13,999 | 0 | 0 | 14,000 | ||||||||||||||||||||||||||||||||||||
Release of warrant liability upon warrant exercises | - | 0 | - | 0 | - | 0 | - | 0 | 1,077 | 0 | 0 | 1,077 | ||||||||||||||||||||||||||||||||||||
Release of warrant liability upon reclassification of liability to equity | - | 0 | - | 0 | - | 0 | - | 0 | 1,494 | 0 | 0 | 1,494 | ||||||||||||||||||||||||||||||||||||
Dividends on preferred stock | - | 0 | - | 0 | - | 0 | - | 0 | (127 | ) | 0 | 0 | (127 | ) | ||||||||||||||||||||||||||||||||||
Stock based compensation expense | - | 0 | - | 0 | - | 0 | - | 0 | 12,418 | 0 | 0 | 12,418 | ||||||||||||||||||||||||||||||||||||
Balance at September 30, 2019 | 161,135 | $ | 0 | 129,332 | $ | 0 | 333,500 | $ | 0 | 30,270,360 | $ | 30 | $ | 261,434 | $ | 4 | $ | (204,186 | ) | $ | 57,282 | |||||||||||||||||||||||||||
Youngevity International, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of CashFlows
(In thousands)
Nine Months Ended September 30, | ||||||||
2020 | 2019 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net loss | $ | (15,403 | ) | $ | (20,423 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 3,808 | 4,199 | ||||||
Stock-based compensation expense | 777 | 12,418 | ||||||
Equity-based compensation for services | 1,132 | 3,982 | ||||||
Amortization of debt discounts and issuance costs | 1,099 | 924 | ||||||
Change in fair value of warrant derivative liability | (1,542 | ) | (4,344 | ) | ||||
Change in fair value of contingent acquisition debt | (1,640 | ) | (911 | ) | ||||
Change in allowance for other receivable (Note 3) | (324 | ) | 0 | |||||
Change in allowance for notes receivable (Note 3) | 337 | 0 | ||||||
Change in inventory reserve | (84 | ) | 889 | |||||
Changes in allowance for accounts receivable | (30 | ) | 0 | |||||
Gain on debt extinguishment | (48 | ) | 0 | |||||
Loss on disposal of property and equipment | 101 | 0 | ||||||
Loss on impairment of inventory | 200 | 0 | ||||||
Non-cash operating lease expense | 1,919 | 0 | ||||||
Stock issuance for true-up shares | 0 | 281 | ||||||
Loss on modification of warrants | - | 876 | ||||||
Deferred taxes | 0 | 73 | ||||||
Changes in operating assets and liabilities, net of effect from business combinations: | ||||||||
Accounts receivable | (111 | ) | (5,389 | ) | ||||
Inventory | 554 | (958 | ) | |||||
Prepaid expenses and other current assets | 337 | (1,411 | ) | |||||
Income taxes receivable | 0 | (233 | ) | |||||
Other assets | (395 | ) | 0 | |||||
Accounts payable | 336 | 454 | ||||||
Accrued distributor compensation | 1,003 | (37 | ) | |||||
Deferred revenues | 6,584 | (307 | ) | |||||
Accrued expenses and other liabilities | 982 | 2,155 | ||||||
Operating lease liabilities | (1,599 | ) | 0 | |||||
Other long-term liabilities | (68 | ) | 0 | |||||
Net Cash Used in Operating Activities | (2,075 | ) | (7,762 | ) | ||||
Cash Flows from Investing Activities: | ||||||||
Acquisitions, net of cash acquired | 0 | (925 | ) | |||||
Purchases of property and equipment | (3,515 | ) | (5,177 | ) | ||||
Net Cash Used in Investing Activities | (3,515 | ) | (6,102 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Proceeds from issuance of promissory notes, net of offering costs | 1,000 | 5,125 | ||||||
Proceeds from private placement of common stock, net of offering costs | 0 | 2,871 | ||||||
Proceeds from the exercise of stock options and warrants, net | 0 | 5,214 | ||||||
Proceeds from at-the-market-offering transaction | 0 | 102 | ||||||
Proceeds from the issuance of preferred stock – series D, net of offering costs | 233 | 7,323 | ||||||
Proceeds from short-term debt | 3,923 | 0 | ||||||
Payments from line of credit, net | (56 | ) | (275 | ) | ||||
Payments of notes payable | (77 | ) | (108 | ) | ||||
Payments of convertible notes payable | (25 | ) | (568 | ) | ||||
Payments of contingent acquisition debt | (175 | ) | (333 | ) | ||||
Payments of finance leases | (832 | ) | (1,099 | ) | ||||
Payments of dividends | (1,108 | ) | (46 | ) | ||||
Net Cash Provided by Financing Activities | 2,883 | 18,206 | ||||||
Foreign Currency Effect on Cash | (518 | ) | 49 | |||||
Net decrease in cash and cash equivalents | (3,225 | ) | 4,391 | |||||
Cash and Cash Equivalents, Beginning of Period | 4,463 | 2,879 | ||||||
Cash and Cash Equivalents, End of Period | $ | 1,238 | $ | 7,270 | ||||
Supplemental Disclosures of Cash Flow Information | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 883 | $ | 2,641 | ||||
Income taxes | $ | 30 | $ | 164 | ||||
Supplemental Disclosures of Noncash Investing and Financing Activities | ||||||||
Purchases of property and equipment funded by finance leases | $ | 427 | $ | 42 | ||||
Purchases of property and equipment funded by mortgage agreements | $ | 0 | $ | 977 | ||||
Fair value of stock issued for Nica Hemp Project (Note 3) | $ | 2,490 | $ | 0 | ||||
Issuance of common stock for promissory note financing (Note 10) | $ | 65 | $ | 0 | ||||
Change in fair value of common stock issued for in relation to advance for working capital (Note 3) | $ | 324 | $ | 0 | ||||
Fair value of stock issued in connection with the acquisition of Khrysos Global, Inc. (Note 2) | $ | 0 | $ | 14,000 | ||||
Fair value of stock issued for services (Note 10) | $ | 0 | $ | 1,880 | ||||
Fair value of warrant issued for services, vested portion (Note 10) | $ | 0 | $ | 2,196 | ||||
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 | ||||
Issuance of common stock for the noncash exercise of warrants | $ | 0 | $ | 157 | ||||
Dividends declared but not paid at the end of period (Note 10) | $ | 120 | $ | 83 | ||||
See accompanying notes to condensed consolidated financial statements.
Preferred Stock | Additional Paid-in | Accumulated Other | Accumulated | Total Stockholders' | ||||||||
Series A | Series B | Series D | Common Stock | Capital | Comprehensive | Deficit | Equity | |||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | (Restated)* | Loss | (Restated)* | (Restated)* | |
| Balance at December 31, 2018 | 161,135 | $- | 129,437 | $- | - | $- | 25,760,708 | $26 | $206,757 | $(45) | $(183,763) | $22,975 |
| Net loss | - | - | - | - | - | - | - | - | - | - | (20,423) | (20,423) |
| Foreign currency translation adjustment | - | - | - | - | - | - | - | - | - | 49 | - | 49 |
| Issuance of common stock from exercise of stock options and warrants | - | - | - | - | - | - | 1,164,102 | 2 | 5,371 | - | - | 5,373 |
| Issuance of common stock, related to ATM Financing | - | - | - | - | - | - | 17,524 | - | 102 | - | - | 102 |
| Issuance of common stock for services | - | - | - | - | - | - | 250,600 | - | 1,466 | - | - | 1,466 |
| Issuance of warrants for services | - | - | - | - | - | - | - | - | 414 | - | - | 414 |
| Issuance of common stock for inducement shares | - | - | - | - | - | - | 64,250 | - | 478 | - | - | 478 |
| Preferred stock-Series D issued through Underwritten Registered Public Offering, net | - | - | - | - | 333,500 | - | - | - | 7,323 | - | - | 7,323 |
| Vesting of Restricted Stock Units | - | - | - | - | - | - | 1,389 | - | - | - | - | - |
| Warrant issued upon vesting for services | - | - | - | - | - | - | - | - | 2,196 | - | - | 2,196 |
| Issuance of common stock for conversion of Series B preferred stock | - | - | (105) | - | - | - | 210 | - | - | - | - | - |
| Issuance of common stock for true-up shares | - | - | - | - | - | - | 44,599 | - | 281 | - | - | 281 |
| Issuance of common stock for debt financing, net of issuance costs | - | - | - | - | - | - | 40,000 | - | 350 | - | - | 350 |
| Issuance of common stock, Private Placement, net of issuance costs | - | - | - | - | - | - | 505,000 | - | 3,125 | - | - | 3,125 |
| Issuance of common stock for convertible note financing, net of issuance costs | - | - | - | - | - | - | 77,250 | - | 451 | - | - | 451 |
| Issuance of common stock related to advance for working capital (note receivable) net of settlement of debt | - | - | - | - | - | - | 295,910 | 1 | 2,308 | - | - | 2,309 |
| Issuance of common stock for related to purchase of land - H&H | - | - | - | - | - | - | 153,846 | - | 1,200 | - | - | 1,200 |
| Issuance of common stock for related to purchase of trademark - H&H | - | - | - | - | - | - | 100,000 | - | 750 | - | - | 750 |
| Issuance of common stock for acquisition of Khrysos | - | - | - | - | - | - | 1,794,972 | 1 | 13,999 | - | - | 14,000 |
| Release of warrant liability upon warrant exercises | - | - | - | - | - | - | - | - | 1,077 | - | - | 1,077 |
| Release of warrant liability upon reclassification of liability to equity | - | - | - | - | - | - | - | - | 1,494 | - | - | 1,494 |
| Dividends on preferred stock | - | - | - | - | - | - | - | - | (127) | - | - | (127) |
| Stock based compensation expense | - | - | - | - | - | - | - | - | 12,418 | - | - | 12,418 |
| Balance at September 30, 2019 | 161,135 | $- | 129,332 | $- | 333,500 | $- | 30,270,360 | $30 | $261,434 | $4 | $(204,186) | $57,282 |
Preferred Stock | Additional | Accumulated Other | Total | Preferred Stock | Total | ||||||||
Series A | Series B | Common Stock | Paid-in | Comprehensive | Accumulated | Stockholders' | Series C | Mezzanine | |||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Income | (Loss) | Deficit | Shares | Amount | Equity | |
| Balance at June 30, 2018 | 161,135 | $- | 328,541 | $- | 21,536,019 | $22 | $182,475 | $(52) | $(166,615) | $15,830 | - | $- | |
| Net loss | - | - | - | - | - | - | - | - | (8,410) | (8,410) | - | - | - |
| Foreign currency translation adjustment | - | - | - | - | - | - | - | 105 | - | 105 | - | - | - |
| Issuance of Series C preferred stock, net of issuance cost | - | - | - | - | - | - | 67 | - | - | 67 | 354,704 | - | 2,309 |
| Issuance of common stock, Private Placement, net of issuance costs | - | - | - | - | 285,527 | - | 985 | - | - | 985 | - | - | - |
| Issuance of common stock pursuant to the exercise of stock options | - | - | - | - | 175 | - | (1) | - | - | (1) | - | - | - |
| Issuance of common stock for services | - | - | - | - | 110,000 | - | 465 | - | - | 465 | - | - | - |
| Issuance of common stock for conversion of Series B preferred stock | - | - | (12,574) | - | 25,148 | - | - | - | - | - | - | - | - |
| Dividends on preferred stock | - | - | - | - | - | - | (3) | - | - | (3) | - | - | - |
| Dividends declared | - | - | - | - | - | - | (89) | - | - | (89) | |||
| Stock based compensation expense | - | - | - | - | - | - | 470 | - | - | 470 | - | - | - |
| Balance at September 30, 2018 | 161,135 | $- | 315,967 | $- | 21,956,869 | $22 | $184,369 | $53 | $(175,025) | $9,419 | 354,704 | $- | $2,309 |
Preferred Stock | Additional | Accumulated Other Comprehensive | Total | Preferred Stock | Total | ||||||||
Series A | Series B | Common Stock | Paid-in | Income | Accumulated | Stockholders' | Series C | Mezzanine | |||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | (Loss) | Deficit | Equity | Shares | Amount | Equity | |
| Balance at December 31, 2017 | 161,135 | $- | - | $- | 19,723,285 | $20 | $171,405 | $(281) | $(163,693) | $7,451 | - | $- | $- |
| Net loss | - | - | - | - | - | - | - | - | (11,332) | (11,332) | - | - | - |
| Foreign currency translation adjustment | - | - | - | - | - | - | - | 334 | - | 334 | - | - | - |
| Issuance of Series B preferred stock, net of issuance cost | - | - | 381,173 | - | - | - | 3,289 | - | - | 3,289 | - | - | - |
| Issuance of Series C preferred stock, net of issuance cost | - | - | - | - | - | - | 67 | - | - | 67 | 354,704 | - | 2,309 |
| Issuance of common stock, Private Placement, net of issuance costs | - | - | - | - | 285,527 | - | 985 | - | - | 985 | - | - | - |
| Issuance of common stock pursuant to the exercise of stock options | - | - | - | - | 612 | - | - | - | - | - | - | - | - |
| Issuance of common stock for services | - | - | - | - | 240,000 | - | 1,010 | - | - | 1,010 | - | - | - |
| Issuance of common stock for conversion of Series B preferred stock | - | - | (65,206) | - | 130,412 | 1 | - | - | - | 1 | - | - | - |
| Issuance of common stock for conversion of Notes - 2017 Notes | - | - | - | - | 1,577,033 | 1 | 6,544 | - | - | 6,545 | - | - | - |
| Dividends on preferred stock | - | - | - | - | - | - | (137) | - | - | (137) | - | - | - |
| Warrant modification | - | - | - | - | - | - | 284 | - | - | 284 | - | - | - |
| Stock based compensation expense | - | - | - | - | - | - | 922 | - | - | 922 | - | - | - |
| Balance at September 30, 2018 | 161,135 | $- | 315,967 | $- | 21,956,869 | $22 | $184,369 | $53 | $(175,025) | $9,419 | 354,704 | $- | $2,309 |
Nine Months Ended September 30, | ||
2019 | 2018 | |
| Cash Flows from Operating Activities: | (Restated)* | |
| Net loss | $(20,423) | $(11,332) |
| Adjustments to reconcile net loss to net cash used in operating activities: | ||
| Depreciation and amortization | 4,199 | 3,781 |
| Stock-based compensation expense | 12,418 | 922 |
| Amortization of debt discounts and issuance costs | 924 | 1,158 |
| Equity issuance costs for services | 3,982 | 249 |
| Change in fair value of warrant derivative liability | (4,344) | 4,634 |
| Change in fair value of contingent acquisition debt | (911) | (4,076) |
| Change in inventory reserve | 889 | 765 |
| Stock issuance for true-up shares | 281 | - |
| Loss on modification of warrants (Note 11) | 876 | - |
| Loss on impairment of intangible assets | - | 2,200 |
| Extinguishment loss on debt | - | 1,082 |
| Deferred taxes | 73 | 137 |
| Changes in operating assets and liabilities, net of effect from business combinations: | ||
| Accounts receivable | (5,389) | (1,823) |
| Inventory | (958) | (2,470) |
| Prepaid expenses and other current assets | (1,411) | (263) |
| Accounts payable | 454 | (1,642) |
| Accrued distributor compensation | (37) | (221) |
| Deferred revenues | (307) | 1,130 |
| Accrued expenses and other liabilities | 2,155 | 1,071 |
| Income taxes receivable | (233) | (34) |
| Net Cash Used in Operating Activities | (7,762) | (4,732) |
| Cash Flows from Investing Activities: | ||
| Acquisitions, net of cash acquired | (925) | (50) |
| Purchases of property and equipment | (5,177) | (252) |
| Net Cash Used in Investing Activities | (6,102) | (302) |
| Cash Flows from Financing Activities: | ||
| Proceeds from issuance of promissory notes, net of offering costs | 5,125 | - |
| Proceeds from issuance of preferred stock - series B, net of offering costs | - | 3,289 |
| Proceeds from issuance of preferred stock - series C, net of offering costs | - | 3,197 |
| Proceeds from issuance of preferred stock - series D, net of offering costs | 7,323 | - |
| Proceeds from private placement of common stock, net of offering costs | 2,871 | 985 |
| Proceeds from exercise of stock options and warrants, net | 5,214 | 3 |
| Proceeds from short-term notes payable | - | 1,907 |
| Proceeds from at-the-market offering transactions | 102 | - |
| Payments net of repayment towards line of credit | (275) | (1,308) |
| Payments of notes payable | (108) | (732) |
| Payments of convertible notes payable | (568) | - |
| Payments of contingent acquisition debt | (333) | (137) |
| Payments of finance leases | (1,099) | (840) |
| Payments of dividends | (46) | (39) |
| Net Cash Provided by Financing Activities | 18,206 | 6,325 |
| Foreign Currency Effect on Cash | 49 | 334 |
| Net increase in cash and cash equivalents | 4,391 | 1,625 |
| Cash and Cash Equivalents, Beginning of Period | 2,879 | 673 |
| Cash and Cash Equivalents, End of Period | $7,270 | $2,298 |
| Supplemental Disclosures of Cash Flow Information | ||
| Cash paid during the period for: | ||
| Interest | $2,641 | $3,517 |
| Income taxes | $164 | $33 |
| Supplemental Disclosures of Noncash Investing and Financing Activities | ||
| Purchases of property and equipment funded by finance leases | $42 | $1,113 |
| Purchases of property and equipment funded by mortgage agreements | $977 | $- |
| Fair value of stock issued for services (Note 11) | $1,880 | $1,010 |
| Fair value of stock issued for property and equipment (land) | $1,200 | $- |
| Fair value of stock issued for purchase of intangibles (tradename) | ��$750 | $- |
| Fair value of stock issued for note receivable, net of debt settlement | $2,309 | $- |
| Fair value of warrant issued for services, vested portion | $2,196 | $- |
| Fair value of stock issued in connection with the acquisition of Khrysos Global, Inc. (Note 5) | $14,000 | - |
| Issuance of common stock for the noncash exercise of warrants | $157 | $- |
| Change in warrant derivative liability to equity classification due to warrant modification | $- | $284 |
| Dividends declared but not paid at the end of period (Note 11) | $83 | $89 |
| Acquisitions of net assets in exchange for contingent debt, net of purchase price adjustments | $- | $527 |
| Conversion of 2017 Notes to Common Stock | $- | $7,254 |
Notes to Unaudited 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 Company also operate in Indonesia, Malaysia, and Japan through its sales force of independent distributors. |
● | 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, 2019 2020 and for the three and nine months ended September 30, 2019 2020 and 20182019 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-K10-K for the year ended December 31, 2018, 2019, filed with the SEC on April 15, 2019. June 25, 2021. The results for interim periods are not necessarily indicative of the results for the entire year.
Segment Information
The Company has three3 reportable segments: direct selling, commercial coffee, and commercial hemp. The direct selling segment develops and distributes health and wellness products through its global independent direct selling network also known as multi-level marketing. The commercial coffee segment is engaged in coffee roasting and distribution, (specializingspecializing in gourmet coffee), millcoffee. The commercial hemp segment manufactures proprietary systems to provide end-to-end extraction and processing that allow for the conversion of green coffee,hemp feed stock into hemp oil and sales of green coffee.hemp extracts. The determination that the Company has three reportable segments is based upon the guidance set forth in Accounting Standards Codification (“ASC”) Topic 280,
During the three months ended September 30, 2020, the Company derived approximately 92.1% of its revenue from its direct selling segment and 7.3% of its revenue from its commercial coffee segment and 0.6% from the commercial hemp segment. During the three months ended September 30, 2019, the Company derived approximately 90.6% of its revenue from its direct selling segment, and approximately 8.8% of its revenue from its commercial coffee segment and approximately 0.6% from the commercial hemp segment.
During the threenine months ended September 30, 2018, 2020, the Company had two reportable segments and derived approximately 88%90.5% of its revenue from its direct selling segment and approximately 12%8.5% of its revenue from its commercial coffee segment and 1.0% from the commercial hemp segment.
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 the Company’s stock-based compensation plan, fair value of assets and liabilities acquired in business combinations, finance 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 consolidated financial statements. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected prospectively in the period they occur.
Liquidity and Going Concern
The accompanying 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 net losses during the nine months ended September 30, 2020 and 2019 of approximately $15,403,000 and $20,423,000, respectively. Net cash used in operating activities was approximately $2,075,000 and $7,762,000 for the nine months ended September 30, 2020 and 2019, respectively.
Management has assessed the Company’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 and continues to take actions to alleviate the cash used in operations. During the nine months ending September 30 2020, the Company reported total revenue of approximately $102,525,000 a decrease of approximately 9.1% compared to the 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 domestic and international warehousing operations due to stay-at-home orders issued within various locations where the Company 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 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 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 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 the Company or to its 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.
Actual results may differ from previously estimated amounts and such differences may be material to the consolidated financial statements. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected prospectively in the period they occur.
Cash and Cash Equivalents
The Company considers only its monetary liquid assets with original maturities of three months or less as cash and cash equivalents.
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 v) Recognize revenue when (or as) each performance obligation is satisfied. (See Note 4)
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 our transactions.
Independent distributors receive compensation which is recognized as Distributor Compensationdistributor 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-timeone-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’sour 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. This606-10-32-18. The 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 itself to be an e-commerce company whereby personal interaction is provided to customers by its independent 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 revenue recognized at shipping point, the point in time the customer obtains control of the products. The majority of the Company’s contracts have a single performance obligation and are short term in nature. 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 - 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 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 Costs
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 Company provides hemp growers, feedstock suppliers, and CBD crude oil producers the use of September 30, 2019equipment, intellectual capital, production consultancy, tolling services, and December 31, 2018,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 hemp 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 balanceCompany 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 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. 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 was approximately $2,005,000 and $2,312,000, respectively. Deferredcustomer 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 the Company’s direct selling segment is attributable to the Heritage MakersMaker’s product line and also for future Company convention and distributor events.
The Company also records deferred revenue within its direct selling, commercial coffee and commercial hemp segments related to payments made by customers for unshipped orders.
Deferred costs relate to Heritage Makers prepaid commissions that are recorded in prepaid expenses and other current assets on the Company’s consolidated balance sheets and recognized in expense at the time the related revenue is recognized. As of September 30, 2019, and December 31, 2018, the balance in deferred costs was approximately $257,000 and $364,000, respectively, and is included in prepaid expenses and other current assets.
Plantation Costs
The Company’s commercial coffee segment includes the results of Siles, which is comprised of (i) a 500-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 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 costs are then recognized as the inventory value. There were 0 deferred costs associated with the harvest at September 30, 2020. Deferred costs associated with the harvest as of September 30, 2019 and at December 31, 2018 are2019 were approximately $381,000 and $400,000, respectively, and are included in prepaid expenses and other current assets on the Company’s balance sheets.
Stock-based Compensation
The Company accounts for stock-based compensation in accordance with ASC Topic 718, “
Compensation – Stock Compensation,”which establishes accounting for equity instruments exchanged forThe Company accounts for equity instruments issued to non-employees in accordance with authoritative guidance for equity-based payments to non-employees. Stock options issued to non-employees are accounted for at their estimated fair value, determined usinguses the Black-Scholes option-pricing model. Theto estimate the fair value of options grantedstock options. The use of a valuation model requires the Company to non-employeesmake certain assumptions with respect to selected model inputs. Expected volatility is re-measured as they vest,calculated based on the historical volatility of the Company’s stock price over the expected 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 resulting increase in value, if any, is recognized as expense duringexpected life assumed at the perioddate of the related services are rendered.
Income Taxes
The Company accounts for income taxes in accordance with ASC Topic 740,
"Income Taxes,"under the asset and liability method which includes the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the condensed consolidated financial statements. Under this approach, deferred taxes are recorded for the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial statement and tax basis of assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. The effects of future changes in income tax laws or rates are not anticipated.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 Contingencies
The Company is from time to time, the subject of claims and suits arising out of matters related to the Company’s business. 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. It is not possible to predict the final resolution of the current litigation to which the Company is party to, and the impact of certain of these matters on the Company’s business, results of operations, and financial condition could be material. Regardless of the outcome, litigation has adversely impacted the Company’s business because of defense costs, diversion of management resources and other factors.
September 30, 2019 | |||
Previously Reported | Adjustments | Restated | |
| ASSETS | |||
| Current Assets | |||
| Cash and cash equivalents | $7,270 | $- | $7,270 |
| Accounts receivable, trade (1) | 35,662 | (25,936) | 9,726 |
| Income tax receivable | 307 | - | 307 |
| Inventory | 23,109 | - | 23,109 |
| Prepaid expenses and other current assets | 5,925 | - | 5,925 |
| Total current assets | 72,273 | (25,936) | 46,337 |
| Property and equipment, net | 22,540 | (1,127) | 21,413 |
| Operating lease right-of-use assets | 7,443 | - | 7,443 |
| Deferred tax assets | 75 | - | 75 |
| Intangible assets, net | 22,083 | - | 22,083 |
| Goodwill | 10,676 | 2,478 | 13,154 |
| Note receivable (Note 1) | 5,146 | - | 5,146 |
| Other assets – notes receivable | 949 | - | 949 |
| Total assets | $141,185 | $(24,585) | $116,600 |
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||
| Current Liabilities | |||
| Accounts payable | $34,108 | $(25,694) | $8,414 |
| Accrued distributor compensation | 3,252 | - | 3,252 |
| Accrued expenses | 10,304 | - | 10,304 |
| Deferred revenues | 2,005 | - | 2,005 |
| Line of credit | 1,981 | - | 1,981 |
| Other current liabilities | 1,205 | - | 1,205 |
| Operating lease liabilities, current portion | 1,484 | - | 1,484 |
| Finance lease liabilities, current portion | 921 | - | 921 |
| Notes payable, current portion | 162 | - | 162 |
| Convertible notes payable, current portion | 25 | - | 25 |
| Warrant derivative liability | 2,699 | - | 2,699 |
| Contingent acquisition debt, current portion | 673 | - | 673 |
| Total current liabilities | 58,819 | (25,694) | 33,125 |
| Operating lease liabilities, net of current portion | 5,959 | - | 5,959 |
| Finance lease liabilities, net of current portion | 593 | - | 593 |
| Notes payable, net of current portion | 10,705 | - | 10,705 |
| Convertible notes payable, net of current portion | 2,592 | - | 2,592 |
| Contingent acquisition debt, net of current portion | 6,344 | - | 6,344 |
| Total liabilities | 85,012 | (25,694) | 59,318 |
| Commitments and contingencies (Note 1) | |||
| Stockholders’ Equity | |||
| Preferred Stock, $0.001 par value: 5,000,000 shares authorized | |||
| Series A – 8% Convertible Preferred Stock, par value $0.001 per share; 161,135 shares issued and outstanding at September 30, 2019 and December 31, 2018 | - | - | - |
| Series B – 6% Convertible Preferred Stock, par value $0.001 per shares; 129,332 and 129,437 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively; $1,244 liquidation preference as of September 30, 2019 | - | - | - |
| Series D – 9.75% Cumulative Redeemable Perpetual Preferred Stock, par value $0.001 per shares; 333,500 shares issued and outstanding at September 30, 2019 and zero at December 31, 2018; $8,405 liquidation preference as of September 30, 2019 | - | - | - |
| Common Stock, $0.001 par value: 50,000,000 shares authorized; 30,270,360 and 25,760,708 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively | 30 | - | 30 |
| Additional paid-in capital | 260,083 | 1,351 | 261,434 |
| Accumulated deficit | (203,944) | (242) | (204,186) |
| Accumulated other comprehensive loss (income) | 4 | - | 4 |
| Total stockholders’ equity | 56,173 | 1,109 | 57,282 |
Total Liabilities and Stockholders’ Equity | $141,185 | $(24,585) | $116,600 |
Three Months Ended September 30, 2019 | |||
Previously Reported | Adjustments | Restated | |
| Revenues | $34,017 | $(637) | $33,380 |
| Cost of revenues | 14,279 | (637) | 13,642 |
| Gross profit | 19,738 | - | 19,738 |
| Operating expenses | - | ||
| Distributor compensation | 13,122 | - | 13,122 |
| Sales and marketing | 4,432 | - | 4,432 |
| General and administrative | 10,663 | - | 10,663 |
| Total operating expenses | 28,217 | - | 28,217 |
| Operating loss | (8,479) | - | (8,479) |
| Interest expense, net | (1,109) | - | (1,109) |
| Change in fair value of warrant derivative liability | 2,457 | - | 2,457 |
| Loss on modification of warrants (Note 11) | (876) | - | (876) |
| Total other income | 472 | - | 472 |
| Loss before income taxes | (8,007) | - | (8,007) |
| Income tax benefit | (133) | - | (133) |
| Net loss | (7,874) | - | (7,874) |
Preferred stock dividends | (85) | - | (85) |
| Net loss attributable to common stockholders | $(7,959) | $- | $(7,959) |
| Net loss per share, basic | $(0.27) | $- | $(0.27) |
| Net loss per share, diluted (Note 3) | $(0.27) | $- | $(0.27) |
| Weighted average shares outstanding, basic | 30,035,182 | - | 30,035,182 |
| Weighted average shares outstanding, diluted | 30,039,676 | - | 30,039,676 |
Nine Months Ended September 30, 2019 | |||
Previously Reported | Adjustments | Restated | |
| Revenues | $144,004 | $(31,215) | $112,789 |
| Cost of revenues | 71,495 | (30,973) | 40,522 |
| Gross profit | 72,509 | (242) | 72,267 |
| Operating expenses | - | ||
| Distributor compensation | 42,509 | - | 42,509 |
| Sales and marketing | 11,237 | - | 11,237 |
| General and administrative | 38,795 | - | 38,795 |
| Total operating expenses | 92,541 | - | 92,541 |
| Operating loss | (20,032) | (242) | (20,274) |
| Interest expense, net | (3,678) | - | (3,678) |
| Change in fair value of warrant derivative liability | 4,344 | - | 4,344 |
| Loss on modification of warrants (Note 11) | (876) | - | (876) |
| Total other expense, net | (210) | - | (210) |
| Loss before income taxes | (20,242) | (242) | (20,484) |
| Income tax benefit | (61) | - | (61) |
| Net loss | (20,181) | (242) | (20,423) |
Preferred stock dividends | (127) | - | (127) |
| Net loss attributable to common stockholders | $(20,308) | $(242) | $(20,550) |
| Net loss per share, basic | $(0.70) | $(0.01) | $(0.71) |
| Net loss per share, diluted (Note 3) | $(0.75) | $(0.01) | $(0.76) |
| Weighted average shares outstanding, basic | 28,924,305 | - | 28,924,305 |
| Weighted average shares outstanding, diluted | 29,003,331 | - | 29,003,331 |
Nine Months Ended September 30, 2019 | |||
Previously Reported | Adjustments | Restated | |
| Net loss | $(20,181) | $(242) | $(20,423) |
| Foreign currency translation | 49 | - | 49 |
Total comprehensive income | 49 | - | 49 |
| Comprehensive loss | $(20,132) | (242) | $(20,374) |
Nine Months Ended September 30, 2019 | |||
Previously Reported | Adjustments | Restated | |
| Cash Flows from Operating Activities: | |||
| Net loss | $(20,181) | $(242) | $(20,423) |
| Adjustments to reconcile net loss to net cash used in operating activities: | |||
| Depreciation and amortization | 4,199 | - | 4,199 |
| Stock-based compensation expense | 12,418 | - | 12,418 |
| Amortization of debt discounts and issuance costs | 924 | - | 924 |
| Equity issuance costs for services | 3,982 | - | 3,982 |
| Change in fair value of warrant derivative liability | (4,344) | - | (4,344) |
| Change in fair value of contingent acquisition debt | (911) | - | (911) |
| Change in inventory reserve | 889 | - | 889 |
| Stock issuance for true-up shares | 281 | - | 281 |
| Extinguishment loss on debt | 876 | - | 876 |
| Deferred taxes | 73 | - | 73 |
| Changes in operating assets and liabilities, net of effect from business combinations: | |||
| Accounts receivable | (31,325) | 25,936 | (5,389) |
| Inventory | (958) | - | (958) |
| Prepaid expenses and other current assets | (1,411) | - | (1,411) |
| Accounts payable | 26,148 | (25,694) | 454 |
| Accrued distributor compensation | (37) | - | (37) |
| Deferred revenues | (307) | - | (307) |
| Accrued expenses and other liabilities | 2,155 | - | 2,155 |
| Income taxes receivable | (233) | - | (233) |
| Net Cash Used in Operating Activities | (7,762) | - | (7,762) |
| Cash Flows from Investing Activities: | |||
| Acquisitions, net of cash acquired | (925) | - | (925) |
| Purchases of property and equipment | (5,177) | - | (5,177) |
| Net Cash Used in Investing Activities | (6,102) | - | (6,102) |
| Cash Flows from Financing Activities: | |||
| Proceeds from issuance of promissory notes, net of offering costs | 5,125 | - | 5,125 |
| Proceeds from issuance of preferred stock - series D, net of offering costs | 7,323 | - | 7,323 |
| Proceeds from private placement of common stock, net of offering costs | 2,871 | - | 2,871 |
| Proceeds from exercise of stock options and warrants, net | 5,214 | - | 5,214 |
| Proceeds from at-the-market-offering transactions | 102 | - | 102 |
| Payments net of repayment towards line of credit | (275) | - | (275) |
| Payments of notes payable | (108) | - | (108) |
| Payments of convertible notes payable | (568) | - | (568) |
| Payments of contingent acquisition debt | (333) | - | (333) |
| Payments of finance leases | (1,099) | - | (1,099) |
| Payments of dividends | (46) | - | (46) |
| Net Cash Provided by Financing Activities | 18,206 | - | 18,206 |
| Foreign Currency Effect on Cash | 49 | - | 49 |
| Net increase in cash and cash equivalents | 4,391 | - | 4,391 |
| Cash and Cash Equivalents, Beginning of Period | 2,879 | - | 2,879 |
| Cash and Cash Equivalents, End of Period | $7,270 | $- | $7,270 |
| Supplemental Disclosures of Cash Flow Information | |||
| Cash paid during the period for: | |||
| Interest | $2,641 | $- | $2,641 |
| Income taxes | $164 | $- | $164 |
| Supplemental Disclosures of Noncash Investing and Financing Activities | |||
| Purchases of property and equipment funded by finance leases | $42 | $- | $42 |
| Purchases of property and equipment funded by mortgage agreements | $977 | $- | $977 |
| Fair value of stock issued for services (Note 11) | $1,880 | $- | $1,880 |
| Fair value of stock issued for property and equipment (land) | $1,200 | $- | $1,200 |
| Fair value of stock issued for purchase of intangibles (tradename) | $750 | $- | $750 |
| Fair value of stock issued for note receivable, net of debt settlement | $2,309 | $- | $2,309 |
| Fair value of stock issued in connection with the acquisition of Khrysos Global, Inc. (Note 5) (1) | $12,649 | $1,351 | $14,000 |
| Fair value of warrant issued for services, vested portion | $2,196 | - | $2,196 |
| Issuance of common stock for the noncash exercise of warrants | $157 | - | $157 |
| Dividends declared but not paid at the end of period (Note 11) | $83 | $- | $83 |
| Acquisition of net assets acquired, net of purchase price adjustments (Note 12) (2) | $2,260 | (2,260) | $- |
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 treasury 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.
September 30, | ||||||||
2020 | 2019 | |||||||
(unaudited) | (unaudited) | |||||||
Warrants | 5,266,187 | 6,238,182 | ||||||
Preferred stock conversions | 22,786 | 275,600 | ||||||
Principal conversions on convertible notes | 309,000 | 312,571 | ||||||
Stock options | 4,567,368 | 3,705,644 | ||||||
Restricted stock units | 429,443 | 456,111 | ||||||
Total | 10,594,784 | 10,988,108 | ||||||
The calculation of diluted loss per share requires that, to the extent the average market price of the underlying shares for the reporting period exceeds the exercise price of the warrants and the presumed exercise of such securities are dilutive to loss per share for the period, an adjustment to net loss used in the calculation is required to remove the change in fair value of the warrants, net of tax from the numerator for the period. Likewise, an adjustment to the denominator is required to reflect the related dilutive shares, if any, under the treasury stock method. During the three and nine months ended September 30, 2019, the Company recorded net of tax gain of approximately $27,000 and $1,529,000, respectively, on the valuation of the Warrant Derivative Liabilitywarrant derivative liability which hashad a dilutive impact on loss per share, respectively.share.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
Loss per Share – Basic | ||||||||||||||||
Numerator for basic loss per share | $ | (5,434,000 | ) | $ | (7,959,000 | ) | $ | (16,507,000 | ) | $ | (20,550,000 | ) | ||||
Denominator for basic loss per share | 32,233,622 | 30,035,182 | 31,479,884 | �� | 28,924,305 | |||||||||||
Loss per common share - basic | $ | (0.17 | ) | $ | (0.27 | ) | $ | (0.52 | ) | $ | (0.71 | ) | ||||
Loss per Share - Diluted | ||||||||||||||||
Numerator for basic loss per share | $ | (5,434,000 | ) | $ | (7,959,000 | ) | $ | (16,507,000 | ) | $ | (20,550,000 | ) | ||||
Adjust: Fair value of dilutive warrants outstanding | 0 | (27,000 | ) | 0 | (1,529,000 | ) | ||||||||||
Numerator for dilutive loss per share | $ | (5,434,000 | ) | $ | (7,986,000 | ) | $ | (16,507,000 | ) | $ | (22,079,000 | ) | ||||
Denominator for basic loss per share | 32,233,622 | 30,035,182 | 31,479,884 | 28,924,305 | ||||||||||||
Plus: Incremental shares underlying “in the money” warrants outstanding | 0 | 4,494 | 0 | 79,026 | ||||||||||||
Denominator for dilutive loss per share | 32,233,622 | 30,039,676 | 31,479,884 | 29,003,331 | ||||||||||||
Loss per common share - diluted | $ | (0.17 | ) | $ | (0.27 | ) | $ | (0.52 | ) | $ | (0.76 | ) | ||||
Three Months Ended September 30, (unaudited) | Nine Months Ended September 30, (unaudited) | |||
2019 | 2018 | 2019 | 2018 | |
(Restated)* | ||||
| Loss per Share – Basic | ||||
| Numerator for basic loss per share | $(7,959,000) | $(9,888,000) | $(20,550, ,000) | $(12,855,000) |
| Denominator for basic loss per share | 30,035,182 | 21,686,085 | 28,924,305 | 20,986,151 |
| Loss per common share - basic | $(0.27) | $(0.46) | $(0.71) | $(0.61) |
| Loss per Share - Diluted | ||||
| Numerator for basic loss per share | $(7,959,000) | $(9,888,000) | $(20,550,000) | $(12,855,000) |
| Adjust: Fair value of dilutive warrants outstanding | (27,000) | - | (1,529,000) | - |
| Numerator for dilutive loss per share | $(7,986,000) | $(9,888,000) | $(22,079,000) | $(12,855,000) |
| Denominator for basic loss per share | 30,035,182 | 21,686,085 | 28,924,305 | 20,986,151 |
| Adjust: Incremental shares underlying “in the money” warrants outstanding | 4,494 | - | 79,026 | - |
| Denominator for dilutive loss per share | 30,039,676 | 21,686,085 | 29,003,331 | 20,986,151 |
| Loss per common share - diluted | $(0.27) | $(0.46) | $(0.76) | $(0.61) |
Recently Issued and Cost of Revenues
The Company records an inventory reserve for estimated excess and obsolete inventory based upon historical turnover, market conditions and assumptions about future demand for its products. When applicable, expiration dates of certain inventory items withdoes not believe that any recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a definite life are taken into consideration.
As of | ||
September 30, 2019 (unaudited) | December 31, 2018 | |
| Finished goods | $14,124 | $11,300 |
| Raw materials | 12,142 | 12,744 |
| Total inventory | 26,266 | 24,044 |
| Reserve for excess and obsolete | (3,157) | (2,268) |
| Inventory, net | $23,109 | $21,776 |
Note 2. Acquisitions and liabilities recognized within its condensed consolidated balance sheets were as follows (in thousands):
Three Months Ended | Nine Months Ended | ||||
| Lease Cost | Classification | September 30, 2019 (unaudited) | September 30, 2018 (unaudited) | September 30, 2019 (unaudited) | September 30, 2018 (unaudited) |
| Operating lease cost | SG&A expenses | $420 | $- | $962 | $- |
| Finance lease cost | |||||
| Amortization of leased assets | Depreciation and amortization | 84 | - | 274 | - |
| Interest on lease liabilities | Net interest expense | 30 | - | 101 | - |
| Net lease cost | $534 | $- | $1,337 | $- | |
During 2019, scheduled annual lease payments were as follows (unaudited) (in thousands):
Operating Leases | Finance Leases | |
| Year ending December 31: | ||
| October 1 through December 31, 2019 | $474 | $402 |
| 2020 | 1,780 | 860 |
| 2021 | 1,520 | 332 |
| 2022 | 1,086 | 18 |
| 2023 | 628 | 13 |
| Thereafter | 3,557 | 9 |
| Total lease payments | 9,045 | 1,634 |
| Less imputed interest | (1,602) | (120) |
| Present value of lease liabilities | $7,443 | $1,514 |
As such, the commercial hemp segment.
Three Months Ended September 30, (unaudited) | Nine Months Ended September 30, (unaudited) | |||
2019 | 2018 | 2019 | 2018 | |
(Restated)* | (Restated)* | |||
| Direct Selling Segment | $30,256 | $34,280 | $95,800 | $106,437 |
| Commercial coffee: | ||||
| Processed green coffee | (22) | 1,785 | 1,046 | 11,297 |
| Milling and processing services | 29 | - | 6,416 | - |
| Roasted coffee and other | 2,933 | 3,017 | 9,002 | 8,597 |
Total commercial coffee | 2,940 | 4,802 | 16,464 | 19,894 |
| Commercial Hemp | 184 | - | 525 | - |
| Total revenue | $33,380 | $39,082 | $112,789 | $126,331 |
During the nine months ended September 30, 2019 has been restated. See Note 2.
2019 Acquisitions
BeneYOU
On October 31, 2019, respectively. The company recognized approximately $228,000 of deferred revenue from the direct selling segment for the three and nine months ended September 30, 2019.
The Company is obligated to make monthly payments based on a Florida corporation (“INXH”). The businesspercentage of the Seller, INXL and INXH
The contingent consideration’s estimated fair value at the approvaldate of the holders of at leastacquisition was approximately $2,648,000 as determined by management using a majority of the issueddiscounted cash flow methodology. The acquisition related costs, such as legal costs and outstanding shares of the Company’s common stockother professional fees were minimal and the approval of expensed as incurred.
The Nasdaq Stock Market (collectively, the “Contingent Consideration Warrants”) consisting of six (6) six-year warrants, to purchase 500,000 shares of common stock each, for an aggregate of 3,000,000 shares of common stock at an exercise price of $10 per share exercisable upon reaching certain levels of cumulative revenue or cumulative net income before taxes by the business during any of the years ending December 31, 2019, 2020, 2021, 2022, 2023 or 2024.
The Company has estimatedrecorded the fair value at the date of acquisition of the acquired tangible and intangible assets and liabilities as follows including the resulting adjustments in changes to the aggregate purchase price (in thousands):
Consideration as Originally Reported | Adjustments | Consideration as Currently Reported | |
| Present value of cash consideration | $1,894 | $- | $1,894 |
| Estimated fair value of common stock issued | 12,649 | 1,351 | 14,000 |
| Aggregate purchase price | $14,543 | $1,351 | $15,894 |
Contingent consideration | $ | 2,648 | ||
Aggregate purchase price | $ | 2,648 |
The following table summarizes the estimated preliminary and as adjusted fair values of the assets acquired and liabilities assumed during the period ended March 31,in November 2019 (in(in thousands):
Fair Value as Originally Reported | Adjustments | Fair Value as Currently Reported | |
| Current assets | $636 | $- | $636 |
| Inventory | 1,264 | - | 1,264 |
| Property, plant and equipment | 2,260 | (1,127) | 1,133 |
| Trademarks and trade name | 1,876 | - | 1,876 |
| Customer-related intangible | 5,629 | - | 5,629 |
| Non-compete intangible | 956 | - | 956 |
| Goodwill | 4,353 | 2,478 | 6,831 |
| Current liabilities | (1,904) | - | (1,904) |
| Notes payable | (527) | - | (527) |
| Net assets acquired | $14,543 | $1,351 | $15,894 |
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 estimatedreported fair value of intangible assets acquired in the amount of $8,461,000$1,839,000 was determined through the use of a third-partythird-party valuation firm using various income and cost approach methodologies. Specifically, the intangibles identified in the acquisition were trademarks and trade name, customer-related intangibledistributor organization, customer relationships and non-compete agreement. The trademarksagreement and trade name, customer-related intangible and non-compete are being amortized over their estimated useful life of 85 years, 79 years, 5 years and 64 years, respectively. The straight-line method is being used and is believed to approximate the time-linetimeline within which the economic benefit of the underlying intangible asset will be realized.
Goodwill acquired as currently reported of $6,831,000 is$669,000 was recognized as the excess purchase price over the acquisition-date fair value of net assets acquired. Goodwill is estimated to represent the synergistic values expected to be realized from the combination of the two businesses. The goodwill is expected to be deductible for tax purposes.
The Contingent Consideration Warrantspro-forma effect assuming the business combination with BeneYOU discussed above are subjecthad occurred at the beginning of 2019 is not presented as the information was not available.
Khrysos Global, Inc.
On February 12, 2019, the Company and 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 vesting based uponacquire substantially all the achievementassets of various sales milestonesKhrysos Global and only ifall 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, Khrysos Global and the Khrysos Representing Party received an aggregate of 1,794,972 shares of the Company’s common stock which had a value of $14,000,000 for the purposes of the AEPA and $500,000 in cash. The fair value of the common stock calculated as part of the acquisition valuation was approximately $14,000,000. In addition, the Company agreed to pay the sellers do not terminate their services. As such,$1,500,000 in cash towards the Contingent Consideration Warrants were considered equity-basedAEPA of which $1,000,000 was paid to Khrysos Global and the Khrysos Representing Party during 2019. The remaining cash payment of $500,000 was not paid as of the filing date herewith as the Company continues to evaluate the terms of the acquisition agreement in conjunction with the termination of the KII President, noted below. At September 30, 2020 and December 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 for future services and not considered contingent consideration in the calculationform of warrants that was to be provided as part of the closing to Dwayne Dundore by the Company were mutually terminated. Effective September 17, 2020, Dwayne Dundore was no longer employed with KII or the Company.
The Company has estimated fair value at the date of acquisition of the acquired tangible and intangible assets and liabilities as follows (in thousands):
Present value of cash consideration | $ | 1,894 | ||
Estimated fair value of common stock issued | 14,000 | |||
Aggregate purchase price | $ | 15,894 |
The following table summarizes the estimated and as adjusted fair values of the assets acquired and liabilities assumed in February 2019 (in thousands):
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 reported fair value of intangible assets acquired in the amount of $8,461,000 was determined through the use of a third-party valuation firm using various income and cost approach methodologies. Specifically, the intangibles identified in the acquisition were trademarks and trade name, customer relationships and non-compete agreement. The trademarks and trade name, customer relationships and non-compete agreement are being amortized over their estimated useful life of 8 years, 4 years and 6 years, respectively. The straight-line method is being used and is believed to approximate the timeline within which the economic benefit of the underlying intangible asset will be realized. In connection with the Company’s annual impairment test in 2019, the net book value of intangible assets of $8,461,000 was determined to be impaired. (See Note 5)
Goodwill of $6,831,000 was recognized as the excess purchase price.
The costs related to the acquisition are included in legal and accounting fees and were expensed as incurred.
The pro-forma effect assuming the business combination with KII discussed above had occurred at the beginning of 2019 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’s mill in a timely and efficient manner. Substantially all the green coffee processed through the Siles mill was coffee assigned to CLR for processing. During the three and nine months ended September 30, 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 and nine months ended September 30, 2020, CLR had purchases from H&H of approximately $1,072,000 and $2,847,000, respectively, and had purchases from H&H Export of $229,000 and $700,000, respectively. CLR made purchases from H&H of approximately $2,828,000 during the nine months ended September 30, 2019.
During the three months ended September 30, 2020 and 2019, CLR recorded net revenues from H&H Export of approximately $211,000 and $29,000, respectively, and $535,000 and $6,416,000, respectively, for the nine months then ended.
At September 30, 2020 and December 31, 2019, CLR's accounts receivable balances for customer related revenue from H&H Export were approximately $7,871,000 and $8,707,000 of which the full amounts were 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.
At September 30, 2020, the following balances were recorded from transactions with H&H:
● | Prepaid expenses and other current assets of approximately $1,017,000 related to green coffee acquisition, |
● | accounts payable of $230,000 related to billings for freight and other charges by H&H, |
● | accrued expenses of $544,000 primarily related to mill operation costs, and |
● | accrued expenses offset of $994,000 related to overpaid cost of green coffee. |
H&H Finance Agreement
In March 2020, CLR entered into a Finance, 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 amounts 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 the continued delay in full payment of the 2020 receivable balances, management considered H&H Export accounts receivable impaired at September 30, 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 the owners of H&H in order to memorialize the various agreements and modifications to those agreements. (See Note 13)
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 services 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 $5,677,000 and $5,340,000 was not collected at September 30, 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 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 (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 and nine months ended September 30, 2020, CLR made payments of approximately $706,000 and $1,506,000, respectively, towards the Matagalpa mill project. For the nine months ended September 30, 2019, CRL made payments toward the Matagalpa mill project of $2,150,000.
At September 30, 2020, CLR contributed a total of $4,556,000 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 $1,304,000 for operating equipment. At September 30, 2020, the Nicaraguan Partner contributed a total of $2,528,000 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, the Company issued 295,910 shares of common stock to H&H Export to pay for certain working capital, construction and other payables. 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 September 30, 2020 and December 31, 2019, the value of the shares was approximately $73,000 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 more than likely to be uncollected at September 30, 2020 and December 31, 2019, and therefore the full amount was recognized as 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 and nine months ended September 30, 2020 was approximately $424,000 and $635,000, respectively. The profit-sharing expense for the three and nine months ended September 30, 2019 was approximately $863,000 and $1,331,000, respectively.
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 April 2020, the Company issued 1,500,000 shares of restricted common stock to Fitracomex in accordance with the 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.
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 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 owned WVNP, Inc., a supplier of certain inventory items sold by the Company. The Company made purchases from WVNP Inc. of approximately $56,000 during the three months ended March 31, 2020. The Company made purchases from WVNP Inc. of approximately $8,000 and $120,000 for the three and nine months ended September 30, 2019, respectively. In addition, Mr. Renton is a distributor of the Company and was paid distributor commissions of $81,000 for the three months ended March 31, 2020.
Carl Grover (Estate of Carl Wilford Grover)
Mr. Grover was the sole beneficial owner of in excess of 5% of the Company’s outstanding common shares at September 30, 2020 and December 31, 2019. At September 30, 2020 and December 31, 2019, the balance of the borrowing from the credit agreement the Company entered into with Mr. Grover in December 2018 was approximately $4,763,000 and $4,085,000, respectively, net of debt discounts. (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 expired in July and August 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 September 30, 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 issued 50,000 shares of common stock in connection with this senior secured promissory note. (See Note 6 and 10)
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)
In April 2021, the Company entered into a settlement agreement with Mr. Mangless related to the payment schedule of the senior 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)
2400 Boswell LLC
2400 Boswell LLC (“Boswell”) is the owner and lessor of the building occupied by the Company for its corporate office and warehouse in Chula Vista, California. The Company acquired Boswell from an immediate member of the Company’s Chief Executive Officer in 2013. (See Note 6)
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 September 30, 2020 and December 31, 2019, respectively. Leigh Dundore is a member and part owner of JJL Equipment. The deposit is to be applied to future machinery and equipment orders from JJL Equipment and was recorded in other current liabilities in the consolidated 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 officers and directors of the Youngevity Foundation, as well as the Company’s Chief Operating Officer and the wife of the Chief Investment Officer who both serve as a director of the Youngevity Foundation. During the three months ended September 30, 2020 and 2019, the Company contributed approximately $22,000 and $24,000, respectively, and $92,000 and $82,000, respectively, for the nine months then ended. At September 30, 2020 and December 31, 2019, the liability representing future contributions to be made to the Youngevity Foundation by the Company was $444,000 and $357,000, respectively, and was included in current liabilities on the Company’s consolidated balance sheets.
Daniel Briskie and Maida Briskie
Daniel Briskie and Maida Briskie, the father and mother of the Company’s Chief Investment Officer, entered into note purchase agreements in the principal amount of $25,000 in September 2014 related to the Company’s private placement offering in 2014. In September 2019, the Company entered into an agreement with Daniel Briskie and Maida Briskie to extend the maturity date of their 2014 PIPE Note for one year. At December 31, 2019, the balance of the loan was $25,000 which was paid off in September 2020. (See Note 7).
Douglas Briskie
Douglas Briskie, the brother of the Company’s Chief Investment Officer, entered into note purchase agreements in the principal amount of $50,000 in August 2014 related to the Company’s private placement offering in 2014. The note was paid in full in August 2019. (See Note 7).
Note 4.Revenue Recognition
The following table summarizes disaggregated revenue by segment (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
Direct selling | $ | 31,319 | $ | 30,256 | $ | 92,750 | $ | 95,800 | ||||||||
Processed green coffee | 254 | (22 | ) | 773 | 1,046 | |||||||||||
Milling and processing services | 211 | 29 | 535 | 6,416 | ||||||||||||
Roasted coffee and other | 2,017 | 2,933 | 7,467 | 9,002 | ||||||||||||
Commercial coffee | 2,482 | 2,940 | 8,775 | 16,464 | ||||||||||||
Commercial hemp | 201 | 184 | 1,000 | 525 | ||||||||||||
Total revenue | $ | 34,002 | $ | 33,380 | $ | 102,525 | $ | 112,789 | ||||||||
Contract Balances
As of September 30, 2020 and December 31, 2019, deferred revenues were approximately $10,954,000 and $3,569,000, respectively. Deferred revenues in the direct selling segment related to customer deposits were $1,800,000 and $1,626,000 on September 30, 2020 and December 31, 2019, respectively. Deferred revenues related to the rewards program in the direct selling segment that began at the beginning of 2020 were $2,624,000 at September 30, 2020. Deferred revenues in the direct selling segment related to Heritage Makers were $1,598,000 and $1,795,000 at September 30, 2020, and December 31, 2019, respectively. Deferred revenues related to pre-enrollment in upcoming conventions were $148,000 at December 31, 2019. The Company did not have a deferred revenue balance related to pre-enrollment in upcoming conventions at September 30, 2020.
Deferred revenues in the commercial coffee segment related to customer deposits were $4,305,000 at September 30, 2020. The commercial coffee segment did not have a deferred revenue balance on December 31, 2019.
Deferred revenues in the commercial hemp segment included inrelated to customer deposits were $627,000 on September 30, 2020. The commercial hemp segment did not have a deferred revenue balance on December 31, 2019.
The following table summarizes the condensed consolidated statementclassification of operationsdeferred revenues balances on the balance sheets (in thousands):
September 30, 2020 | December 31, 2019 | |||||||
(unaudited) | ||||||||
Accrued expenses | $ | 627 | $ | 0 | ||||
Deferred revenue | 8,527 | 1,943 | ||||||
Other current liabilities | 1,800 | 1,626 | ||||||
Deferred revenue, total | $ | 10,954 | $ | 3,569 | ||||
Note 5.Selected Consolidated Balance Sheet Information
Accounts Receivable, net
Net accounts receivable consists of the following (in thousands):
September 30, 2020 | December 31, 2019 | |||||||
(unaudited) | ||||||||
Accounts receivable | $ | 11,253 | $ | 11,142 | ||||
Allowance for doubtful accounts | (8,210 | ) | (8,240 | ) | ||||
Accounts receivable, net | $ | 3,043 | $ | 2,902 | ||||
On September 30, 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 respective 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.
Inventory, net
Inventories consist of the following (in thousands):
September 30, 2020 | December 31, 2019 | |||||||
(unaudited) | ||||||||
Finished goods | $ | 12,448 | $ | 14,890 | ||||
Raw materials | 13,382 | 11,694 | ||||||
Total inventory | 25,830 | 26,584 | ||||||
Reserve for excess and obsolete | (3,794 | ) | (3,878 | ) | ||||
Inventory, net | $ | 22,036 | $ | 22,706 | ||||
Property and Equipment, net
Property and equipment consist of the following (in thousands):
September 30, 2020 | December 31, 2019 | |||||||
(unaudited) | ||||||||
Buildings | $ | 4,117 | $ | 4,789 | ||||
Leasehold improvements | 3,148 | 2,948 | ||||||
Land | 2,544 | 3,307 | ||||||
Land improvements | 606 | 606 | ||||||
Producing coffee trees | 553 | 553 | ||||||
Manufacturing equipment | 10,464 | 9,568 | ||||||
Furniture and other equipment | 2,062 | 2,050 | ||||||
Computer software | 1,442 | 1,420 | ||||||
Computer equipment | 2,714 | 2,648 | ||||||
Vehicles | 326 | 326 | ||||||
Assets held for sale (1) | 1,496 | 0 | ||||||
Construction in process | 9,133 | 6,562 | ||||||
Total property and equipment, gross | 38,605 | 34,777 | ||||||
Accumulated depreciation | (13,416 | ) | (11,461 | ) | ||||
Total property and equipment, net | $ | 25,189 | $ | 23,316 | ||||
(1) | Assets held for sale at September 30, 2020 consisted of approximately $1,053,000 in land and $443,000 in buildings related to the commercial hemp segment. (See Note 13) |
Depreciation expense totaled approximately $635,000 and $617,000 for the three and nine months ended September 30, 2020 and 2019, respectively, and $1,968,000 and $1,694,000 for the respective nine month periods.
Operating and Financing Leases
The Company’s operating and financing lease assets and liabilities recognized within its consolidated balance sheets were classified as follows (in thousands):
September 30, 2020 | December 31, 2019 | |||||||
(unaudited) | ||||||||
Assets | ||||||||
Operating lease right-of-use assets | $ | 6,467 | $ | 8,386 | ||||
Finance lease right-of-use assets (1) | 882 | 1,052 | ||||||
Total leased assets | 7,349 | $ | 9,438 | |||||
Liabilities | ||||||||
Operating lease liabilities, current portion | $ | 1,290 | $ | 1,740 | ||||
Finance lease liabilities, current portion | 1,703 | 736 | ||||||
Total leased liabilities, current portion | 2,993 | 2,476 | ||||||
Operating lease liabilities, net of current portion | 5,497 | 6,646 | ||||||
Finance lease liabilities, net of current portion | 1,081 | 408 | ||||||
Total lease liabilities | $ | 9,571 | $ | 9,530 | ||||
(1) | Finance lease right-of-use assets are recorded within property and equipment, net of accumulated amortization of approximately $2,070,000 and $1,367,000 at September 30, 2020 and December 31, 2019, respectively. |
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 $184,000$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.
The weighted-average remaining lease term and $525,000, respectively.
September 30, 2020 | December 31, 2019 | |||||||
(unaudited) | ||||||||
Weighted-average remaining lease term (in years) | ||||||||
Operating leases | 6.7 | 6.8 | ||||||
Finance leases | 1.7 | 1.6 | ||||||
Weighted-average discount rate | ||||||||
Operating leases | 5.41 | % | 5.47 | % | ||||
Finance leases | 17.63 | % | 4.57 | % | ||||
Operating and finance lease costs were as follows (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
Operating lease cost (1) | $ | 495 | $ | 420 | $ | 1,591 | $ | 962 | ||||||||
Finance lease cost: | ||||||||||||||||
Amortization of leased assets (2) | 311 | 84 | 703 | 274 | ||||||||||||
Interest on lease liabilities (3) | 18 | 30 | 66 | 101 | ||||||||||||
Total operating and finance lease cost | $ | 824 | $ | 534 | $ | 2,360 | $ | 1,337 | ||||||||
(1) | Operating lease costs are classified within selling and marketing and general and administrative expenses. |
(2) | Amortization of leased assets are classified as a component of depreciation and amortization. |
(3) | Interest on lease liabilities are classified within interest expense, net. |
Intangible Assets and Goodwill
Intangible assets consist of the following (in thousands):
September 30, 2019 (unaudited) | December 31, 2018 | |||||
Cost | Accumulated Amortization | Net | Cost | Accumulated Amortization | Net | |
| Distributor organizations | $14,559 | $10,202 | $4,357 | $14,559 | $9,575 | $4,984 |
| Trademarks and trade names | 9,964 | 2,507 | 7,457 | 7,337 | 1,781 | 5,556 |
| Customer relationships | 16,027 | 6,708 | 9,319 | 10,398 | 5,723 | 4,675 |
| Internally developed software | 720 | 633 | 87 | 720 | 558 | 162 |
| Non-compete agreement | 956 | 93 | 863 | - | - | - |
| Intangible assets | $42,226 | $20,143 | $22,083 | $33,014 | $17,637 | $15,377 |
September 30, 2020 (unaudited) | December 31, 2019 | |||||||||||||||||||||||
Cost | Accumulated Amortization | Net | Cost | Accumulated Amortization | Net | |||||||||||||||||||
Distributor organizations | $ | 15,735 | $ | 11,090 | $ | 4,645 | $ | 15,735 | $ | 10,418 | $ | 5,317 | ||||||||||||
Trademarks and trade names | 8,430 | 3,070 | 5,360 | 8,430 | 2,539 | 5,891 | ||||||||||||||||||
Customer relationships | 10,442 | 6,934 | 3,508 | 10,442 | 6,413 | 4,029 | ||||||||||||||||||
Internally developed software | 720 | 720 | 0 | 720 | 657 | 63 | ||||||||||||||||||
Non-compete agreement | 277 | 64 | 213 | 277 | 11 | 266 | ||||||||||||||||||
Intangible assets | $ | 35,604 | $ | 21,878 | $ | 13,726 | $ | 35,604 | $ | 20,038 | $ | 15,566 | ||||||||||||
Amortization expense related to intangible assets was approximately $1,249,000$600,000 and $724,000$1,249,000 for the three months ended September 30, 2019 2020 and 2018,2019, respectively. Amortization expense related to intangible assets was approximately $2,505,000$1,840,000 and $2,416,000$2,505,000 for the nine months ended September 30, 2019 2020 and 2018,2019, respectively.
At September 30, 2018, the Company recorded an impairment of intangible assets of $2,200,000 in conjunction with our 2017 acquisition of BeautiControl. In determining the fair value of the assets acquired 2020 and the purchase price, initially it was based on a number of products to be made available to the Company through collaboration with the seller, and ensuring active participation by BeautiControl’s distributor organization. Delays in the Company’s ability to access many key products substantially reduced the potential to deliver the revenues initially anticipated.
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”) Accounting Standards Codification (“ASC”) Topic 350,
September 30, 2020 | December 31, 2019 | |||||||
(unaudited) | ||||||||
Direct selling | $ | 3,678 | $ | 3,678 | ||||
Commercial coffee | 3,314 | 3,314 | ||||||
Commercial hemp | 0 | 0 | ||||||
Total goodwill | $ | 6,992 | $ | 6,992 | ||||
September 30, 2019 (unaudited) | December 31, 2018 | |
| Goodwill, commercial coffee | $3,314 | $3,314 |
| Goodwill, direct selling | 3,009 | 3,009 |
| Goodwill, commercial hemp | 6,831 | - |
| Total goodwill | $13,154 | $6,323 |
Note 7. 6.Notes Payable and Other Debt
Credit Note
In December 2018, the Company entered into lending agreements (the “Lending Agreements”) with three (3) 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
The Credit Note accrues interest at eight percent (8%)a rate of 8.00% per annum. All principalannum and accrued interest under the Credit Note is due and payable on December 12, 2020.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 ten percent (10%)10.00% per annum. In connection with the Credit Agreement,credit agreement, the Company issued to Mr. Grover a four-yearfour-year warrant to purchase 250,000 shares of its common stock, exercisable at $6.82 per share, (“Warrant 1”), and a four-yearfour-year warrant to purchase 250,000 shares of its common stock, exercisable at $7.82 per share (“Warrant 2”).
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%3.00% fee on the transaction with Mr. Grover and issued to the advisor (or it’s designees)advisor’s designee a four-yearfour-year warrant to purchase 50,000 shares of the Company’s common stock, exercisable at $6.33 per share.
The Company recognized an initialrecorded debt discountdiscounts of approximately $1,469,000 related to the initial fair value of warrants issued in the transaction and $175,000 of transaction issuance costs. costs both of which are amortized to interest expense over the life of the Credit Note. The Company recorded amortization of approximately $245,000 and $182,000 related to the debt discount and issuance cost during the three months ended September 30, 2020 and 2019, respectively, and $678,000 and $503,000 during the nine months ended September 30, 2020 and 2019, respectively. At September 30, 2020 and December 31, 2019, the combined remaining balance of the debt discounts and issuance cost was approximately $237,000 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 September 30, 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 $47,000 and $41,000 related to the debt discount and issuance cost related to the promissory notes during the three months ended September 30, 2020 and 2019, respectively and $135,000 and $83,000 during the nine months ended September 30, 2020 and 2019, respectively. At September 30, 2020 and December 31, 2019, the combined remaining balance of the debt discount and issuance costs was approximately $93,000 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)
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 $182,000 and $503,000$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. The Company recorded amortization of approximately $16,000 and $34,000 related to the debt discount during the three and nine months ended September 30, 2019, respectively, which was included in interest expense in the condensed consolidated statements of operations. As of 2020, respectively. At September 30, 2019, 2020, the remaining unamortizedbalance of the debt discount isdiscounts was approximately $1,111,000.
In March 2013, April 2021, the Company acquired 2400 Boswell for approximately $4,600,000. 2400 Boswell isentered into a settlement agreement with Mr. Mangless related to the owner and lessorpayment schedule of the building occupied byMangless Note issued in March 2020. In addition, as part of the settlement agreement the Company for its corporate office and warehouseissued Mr. Mangless 1,000,000 shares of common stock. (See Note 13)
2400 Boswell Mortgage Note
In connection with the acquisition of 2400 Boswell, LLC in Chula Vista, California. The purchase was from an immediate family member of our Chief Executive Officer and consisted of approximately $248,000 in cash, $334,000 of debt forgiveness and accrued interest, and a promissory note of approximately $393,000, payable in equal payments over 5 years with interest at 5.0%. Additionally,2013, the Company assumed a long-term mortgage of $3,625,000, payable over 25 years with an initial interest rate of 5.75%. The interest rate is the prime rate plus 2.5%. As of September 30, 2019, the interest rate was 8.0%. The lender will adjust the interest rate on the first calendar day of each change period.years. The Company and its Chief Executive Officer and Chairman and Chief Operating Officer are both co-guarantorsguarantors of the mortgage. AsInterest is paid monthly at the prime rate plus 2.50% and is adjusted by the lender on the first calendar day of month. At September 30, 2020 and December 31, 2019, the interest rate was 5.75% and 7.50%, respectively. At September 30, 2020 and December 31, 2019, the outstanding principal balance on the long-term mortgage was approximately $3,082,000 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 which is discussed further below.
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 $3,162,000 $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 September 30, 2020 and December 31, 2019, the aggregate outstanding principal balance on the promissory note is zero.
mortgages was approximately $517,000 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 September 30, 2020 and December 31, 2019, the remaining mortgage balance was approximately $432,000 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)
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 three3 installments during 2007, followed by monthly payments in the amount of 10%10.00% of the sales related to the acquired assets until the entire note balance is paid. As of At September 30, 2019 2020 and December 31, 2018, 2019, the carrying value of the liability was approximately $1,037,000$997,000 and $1,071,000,$1,027,000, respectively.
Small Business Administration – Paycheck Protection Program Loans
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 July 2020, the Company received an additional $150,000 from SBA lenders related to its commercial coffee segment. The interest associated withCompany received cash in the noteaggregate 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, $783,000 related to its commercial coffee segment and $623,000 related to its commercial hemp segment.
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 the three and nine months ended September 30, 20192020, the SBA paid approximately $70,000 and 2018 was minimal.
In November 2020, the Company assumed an interest only mortgageSBA lenders forgave approximately $613,000 in loan proceeds received in April 2020 from the commercial hemp segment. (See Note 13)
In April 2021, the Company’s commercial coffee segment received a second PPP loan in the amount of $350,000, due in Septemberapproximately $633,000. (See Note 13)
In June 2021, and bears an interest rate of 8.0%. In addition,the SBA lenders forgave approximately $3,141,000 which represented loan proceeds the Company assumed a mortgage of approximately $177,000, duereceived in June 2023, and bears an interest rate of 7.0% per annum. As of September 30, 2019, the remaining aggregate mortgage balance is approximately $525,000.
Other Notes
The Company’s other notes relate to loans for commercial vans at CLR in the amount of approximately $79,000 as of $56,000 and $71,000 at September 30, 2020 and December 31, 2019, respectively, which matureexpire at various dates through 2023.
Line of Credit - Loan
The Company’s loan and Security Agreement
The Agreementagreement contains certain financial and nonfinancial covenants with which the Company must comply to maintain its borrowing availability and avoid penalties. AsAt the filing date of September 30, 2019,this Quarterly Report on Form 10-Q, the Company iswas not in compliance with all financialthe covenants under the terms of the agreement.
In January 2022, the Company entered into the second amendment to the Crestmark loan and nonfinancial covenants.
The outstanding principal balance of the Agreement will bearline of credit bears interest based upon a 360-day year of 360 days with interest being 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%. As of At September 30, 2020 and December 31, 2019, the interest rate was 7.5%.6.75% and 7.25%, respectively. In addition, other fees are incurred for the maintenance of the loan in accordance with the Agreement.agreement. Other fees may be incurred in the event the minimum loan balance of $2,000,000 is not maintained. The Agreement isagreement was effective beginning in November 2017 and will continue to be effective until November 16, 2020.
The Company and the Company’s CEO, Stephan Wallach have entered into a Corporate Guarantycorporate guaranty and Personal Guaranty,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, David Briskie, personally entered into a Guarantyguaranty of Validityvalidity representing the Company’s financial statements so long as the indebtedness is owingowed to Crestmark, maintaining certain covenants and guarantees.
The Company’s outstanding line of credit liability related to the AgreementCrestmark Loan was approximately $1,981,000 as of $1,955,000 and $2,011,000 at September 30, 2019 2020 and $2,256,000 as of December 31, 2018.2019, respectively.
Note 10)
Total convertible notes payable, as of September 30, 2019 and December 31, 2018, net of debt discount outstanding consisted of the amount set forth in the following table (in(in thousands):
September 30, 2019 (unaudited) | December 31, 2018 | |
| 8% Convertible Notes (2014 Notes), principal | $25 | $750 |
| Debt discounts | - | (103) |
| Carrying value of 2014 Notes | 25 | 647 |
| 6% Convertible Notes (2019 PIPE Notes), principal | 3,090 | - |
| Debt discounts | (498) | - |
| Carrying value of 2019 PIPE Notes | 2,592 | - |
| Total carrying value of convertible notes payable | $2,617 | $647 |
September 30, 2020 | December 31, 2019 | |||||||
(unaudited) | ||||||||
6.00% Convertible Notes (2019 PIPE Notes), principal | $ | 3,090 | $ | 3,090 | ||||
Debt discounts | (163 | ) | (415 | ) | ||||
Carrying value of 2019 PIPE Notes | 2,927 | 2,675 | ||||||
8.00% Convertible Notes (2014 PIPE Notes), principal | 0 | 25 | ||||||
Debt discounts | 0 | 0 | ||||||
Carrying value of 2014 PIPE Notes | 0 | 25 | ||||||
Total carrying value of convertible notes payable | $ | 2,927 | $ | 2,700 | ||||
Unamortized debt discounts and issuance costs are included with convertible notes payable, net of debt discount on the condensed 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. (See Note 10)
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 September 30, 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 nine months ended September 30, 2020 and 2019, the Company recorded approximately $252,000 and $172,000, respectively, of amortization related to the debt discounts. At September 30, 2020 and December 31, 2019, the remaining balance of the debt discount was approximately $163,000 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
In September 2019.
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 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. The unamortized issuance costs recognized with the Debt Exchange was approximately $63,000. As of September 30, 2019 and December 31, 2018 the remaining balance of the issuance costs is approximately zero and $10,000, respectively. The Company recorded approximately $10,000 and $73,000 of the debt discounts amortization during the nine months ended September 30, 2019 and 2018, respectively, and is recorded as interest expense.
Note 9. 8.Derivative Liability
Warrants
At, December 31, 2019, the definition of a derivative financial instrument would not be considered as such if the contract is both (i) indexed to the entity’s own stock and (ii) classified in the stockholders’ equity section of the entity’s balance sheet. The Company determined that certain warrants and embedded conversion features issued in the Company’s private placements are ineligible for equity classification due to anti-dilution provisions set forth therein.
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 of $2,457,000$101,000 and an increase of $5,538,000$2,457,000 for the three months ended September 30, 2019 2020 and 2018,2019, respectively. The changes to the derivative liability for warrants resulted in a decrease of $4,344,000$1,542,000 and an increase of $4,634,000$4,344,000 for the nine months ended September 30, 2019 2020 and 2018,2019, respectively.
The estimated fair value of the warrants was computed as of September 30, 2019 and December 31, 2018 using the Monte Carlo option pricing model with the following assumptions:
September 30, 2019 (unaudited) | December 31, 2018 | ||
| Stock price volatility | 101%-106.3% | 83.78%-136.76% | |
| Risk-free interest rates | 1.72%-1.78% | 2.465%-2.577% | |
| Annual dividend yield | 0% | 0% | |
| Expected life | 0.83-1.21 years | 0.58-2.76 |
December 31, 2019 | |||||
Stock price volatility | 64.10 | % | |||
Risk-free interest rates | 1.59% | – | 1.60 | % | |
Annual dividend yield | 0 | ||||
Expected life (in years) | 0.6 | – | 1.0 | ||
In addition, management assessed the probabilities of future financing assumptions in the valuation models.
Note 10. 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, 2020 (unaudited) | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Liabilities: | ||||||||||||||||
Contingent acquisition debt, current portion | $ | 1,341 | $ | 0 | $ | 0 | $ | 1,341 | ||||||||
Contingent acquisition debt, less current portion | 5,455 | 0 | 0 | 5,455 | ||||||||||||
Warrant derivative liability | 0 | 0 | 0 | 0 | ||||||||||||
Total derivative liabilities | $ | 6,796 | $ | 0 | $ | 0 | $ | 6,796 | ||||||||
Fair Value at September 30, 2019 (unaudited) | ||||
Total | Level 1 | Level 2 | Level 3 | |
| Liabilities: | ||||
| Contingent acquisition debt, current portion | $673 | $- | $- | $673 |
| Contingent acquisition debt, less current portion | 6,344 | - | - | 6,344 |
| Warrant derivative liability | 2,699 | - | - | 2,699 |
| Total liabilities | $9,716 | $- | $- | $9,716 |
Fair Value at December 31, 2018 | ||||
Total | Level 1 | Level 2 | Level 3 | |
| Liabilities: | ||||
| Contingent acquisition debt, current portion | $795 | $- | $- | $795 |
| Contingent acquisition debt, less current portion | 7,466 | - | - | 7,466 |
| Warrant derivative liability | 9,216 | - | - | 9,216 |
| Total liabilities | $17,477 | $- | $- | $17,477 |
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 2017, 2015 and 2014 Private Placementsprivate placements measured at fair value using Level 3 inputs (in thousands):
Balance at December 31, 2019 | $ | 1,542 | ||
Adjustments to estimated fair value | (1,542 | ) | ||
Balance at September 30, 2020 (unaudited) | $ | 0 |
The following table reflects the activity for the Company’s contingent acquisition liabilities measured at fair value using Level 3 inputs (in thousands):
Balance at December 31, 2019 | $ | 8,611 | ||
Liabilities settled | (175 | ) | ||
Adjustments to liabilities included in earnings | (1,640 | ) | ||
Balance at September 30, 2020 (unaudited) | $ | 6,796 |
The fair value of the contingent acquisition liabilities is evaluated each reporting period using projected revenues,weighted-average discount rates, and projected timing of revenues. Projected contingent payment amounts are discounted backrate used 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 higher fair value measurements. Increases in discount rates and the time 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, 2019, the net adjustment todetermine the fair value of the contingent acquisition debt was a decrease of approximately $478,00018.50% and approximately $911,000, respectively, and is included in the Company’s statements of operations in general and administrative expense. During the three and nine months ended 18.42% at September 30, 2018, the net adjustment to the fair value of the contingent acquisition debt was a decrease of approximately $2,618,000 2020 and approximately $4,076,000, December 31, 2019, respectively.
Note 11. Stockholders’10.Stockholders’ Equity
The Company’s Certificate of Incorporation, as amended, authorizes the issuance of two classes of stock to be designated: “Common Stock”designated “common stock” and “Preferred Stock”“preferred stock”.
At September 30, 2020, the total number of shares of stock which the Company has authority to issue iswas 50,000,000 shares of common stock, par value $0.001 per share and 5,000,000 shares of preferred stock, par value $0.001 per share, of which (i) 161,135 shares have beenwas designated as Series A convertible preferred stock par value $0.001 per share (“Series A Convertible Preferred Stock”),(ii) 1,052,631 has beenwas designated as Series B convertible preferred stock, (“Series B Convertible Preferred Stock”),(iii) 700,000 has beenwas designated as Series C convertible preferred stock (“Series C Convertible Preferred Stock”) and 460,000 has been(iv) 650,000 was designated as Series D cumulative redeemable perpetual preferred stock.
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”)Stock, $0.001 par value 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 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 our registration statement on Form S-3 (the “Shelf”) will be limited until such time that the market value of our voting securities held by non-affiliates is $75 million or more. The Company raised gross 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 through September 30, 2019 2020.
Common Stock
At September 30, 2020 and December 31, 2018 2019 there were 30,270,36032,236,994 and 25,760,70830,274,601 shares of common stock outstanding, respectively.
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 (the “Purchase Agreement”) with one accredited investor that had a substantial pre-existing relationship withDaniel 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,purchase agreement, the Company also issued to the investorMr. Mangless a three-yearthree-year warrant to purchase 250,000 shares of common stock at an exercise price of $7.00. The Company received gross proceeds wereof $1,750,000. Consulting fees to the Placement Agentplacement agent for arranging the Purchase Agreementpurchase 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-yearthree-year warrants to purchase 100,000 shares of common stock expiring in February 2022 which were priced at $10.00. $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. No NaN cash commissions were paid.
2019 Promissory Notes
In March 2019, and July 12, 2019, the Company closed five tranches related to the 2019 January Private Placement debt offering, pursuant to which the Company offered for up to a maximum of $10,000,000 in principal amount of notes (the “2019 PIPE Notes”), with each investor receiving in addition to a 2019 PIPE Notes, 2,000 shares of common stock for each $100,000 invested. The Company entered into subscription agreements with thirty-one (31) accredited investors that had a substantial pre-existing relationship with the Company pursuant to which the Company received aggregate gross proceeds of $3,090,0002019 Promissory Notes 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. Each 2019 PIPE Note matures 24 months after issuance, bears interest at a rate of six percent (6%) 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 Note, at a conversion price of $10.00 per share (subject to adjustment for stock splits, stock dividends and reclassification of the common stock).
In February 2021, the Company entered into amendment agreements extending the 2019 Promissory Notes payand increasing the interest at a raterate. At the filing date, the Company was in default of eight percent (8%the terms of the amended agreements. (See Note 13) per annum
2019 Private Placement - Convertible Notes
Between February and interest is paid quarterlyJuly 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 arrears with all principal and unpaid interest due at maturity on March 18, 2021.addition to the 2019 PIPE Notes, 2,000 shares of common stock for each $100,000 invested. The Company issued an aggregate of 40,00061,800 shares of common stock and warrants to purchase an aggregateas a result of 40,000the 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 8%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 principal amount of $2,000,000.
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 agreementagreements with one accredited investor thatnine investors with whom the Company had a substantial pre-existing relationship with the Company pursuant to which the Company sold 250,000an aggregate of 630,526 shares of common stock at an offering price of $5.50$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 gross proceeds were $1,375,000. 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 September 30, 2020 and December 31, 2019.
The Company did not pay consulting feesadopted 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 this transaction.
2014 Convertible Note – Debt Exchange
In October 2018, the investorsCompany entered into an agreement with Carl Grover to exchange all amounts owed under the 2014 Note held by him in the principal amount of the Company’s August 2018 Private Placement became eligible to receive additional$4,000,000 which matured in July 2019, for 747,664 shares of the Company’s common stock as it was referredat a conversion price of $5.35 per share, and a four-year warrant to in their respective Purchase Agreement as True-up Shares. Total number of additional shares issued to those three investors was 44,599purchase 631,579 shares of the Company’s common stock. In addition, thestock 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 September 30, 2020 and December 31, 2019.
A FINRA broker dealer acted as the warrants issued at their respective closings is reset pursuant toCompany’s advisor in connection with the termsdebt 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 exercise prices ranging from $4.06 to $4.44 from the exercise pricepurchase an aggregate 150,000 shares remained outstanding at issuance of $4.75.
Preferred Stock
Series A Convertible Preferred Stock
The Company hashad 161,135 shares of Series A Convertible Preferred Stockpreferred stock outstanding as of at both September 30, 2019, 2020 and December 31, 2018 2019 and accrued dividends of approximately $3,000$160,000 and $137,000,$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 stock at the Company's election. Each share of Series A Convertible Preferredpreferred stock is convertible into common stock at a conversion rate of 0.10.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. The holders of Series A Convertible Preferredpreferred stock have no voting rights, except as required by law.
Series B Convertible Preferred Stock
In March 30, 2018, the Company completed the Series B Offering,offering, pursuant to which the Company sold 381,173 shares of Series B Convertible Preferred Stockpreferred stock at an offering price of $9.50 per share and received gross proceeds in aggregate of approximately $3,621,000. The net proceeds to the Company from the Series B Offering were approximately $3,289,000 after deducting commissions, closing and issuance costs.share. Each share of Series B Convertible Preferred Stockpreferred stock is initially convertible at any time, in whole or in part, at the option of the holders, at an initiala conversion price of $4.75 per share, into two (2)2 shares of common stock and automatically converts into two (2)2 shares of common stock on its two-yeartwo-year anniversary of issuance. Holders of
In connection with the Series B Convertible Preferred Stock have no voting rights, except as required by law.
The Company had 129,332 shares of Series B preferred stock outstanding at December 31, 2019. In March 2020, all outstanding shares of Series B preferred stock automatically converted into 2 shares of common stock on the two-year anniversary date of the issuance date December 19, 2018.
During the year ended December 31, 2019, the Company received notice of conversion for 105 shares of Series C Offering were sold pursuantB preferred stock which converted to the Company’s Registration Statement, which was declared effective with the SEC on December 10, 2018.
Pursuant to the Certificatecertificate of Designation,designation, the Company agreed to paypaid cumulative dividends on the Series C Convertible Preferred StockB preferred stock from the date of original issue at a rate of 6.0%5.0% per annum payable quarterly in arrears on or about the last day of March, June, September and December of each year, beginning which ended in March 2020.
At December 31, 2019, accrued dividends for Series B preferred stock were approximately $15,000. During the nine months ended September 30, 2018. In 2018,2020 and 2019 a total of approximately $51,000$32,000 and $46,000, respectively, of dividends was paid to the holders of the Series C Convertible Preferred Stock. B preferred stock. All dividends related to the Series B preferred stock were paid in full as of March 31, 2020. The Series C Convertible Preferred StockB preferred stock ranked senior to the Company’s outstanding Series A Convertible Preferred Stock, Series B Convertible Preferred Stockpreferred 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 Convertible Preferred Stock had no voting rights.
In connection with the Series C Convertible Preferred Stock.
Series D Preferred Stock the effective conversion price of the Series C Convertible Preferred Stock was less than the Company’s common stock price on each commitment date, resulting in an aggregate beneficial conversion feature of approximately $3,276,000, which reduced the carrying value of the Series C Convertible Preferred Stock. Since the conversion option of the Series C Convertible Preferred Stock was immediately exercisable, the beneficial conversion feature was immediately accreted as a deemed dividend, resulting in an increase in the carrying value of the C Convertible Preferred Stock of approximately $3,276,000.
In September and the Company has issued 1,394,726 warrants. As of December 31, 2018, no shares of Series C Convertible Preferred Stock remain outstanding.
In January 2020, the Company issued an additional 11,375 shares of Series D preferred stock upon the partial exercise by the underwriters in full.
The Series D Cumulative Preferred Stockpreferred stock was approved for listing on the NASDAQNasdaq Capital Market under the symbol “YGYIP,” and trading the Series D Cumulative Preferred Stockpreferred stock on NASDAQNasdaq commenced on in September 20, 2019. The net proceeds to the Company from the Series D Offering were approximately $7,323,000$12,269,000 after deducting underwriting discounts and commissions and expenses which were paid by the Company.
At September 30, 2020, a total of 460,000650,000 shares of the Preferred Stock ispreferred stock was designated as Series D Cumulative Preferred Stock. As of preferred stock. At September 30, 2019, 2020, the Company has available for issuance an additional 126,50059,727 shares of Series D Cumulative Preferred Stock. preferred stock.
The Series D Cumulative Preferred Stockpreferred 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 Cumulative Preferred Stockpreferred stock are entitled to cumulative dividends from the first day of the calendar month in which the Series D Cumulative Preferred Stockpreferred 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 Cumulative Preferred Stock. As of preferred stock.
At September 30, 2020 and December 31, 2019, accrued dividends were approximately $68,000, payable to shareholders of record as of $120,000 and $118,000, respectively. During the nine months ended September 30, 2020, the Company paid $1,076,000 in cash dividends to holders of Series D preferred stock.
At September 30, 2020 and December 31, 2019, which was paid October 15, 2019.
Upon liquidation, dissolution or winding up of the Company, each holder of Series D Cumulative Preferred Stockpreferred 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 Cumulative Preferred Stock,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,preferred stock, the Series B Preferred Stock,preferred stock, the Series C Convertible Preferred Stockpreferred stock or any other class or series of stock ranking junior to the Series D Cumulative Preferred Stock.
The Series D Cumulative Preferred Stockpreferred stock is not redeemable by the Company prior to September 23, 2022, except upon a Changechange of Controlcontrol (as defined in the Certificatecertificate of Designations)designations). On and after such date, the Company may, at its option, redeem the Series D Cumulative Preferred Stock,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 Changechange of Control,control, the Company may, at its option, redeem the Series D Cumulative Preferred Stock,preferred stock, in whole or in part, within 120 days after the first date on which such Changechange of Controlcontrol 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 Cumulative Preferred Stockpreferred stock generally have no voting rights.
Advisory Agreements
The Company records the fair value of common stock and warrants issued in conjunction with investor relations advisory service agreements based on the closing stock price of the Company’s common stock on the measurement date. The fair value of the stock issued is recorded through equity and prepaid advisory fees and amortized over the life of the service agreement when applicable. The stock issuance expense associated with the amortization of advisory fees iswas recorded as equitystock issuance expense and iswas included in general and administrative expense on the Company’s Condensed Consolidated Statementsconsolidated statements of Operations.
Capital
In July 2018, the Company entered into an agreement with
In January 2019, and 2018, the Company recorded expense of approximately $386,000 and $70,000, respectively, in connection with amortization of the equity issuance expense.
During both the vested portion of the warrant was approximately $2,197,000 and was recorded as equity on the Company’s balance sheet as of nine months ended September 30, 2019. During the three 2020 and nine months ended September 30, 2019, the Company recorded expense of approximately $270,000$386,000 in connection with amortization of the stock issuance expense. During the nine months ended September 30, 2019, the Company recorded expense of $100,000 in connection with the base fee. During the nine months ended September 30, 2020 and 2019, the Company recorded expense of approximately 280,000 and $2,197,000, respectively, in connection with amortization of equity issuance expense related to the vestingfair value of the warrant.
Corinthian Partners, LLC
In August 2019, the Company recorded expenseissued 600 shares of approximately
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 for a period of 21 months 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 nine months ended September 30, 2019, the Company recorded expense of approximately $134,000 in connection with amortization of the stock issuance. The agreement with Greentree ended in December 2019.
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 12twelve 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 nine months ended September 30, 2020 and 2019, the Company recorded expense of approximately $143,000 and $286,000, respectively, in connection with amortization of the stock issuance expense.
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 September 30, 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 for a period of 21 months 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 and nine months ended September 30, 2019, the Company recorded expense of approximately $143,000 and $286,000, respectively, $89,000 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 expense.
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 was deemed fully earned. The fair value of the warrant issued was approximately $167,000. During the nine months ended September 30, 2020, the Company recorded issuance costs of approximately $325,000 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 September 30, 2020.
The Benchmark Company, LLC
In August 1, 2019, the board of directors approved the issuance of 20,000 shares of restricted common stock to The Benchmark Company, LLC for investment banking services provided to the Company. The fair value of shares issued was approximately $91,000 and was fully expensed in the three months ended 2019.
Warrants
At September 30, 2019.
At December 31, 2019, the intrinsic value of the outstanding warrants based on the Company’s closing stock prices was approximately $95,000. There was 0 intrinsic value of outstanding warrants based on the Company’s closing stock prices at September 30, 2019.
The Company uses a combination of option-pricing models to estimate the fair value of the warrants including the Monte Carlo, Lattice and Black-Scholes.
A summary of the warrant activity for the nine months ended September 30, 2019 is presented in the following table:
Number of Warrants | ||||
Outstanding at December 31, | 6,238,182 | |||
Issued | 250,000 | |||
Expired / cancelled | (1,221,995 | ) | ||
Exercised | 0 | |||
Outstanding at September 30, | 5,266,187 | |||
Warrant Modification – loss on modification of warrants
In July 31, 2019, Carl Grover, who is also a related party to the Company acquired 600,242 shares of common stock, upon the partial exercise at $4.60 per share of a 2014 Warrant warrant to purchase 782,608 shares of common stock held by him. In connection with such exercise, the Company received $2,761,113approximately $2,761,000 from Mr. Grover and issued to Mr. Grover 50,000 shares of restricted common stock as an inducement fee and agreed to extend the expiration date of the remaining unexercised 2014 Warrant warrant held by him to December 15, 2020 with respect to 182,366 shares of common stock. The 2014 Warrant warrant was classified as a liability.
In July 31, 2019 one investor (the “July“July 2014 Investor”) from the Company’s 2014 Private Placement private placement acquired 19,565 shares of the Company’s common stock upon exercise of their 2014 Warrant. warrant. The July 2014 Investor used the proceeds from their 2014 Note note in the amount of $100,000 which was payable on July 31, 2019 by the Company and applied this amount to the exercise of the warrant. In connection with the exercise, the Company paid to the July 2014 Investor the remaining balance due on the 2014 Note note with interest of approximately $11,000 and issued as an inducement to exercise the 2014 Warrant an additional 2,500 shares of restricted common stock.stock as an inducement to exercise the 2014 warrant. The 2014 Warrant warrant was classified as a liability.
In August 12, 2019, one investor (the “August“August 2014 Investor”) from the Company’s 2014 Private Placement private placement acquired 48,913 shares of the Company’s common stock upon exercise of their 2014 Warrant. warrant. In connection with the exercise, the Company received $228,052approximately $228,000 and issued as an inducement to exercise the 2014 Warrant an additional 5,750 shares of restricted common stock.stock as an inducement to exercise the 2014 warrant. The 2014 Warrant warrant was classified as a liability.
The Company also agreed to amend a warrant issued to Brian Frank (the “Placement Agent”) on in September 10, 2014, to purchase 44,107 shares of common stock at $7.00 per share and expiring on September 10, 2019, and a warrant issued to the Placement Agent on in September 10, 2014, to purchase 60,407 shares of common stock at $4.60 per share of common stock and expiring on September 10, 2019 (collectively,(collectively, the “Placement Agent Warrants”), to extend the expiration date of the Placement Agent Warrants to December 15, 2020 for his assistance in connection with the above transaction with Mr. Grover. The Placement Agent warrantsWarrants were classified as equity.
In August 20, 2019, one investor from the Company’s Series C Offeringoffering acquired 63,156 shares of common stock of the Company, upon the exercise at $4.75 per share of a Preferred Warrantpreferred warrant to purchase 63,156 shares of common stock held by them. In connection with such exercise, the Company received $299,991approximately $300,000 from the investor and issued to the investor 6,000 shares of restricted common stock as an inducement fee. The Preferred Warrantpreferred warrant was classified as equity.
The Company considered the guidance of ASC 470-20-40,470-20-40, Debt with Conversion and Other Options, ASC 505-50,505-50, Equity-Based Payments to Non-Employees and ASC 718-20-35,718-20-35, Awards Classified as Equity to determine the appropriate accounting treatment to record the impact of the modification of the warrants and the inducement shares issued upon the exercise of the warrants.
The Company concluded that the inducement of shares and the change in the terms of the warrants were considered modification of the warrant terms.
The liability classified warrants were measured before and after the modification with changes in the fair value recorded to earnings. The fair value of the inducement shares was recorded as a loss on modification of warrants and a credit to additional paid in capital/capital and common stock.
Some of the equity-classified warrants were modified by issuing common shares, not called for by the warrant agreement, to induce exercise of the warrant. Other equity-classified warrants, such as the Placement Agent Warrants, were modified by increasing the exercise period of the warrants. All of these changes are considered modifications of the warrant terms.
These modifications result in the recognition of incremental fair value. Incremental fair value is equal to the difference between the fair value of the modified warrant and the fair value of the original warrant immediately before it was modified. Based on the above guidance, the incremental fair value of the warrants is recognized immediately, as a non-operating expense, as the warrants are not subject to vesting conditions.
The fair value of the Placement Agent Warrants was estimated on July 29, 2019 (date(date of warrant maturity date modification) using a Black-Scholes option pricing model both before and after modification. The increase in fair value was recognized as a debit to loss on modification of warrants expense and a credit to additional paid-in capital. The fair value of the inducement shares issued with the Preferred Warrantpreferred warrant was calculated as the number of shares issued times the per share price of the Company’s common stock on the exercise date of August 20, 2019. This amount was recorded as a loss on modification of warrants expense and a credit to additional paid-in capital/capital and common stock.
The Company recorded a loss on modification of warrants expense for the three and nine months ended September 30, 2019, related to the above warrant modifications in the aggregate of approximately $876,000.
The Company concluded that the 2014 Warrant warrant held by Mr. Grover would continue to be treated as a liability.
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 September 30, | Nine Months Ended September 30, | |||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Cost of revenues | $ | 5 | $ | 6 | $ | 16 | $ | 89 | ||||||||
Sales and marketing | 31 | 33 | 92 | 563 | ||||||||||||
General and administrative | 216 | 622 | 669 | 11,766 | ||||||||||||
Total stock-based compensation | $ | 252 | $ | 661 | $ | 777 | $ | 12,418 | ||||||||
Stock Options
A summary of the Plan stock option activity for the nine months ended September 30, 2019 2020 is presented in the following table:
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contract Life (years) | Aggregate Intrinsic Value (in thousands) | |
| Outstanding December 31, 2018 | 2,394,379 | $4.45 | 6.94 | $3,049 |
| Issued | 2,727,562 | 6.51 | ||
| Canceled / expired | (338,640) | 4.98 | ||
| Exercised | (110,304) | 4.23 | - | |
Outstanding September 30, 2019 | 4,672,997 | $5.62 | 8.09 | $534 |
Exercisable September 30, 2019 | 4,016,474 | $5.79 | 8.09 | $361 |
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 | (70,274 | ) | 4,88 | 0 | ||||||||||||
Exercised | 0 | 0 | 0 | |||||||||||||
Outstanding September 30, 2020 (unaudited) | 4,567,368 | $ | 5.64 | 7.1 | $ | 0 | ||||||||||
Exercisable September 30, 2020 (unaudited) | 4,219,877 | $ | 5.71 | 7.1 | $ | 0 | ||||||||||
The weighted-average fair value per share of the granted stock options for the nine months ended September 30, 2019 was approximately
At September 30, 2019 and 2018, respectively.
Restricted Stock Units
In August 2019, the Company usesissued 50,000 restricted stock units to a consultant. Vesting occurs monthly over a three-year period with the Black-Scholes 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 basedaward. During 2019, a total of 5,556 restricted stock units vested. During the nine months ended September 30, 2020, a total of 12,501 restricted stock units vested which were forfeited by the consultant 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 equalDecember 31, 2020. All unvested restricted stock units issued 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 and consultants. These shares of common stock will be issued upon vesting of the restricted stock unit (“RSU’s”).units. Full vesting occurs on the sixth-yearsixth-year anniversary of the grant date, 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 fair value of each RSU’srestricted stock unit issued to employees was based on the closing price on the grant date of $4.53 and restricted stock units issued to consultants were revalued with the closing stock price at each change in financial period. During the nine months ended September 30, 2020, there were 39,750 restricted stock units that vested from the August 2017 issuance, of $4.53 and is recognized as stock-based compensation expense over the vesting termwhich 9,632 shares of the award.
The Company adopted ASU 2018-072018-07 on January 1, 2019 and the stock-based compensation expense for non-employee grants iswas based on the closing price of our common stock of $5.72 on December 31, 2018, which was the last business day before we adopted ASU 2018-07. See Note 1 above,
A summary of restricted stock unit activity is presented in the Company’s adoption of ASU 2018-07.
Number of | ||||
Balance at December 31, | 451,944 | |||
Issued | 0 | |||
Canceled | ( | ) | ||
Vested | ( | ) | ||
Balance at September 30, | 389,693 | |||
At September 30, 2019 and 2018, respectively, and $193,000 and $304,000 for the nine months ended September 30, 2019 and 2018, respectively.
Note 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 September 30, 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 September 30, 2020, the Company’s direct selling segment made purchases from 2 vendors, Global Health Laboratories and Michael Schaffer, LLC., that individually comprised more than 10% of total segment purchases and in aggregate approximated 48% of total segment purchases. For the nine months ended September 30, 2020, the Company’s direct selling segment made purchases from 2 vendors, Global Health Laboratories and Michael Schaffer, LLC., that individually comprised more than 10% of total purchases and in aggregate approximated 46% of total segment purchases.
For the three months ended September 30, 2019, the Company’s direct selling segment made purchases from 2 vendors, Global Health Labs, Inc. and Michael Schaeffer, LLC., that individually comprised more than 10% of total purchases and in aggregate approximated 39% of total purchases made by the direct selling segment. For the nine months ended September 30, 2019, the Company’s direct selling segment made purchases from 2 vendors, Global Health Labs, Inc. and Michael Schaeffer, LLC., that individually comprised more than 10% of total purchases and in aggregate approximated 41% of total purchases made by the direct selling segment.
For the three months ended September 30, 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 purchases and in aggregate approximated 62% of total segment purchases. For the nine months ended September 30, 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 purchases and in aggregate approximated 55% of total segment purchases.
For the three months ended September 30, 2019, the Company’s commercial coffee segment made purchases from 3 vendors, INTL FC Stone, Inc., Sixto Packaging, Inc. and The Serengeti Trading Co., that individually comprised more than 10% of total purchases and in aggregate approximated 65% of total purchases made by the commercial coffee segment. For the nine months ended September 30, 2019, the Company’s commercial coffee segment made purchases from 3 vendors, H&H and INTL FC Stone, Inc. and Sixto Packaging, Inc., that individually comprised more than 10% of total purchases and in aggregate approximated 70% of total purchases made by the commercial coffee segment.
For the three months ended September 30, 2020, the Company’s commercial hemp segment made purchases from 2 vendors, Fluid Flow Products, Inc. and Livingston & Haven, LLC, that individually comprised more than 10% of total segment purchases and in aggregate approximated 53% of total segment purchases. For the nine months ended September 30, 2020, the Company’s commercial hemp segment made purchases from 2 vendors, BioProcessing Corporation and Xtraction Services, Inc., that individually comprised more than 10% of total segment purchases and in aggregate approximated 45% of total segment purchases.
For the three months ended September 30, 2019, the Company’s commercial hemp segment made purchases from 2 vendors, Bio Processing Corp., and AMAZON Hose & Rubber Company, that individually comprised more than 10% of total purchases and in aggregate approximated 50% of total purchases made by the commercial hemp segment. For the nine months ended September 30, 2019, the Company’s commercial hemp segment made purchases from 1 vendor, Bio Processing Corp., that in aggregate approximated 35% of total purchases made by the commercial hemp segment.
Customer Concentration
For the three months ended September 30, 2020, the Company’s commercial coffee segment had 3 customers, Super Store Industries, Rothfos Corporation, and Topco Associates, LLC, that individually comprised more than 10% of segment revenue and in aggregate approximated 55% of total segment revenue. For the nine months ended September 30, 2020, the Company’s commercial coffee segment had 2 customers, Super Store Industries and Topco Associates, LLC, that individually comprised more than 10% of segment revenue and in aggregate approximated 39% of total segment revenue.
For the three months ended September 30, 2019, the Company’s commercial coffee segment had 4 customers, Topco Associates, LLC, Carnival Cruise Lines, Walmart Corporation and Super Store Industries, that individually comprised more than 10% of revenue and in aggregate approximated 61% of total revenue generated by the commercial coffee segment. For the nine months ended September 30, 2019, the Company’s commercial coffee segment had 1 customer, H&H Export, that approximated 39% of total revenue generated by the commercial coffee segment.
At September 30, 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. 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 $1,507,000 at September 30, 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 September 30, 2020, the Company’s commercial hemp segment had 2 customers, The Fishel Company and Fluent Servicing, LLC that approximated 31% of total segment revenue. For the nine months ended September 30, 2020, the Company’s commercial hemp segment had 1 customer, BioProcessing Corporation, that approximated 22% of total segment revenue.
For the three months ended September 30, 2019, the Company’s commercial hemp segment had 4 customers, Air Spec, The Fishel Company, Carolina Botanicals and Xtraction Services, that individually comprised more than 10% of revenue and in aggregate approximated 75% of total revenue generated by the commercial hemp segment. For the nine months ended September 30, 2019, the Company’s commercial hemp segment had 3 customers, Xtraction Services, Air Spec and David Shin that individually comprised more than 10% of revenue and in aggregate approximated 58% of total revenue generated by the commercial hemp segment.
Note 12.Segment and Geographical Information
The Company operates in three3 segments: the direct selling segment where products are offered through a global distribution network of preferred customers and distributors, the commercial coffee segment where roasted and green coffee bean products are sold directly to businesses, and the commercial hemp segment provides endmanufactures proprietary systems to endprovide end-to-end extraction and processing via the Company’s proprietary systems that allow for the conversion of hemp feedstockfeed stock into hemp oil and hemp extracts. The primary focus of the commercial hemp segment is to generate revenue through sales of extraction services and end to end processing services for the conversion of hemp feedstock and hemp oil into sellable ingredients. Additionally, the Company offers various rental, sales, and service programs of the Company’s extraction and processing systems.
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.
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 | Nine months ended | |||
September 30, | September 30, | |||
2019 | 2018 | 2019 | 2018 | |
| Revenues | (Restated)* | (Restated)* | ||
| Direct selling | $30,256 | $34,280 | $95,800 | $106,437 |
| Commercial coffee | 2,940 | 4,802 | 16,464 | 19,894 |
| Commercial hemp | 184 | - | 525 | - |
| Total revenues | $33,380 | $39,082 | $112,789 | $126,331 |
| Gross profit (loss) | ||||
| Direct selling | $19,749 | $23,622 | $64,744 | $73,444 |
| Commercial coffee | (163) | 90 | 7,393 | 662 |
| Commercial hemp | 152 | - | 130 | - |
| Total gross profit | $19,738 | $23,712 | $72,267 | $74,106 |
| Operating income (loss) | ||||
| Direct selling | $(3,997) | $(487) | $(17,090) | $1,670 |
| Commercial coffee | (2,336) | (919) | 390 | (2,399) |
| Commercial hemp | (2,146) | - | (3,574) | - |
| Total operating loss | $(8,479) | $(1,406) | $(20,274) | $(729) |
| Net income (loss) | ||||
| Direct selling | $(4,332) | $(2,788) | $(18,959) | $(2,656) |
| Commercial coffee | (1,397) | (5,622) | 2,142 | (8,676) |
| Commercial hemp | (2,145) | - | (3,606) | - |
| Total net loss | $(7,874) | $(8,410) | $(20,423) | $(11,332) |
| Capital expenditures | ||||
| Direct selling | $594 | $132 | $674 | $247 |
| Commercial coffee | 181 | 414 | 3,596 | 1,144 |
| Commercial hemp | 1,127 | - | 2,609 | - |
| Total capital expenditures | $1,902 | $546 | $6,879 | $1,391 |
Capital expenditures acquired through acquisitions | ||||
Direct selling | $- | $- | $- | $- |
Commercial coffee | - | - | - | - |
| Commercial hemp | - | - | 1,133 | - |
| Total capital expenditures acquired through acquisitions | $- | $- | $1,133 | $- |
As of | ||
September 30, 2019 (unaudited) | December 31, 2018 | |
| Total assets | (Restated)* | |
| Direct selling | $43,564 | $38,947 |
| Commercial coffee | 47,768 | 37,026 |
| Commercial hemp | 25,268 | - |
| Total assets | $116,600 | $75,973 |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
Revenues | ||||||||||||||||
Direct selling | $ | 31,319 | $ | 30,256 | $ | 92,750 | $ | 95,800 | ||||||||
Commercial coffee | 2,482 | 2,940 | 8,775 | 16,464 | ||||||||||||
Commercial hemp | 201 | 184 | 1,000 | 525 | ||||||||||||
Total revenues | $ | 34,002 | $ | 33,380 | $ | 102,525 | $ | 112,789 | ||||||||
Gross profit (loss) | ||||||||||||||||
Direct selling | $ | 20,429 | $ | 19,749 | $ | 61,425 | $ | 64,744 | ||||||||
Commercial coffee | (407 | ) | (163 | ) | (1,187 | ) | 7,393 | |||||||||
Commercial hemp | (268 | ) | 152 | (651 | ) | 130 | ||||||||||
Total gross profit | $ | 19,754 | $ | 19,738 | $ | 59,587 | $ | 72,267 | ||||||||
Operating income (loss) | ||||||||||||||||
Direct selling | $ | (1,180 | ) | $ | (3,997 | ) | $ | (4,259 | ) | $ | (17,090 | ) | ||||
Commercial coffee | (1,249 | ) | (2,336 | ) | (4,652 | ) | 390 | |||||||||
Commercial hemp | (2,233 | ) | (2,146 | ) | (6,280 | ) | (3,574 | ) | ||||||||
Total operating income (loss) | $ | (4,662 | ) | $ | (8,479 | ) | $ | (15,191 | ) | $ | (20,274 | ) | ||||
Net income (loss) | ||||||||||||||||
Direct selling | $ | (1,271 | ) | $ | (4,332 | ) | $ | (4,556 | ) | $ | (18,959 | ) | ||||
Commercial coffee | (1,555 | ) | (1,397 | ) | (4,526 | ) | 2,142 | |||||||||
Commercial hemp | (2,246 | ) | (2,145 | ) | (6,321 | ) | (3,606 | ) | ||||||||
Total net loss | $ | (5,072 | ) | $ | (7,874 | ) | $ | (15,403 | ) | $ | (20,423 | ) | ||||
Capital expenditures | ||||||||||||||||
Direct selling | $ | 15 | $ | 594 | $ | 266 | $ | 674 | ||||||||
Commercial coffee | 1,516 | 181 | 2,977 | 3,596 | ||||||||||||
Commercial hemp | 30 | 1,127 | 699 | 2,609 | ||||||||||||
Total capital expenditures | $ | 1,561 | $ | 1,902 | $ | 3,942 | $ | 6,879 | ||||||||
Capital expenditures acquired through acquisitions | ||||||||||||||||
Direct selling | $ | - | $ | - | $ | - | $ | - | ||||||||
Commercial coffee | - | - | - | - | ||||||||||||
Commercial hemp | $ | - | $ | - | $ | - | $ | 1,133 | ||||||||
Total capital expenditures acquired through acquisitions | - | - | - | 1,133 | ||||||||||||
September 30, 2020 | December 31, 2019 | |||||||
(unaudited) | ||||||||
Total assets | ||||||||
Direct selling | $ | 38,349 | $ | 43,221 | ||||
Commercial coffee | 36,302 | 34,348 | ||||||
Commercial hemp | 10,907 | 12,122 | ||||||
Total assets | $ | 85,558 | $ | 89,691 | ||||
Total net property and equipment netassets located outside the United StatesU.S. were approximately $8.1 million$7,477,000 and $6.2 million as of $7,787,000 at September 30, 2019 2020 and December 31, 2018, 2019, respectively.
The Company conducts its operations primarily in the United States.U.S. For the three months ended September 30, 2019 2020 and 20182019 approximately 16% of the Company’s revenue in both periods were derived from sales outside the U.S. For the nine months ended September 30, 2020 and 2019, approximately 16% and 14%15%, respectively, of the Company’s sales were derived from sales outside the United States. For the nine months ended September 30, 2019 and 2018 approximately 15% and 14%, respectively,U.S.
The following table displays revenues attributable to the geographic location of the customer (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
Revenues | ||||||||||||||||
United States | $ | 28,522 | $ | 28,004 | $ | 85,814 | $ | 96,421 | ||||||||
International | 5,480 | 5,376 | 16,711 | 16,368 | ||||||||||||
Total revenues | $ | 34,002 | $ | 33,380 | $ | 102,525 | $ | 112,789 | ||||||||
Three months ended | Nine months ended | |||
September 30, | September 30, | |||
2019 | 2018 | 2019 | 2018 | |
| Revenues | (Restated)* | (Restated)* | ||
| United States | $28,004 | $33,600 | $96,421 | $108,973 |
| International | 5,376 | 5,482 | 16,368 | 17,358 |
| Total revenues | $33,380 | $39,082 | $112,789 | $126,331 |
Note 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 three and nine monthsquarters ended September 30, 20192021 and December 31, 2021, as set forth in the loan agreement. As a result of this default, Crestmark has been restated. See Note 2.
In April 2022, the Company acquiredentered into a forbearance agreement with Crestmark. The forbearance agreement provides that Crestmark agreed to forbear from collection action under the assetsloan documents until the termination date of BeneYOU, LLC., (“BeneYOU”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 term of the forbearance agreement. On June 17, 2022, the balance of the line of credit was $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”). BeneYOUPursuant 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.
Small Business Administration – Paycheck Protection Program Loan
In November 2020, the SBA lenders forgave approximately $613,000 of the loan proceeds received related to its commercial hemp segment of which the remaining $10,000 was unforgiven.
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 April 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, the 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 in the total amount of 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 nutritionalguarantor of the lending agreement. At the filing date of this Quarterly Report on Form 10-Q, this lending agreement was in default.
Cannooba Joint Venture
In April 2021, CLR and beauty product companyKII (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 bringshave 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 Company customersfunds owed by one party to the other; therefore this MA Agreement also sets forth a detailed accounting of the different business relationships and distributorsreconciles the monetary obligations between each party through the end of Jamberry, Avisaefiscal year 2020.
The MA Agreement memorialized the key settlement terms and M.Global. BeneYOU’s, flagship brand Jamberryestablished 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 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 an extensive linerecorded allowances of nail products$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 a core competencyredemption of the receivable in social selling where as Avisae focuses on the gut health, and M.Global delivers hydration products.
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 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 three 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 three 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 three months of 2020 of approximately $360,000.
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, (iv) 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.
FORWARD LOOKING STATEMENTS
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-Q with the Securities and Exchange Commission. These forward-looking statements are subject to risks and uncertainties, including, without limitation, those risks and uncertainties discussed in Part I, Item 1A, “Risk Factors” and 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 for the year ended December 31, 2019 (the “2019 10-K”), as filed with the Securities and Exchange Commission on April 15, 2019 and herein 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 and uncertainties,including, but not limited to, those set forth under “Risk Factors” in Part I, Item 1A of the reader should not place undue reliance on these forward-looking statements.
Unless the context requires otherwise, references to Youngevity International, Inc. or collectively“we,” “us,” “our,” the “Company” and “Youngevity,” refer to Youngevity International, Inc. and its subsidiaries.
Overview
We operate in three 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, the distribution of processed green coffee beans are processed and provides milling services are provided for unprocessed green coffee beans, and (iii) the commercial hemp segment provides endwhere we manufacture proprietary systems to endprovide end-to-end extraction and processing via our proprietary systems that allow for the conversion of hemp feedstockfeed stock into hemp oil and hemp extracts.
For the three months ended September 30, 2020, we derived approximately 92.1% of our revenue from direct sales, 7.3% of our revenue from our commercial coffee sales and 0.6% of our revenue from our commercial hemp business. During the three months ended September 30, 2019, we derived 90.6% of our revenue from our direct selling segment, 8.8% of our revenue from our commercial coffee segment and 0.6% from the commercial hemp segment.
For the nine months ended September 30, 2020, we derived approximately 90.5% of our revenue from direct sales, 8.5% of our revenue from our commercial coffee sales and 1.0% of our revenue from our commercial hemp business. During the nine months ended September 30, 2019, we derived approximately 84.9% of our revenue from our direct selling segment, 14.6% of our revenue from its commercial coffee segment and 0.5% from the commercial hemp segment.
We conduct our operations primarily in the United States.U.S. For the three months ended September 30, 20192020 and 20182019 approximately 16% and 14%, respectively, of our salesrevenue in both periods were derived from sales outside the United States.U.S. For the nine months ended September 30, 2020 and 2019 approximately 16% and 2018 approximately 15% and 14%, respectively, of our salesrevenues were derived from sales outside the United States.
Overview of Significant Events
Public Offering. Between September and wellness, beauty product and skin care, scrap booking and story booking items, packaged food products and other service-based products including, our recent
The Series D Preferred Stockpreferred stock was approved for listing on The NASDAQNasdaq Capital Market under the symbol “YGYIP,” and had commenced trading of the Series D Preferred Stock on NASDAQ commenced on September 20, 2019. The net proceeds from this offering were approximately $7,323,000$12,269,000 after deducting underwriting discounts and commissions and expenses which were paid by us.
Stock Offerings. In connection with such exercise, we received $2,761,113 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 31, 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.
In June 17, 2019, we entered into a Securities Purchase Agreement (the “Purchase Agreement”)securities purchase agreement with one accredited investor thatDaniel Mangless, with whom we had a substantial pre-existing relationship, with us pursuant to which we sold 250,000 shares of common stock at an offering price of $5.50 per share. TheWe received proceeds were $1,375,000.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 didare not pay consulting fees in this transaction.
Convertible Notes
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 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 net 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 note and stock was 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 (the “PPP”) 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. In July 2020, we received an additional $150,000 from SBA lenders. Under the SBA loans, we received $2,508,000 related to our direct selling segment, $783,000 related to our commercial coffee segment and $623,000 related to our commercial hemp segment of which $613,000 was forgiven in November 2020 and the remaining $10,000 was unforgiven.
Under the SBA loans, our direct selling segment qualified for mortgage assistance, whereby our corporate office’s mortgage had been paid directly from the SBA lenders. We qualified for the mortgage payment program for a period of six months. During the three and nine months ended September 30, 2020, the SBA paid approximately $70,000 and $142,000 in principal and interest directly to our mortgage holder.
In November 2020, the SBA lenders forgave approximately $613,000 of the loan proceeds received related to its commercial hemp segment of which the remaining $10,000 was unforgiven. Under the SBA loans, the Company’s direct selling segment qualified for mortgage assistance, whereby our corporate office’s mortgage was paid directly from the SBA lenders. 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 and nine months ended September 30, 2020, CLR made payments of approximately $706,000 and $1,506,000, respectively, towards the Matagalpa mill project. For the nine months ended September 30, 2019, CRL made payments toward the Matagalpa mill project of $2,150,000. At September 30, 2020, CLR contributed a total of $4,556,000 towards the construction of the Matagalpa mill project, and paid a total of $1,304,000 for operating equipment. At September 30, 2020, the Nicaraguan Partner contributed a total of $2,528,000 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 September 30, 2020 and December 31, 2019, the value of the shares was approximately $73,000 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 more than likely to be uncollected at September 30, 2020 and December 31, 2019, 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 18,2014 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 and nine months ended September 30, 2020 was approximately $424,000 and $635,000, respectively. The profit-sharing expense for the three and nine months ended September 30, 2019 was approximately $863,000 and $1,331,000, respectively.
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 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 April 2020, we issued 1,500,000 shares of restricted common stock to Fitracomex in accordance with the 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 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 September 30, 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 nine months ended September 30, 2020 and 2019 of approximately $15,403,000 and $20,423,000, respectively. Net cash used in operating activities was approximately $2,075,000 and $7,762,000 for the nine months ended September 30, 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 September 30, 2020, cash and cash equivalents totaled approximately $1,238,000. We have and continue to take actions to alleviate the cash used in operations. During the nine months ended September 30, 2020, we reported total revenue of approximately $102,525,000 a decrease of approximately 9.1% 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.
Three months ended September 30, 20192020 compared to three months ended September 30, 2018
Revenues
For the three months ended September 30, 2019,2020, our revenues decreased 14.6%increased 1.9% to $33,380,000approximately $34,002,000 as compared to $39,082,000$33,380,000 for the three months ended September 30, 2018.2019. During the three months ended September 30, 2019,2020, we derived approximately 90.6%92.1% of our revenue from our direct selling sales, and approximately 8.8%7.3% of our revenue from our commercial coffee sales and approximately 0.6% from our commercial hemp segment.
For the three months ended September 30, 2019, commercial coffee2020, direct selling segment revenues decreasedincreased by $1,862,000$1,063,000 or 38.8%3.5% to $2,940,000$31,319,000 as compared to $4,802,000$30,256,000 for the three months ended September 30, 2018. This decrease2019. The increase in revenue was primarily related to sales of our green coffee business of $1,807,000, attributabledue to the changeincrease in recognition of H&H Export revenue in 2019 to milling and processing services related toeconomic activity within the green coffee business. and a decrease in our roasted coffee business of $84,000, offset by milling and processing services of approximately $29,000.
Three Months Ended September 30, | |||
2019 | 2018 | Percentage Change (2) | |
(Restated) (1) | |||
| Direct selling | $30,256 | $34,280 | (11.7)% |
| As a % of Revenue | 90.6% | 87.7% | 2.9% |
| Commercial coffee: | |||
| Processed green coffee | (22) | 1,785 | (101.2)% |
| As a % of Segment Revenue | (0.7)% | 37.2% | (37.9)% |
| Milling and processing services | 29 | - | N/A |
| As a % of Segment Revenue | 1.0% | -% | N/A |
| Roasted coffee and other | 2,933 | 3,017 | (2.8)% |
| As a % of Segment Revenue | 99.7% | 62.8% | 36.9% |
| Total commercial coffee total | 2,940 | 4,802 | (38.8)% |
| As a % of Revenue | 8.8% | 12.3% | (3.5)% |
| Commercial hemp | 184 | - | N/A |
| As a % of Revenue | 0.6% | -% | N/A |
| Total Revenues | $33,380 | $39,082 | (14.6)% |
For the three months ended September 30, 2019, overall cost of2020, commercial coffee segment revenues
For the three months ended September 30, 2020, commercial hemp segment revenues increased by $17,000 or 9.2% to $201,000 as compared to $184,000 for the three months ended September 30, 2019. The increase was primarily attributed to higher sales of the hemp product lines and tolling services.
The following table summarizes our revenue by segment (in thousands):
Three Months Ended September 30, | ||||||||||||
2020 | 2019 | Percentage Change | ||||||||||
Direct selling | $ | 31,319 | $ | 30,256 | 3.5 | % | ||||||
As a % of Revenue | 92.1 | % | 90.6 | % | 1.5 | % | ||||||
Processed green coffee | 254 | (22 | ) | (1,254.5 | )% | |||||||
As a % of Segment Revenue | 10.2 | % | (0.7 | )% | 10.9 | % | ||||||
Milling and processing services | 211 | 29 | 627.6 | % | ||||||||
As a % of Segment Revenue | 8.5 | % | 1.0 | % | 7.5 | % | ||||||
Roasted coffee and other | 2,017 | 2,933 | (31.2 | )% | ||||||||
As a % of Segment Revenue | 81.3 | % | 99.7 | % | (18.4 | )% | ||||||
Commercial coffee | 2,482 | 2,940 | (15.6 | )% | ||||||||
As a % of Revenue | 7.3 | % | 8.8 | % | (1.5 | )% | ||||||
Commercial hemp | 201 | 184 | 9.2 | % | ||||||||
As a % of Revenue | 0.6 | % | 0.6 | % | 0.0 | % | ||||||
Total Revenues | $ | 34,002 | $ | 33,380 | 1.9 | % | ||||||
Cost of Revenues
For the three months ended September 30, 2020, cost of revenues increased approximately 4.4% to $14,248,000 as compared to $13,642,000 for the three months ended September 30, 2019.
The direct selling segment cost of revenues decreased 1.4%increased 3.6% to approximately $10,507,000 when$10,890,000 as compared to $10,658,000$10,507,000 for the same period last year,three months ended September 30, 2019, primarily due to increases in the decrease in revenues, partially offset by an increase incost of inventory reserve expense of $691,000.
The commercial coffee segment cost of revenues decreased 34.1%6.9% to approximately $2,889,000 as compared to $3,103,000 whenfor the three months ended September 30, 2019, primarily attributable the cost of revenues for roasted coffee that decreased 23.7% to $2,420,000 compared to $4,712,000 for$3,170,000 during the same period last year. This was primarily attributable tothree months ended September 30, 2019, partially offset by the shift inaway from revenue
The commercial hemp segment cost of revenues increased to approximately $67,000 or 104.1% of total commercial coffee revenue$469,000 for the three months ended September 30, 2020 as compared to $32,000 for the three months ended September 30, 2019. ThisThe increase was primarily dueattributable to pricing true ups related to fluctuations in market coffee pricing on current period final invoicing related to prior period sales recorded, which can have effects on margins.
Gross Profit (Loss)
For the three months ended September 30, 2019, overall2020, gross profit decreasedincreased 0.1% to approximately 16.8% to $19,738,000$19,754,000 as compared to $23,712,000$19,738,000 for the three months ended September 30, 2018. Overall gross profit as a percentage of revenues decreased to 59.1%, compared to 60.7% in the same period last year, primarily due to the decrease in revenues discussed above and the increase in inventory reserve expense of $691,000.
Gross profit in the direct selling segment increased 3.4% to approximately $20,429,000 from $19,749,000 for the salesthree months ended September 30, 2019 primarily as a result of processed green coffeethe higher revenues. Gross profit as a percentage of revenues for the three months ended September 30, 2020 and 2019 was $45,000 or 68.8% of65.2% and 65.3%, respectively.
Gross loss in the commercial coffee segment revenues.
Gross loss in the commercial hemp segment relatedwas approximately $268,000 compared to gross profit of $152,000 for the February 12,three months ended September 30, 2019. Gross loss as a percentage of revenues for the three months ended September 30, 2020 was 133.3%. Gross profit as a percentage of revenues for the three months ended September 30, 2019 acquisition was $152,000.
Below is a table of gross profit (loss) by segment (in thousands) and gross profit (loss) as a percentage of segment revenues:
Three Months Ended September 30, | |||
2019 | 2018 | Percentage Change (2) | |
(Restated) (1) | |||
| Direct selling | $19,749 | $23,622 | (16.4)% |
| Gross Profit % of Segment Revenues | 65.3% | 68.9% | (3.6)% |
| Commercial coffee: | |||
| Processed green coffee | 45 | 144 | (68.8)% |
| Gross Profit % of Segment Revenues | 1.5% | 3.0% | (1.5)% |
| Milling and processing services | 29 | - | N/A |
| Gross Profit % of Segment Revenues | 1.0% | -% | N/A |
| Roasted coffee and other | (237) | (54) | 338.9% |
| Gross Loss % of Segment Revenues | (8.1)% | (1.1)% | (7.0)% |
| Total commercial coffee | (163) | 90 | (281.1)% |
| Gross Loss % of Segment Revenues | (5.5)% | 1.9% | (7.4)% |
| Commercial hemp | 152 | - | N/A |
| Gross Profit % of Segment Revenues | 82.6% | -% | N/A |
| Total | $19,738 | $23,712 | (16.8)% |
| Gross Profit % of Revenues | 59.1% | 60.7% | (1.6)% |
Three Months Ended September 30, | ||||||||||||
2020 | 2019 | Percentage Change | ||||||||||
Direct selling | $ | 20,429 | $ | 19,749 | 3.4 | % | ||||||
Gross Profit % of Segment Revenues | 65.2 | % | 65.3 | % | (0.1 | )% | ||||||
Processed green coffee | (215 | ) | 45 | (577.8 | )% | |||||||
Gross Profit (Loss) % of Segment Revenues | (8.7 | )% | 1.5 | % | (10.2 | )% | ||||||
Milling and processing services | 211 | 29 | 627.6 | % | ||||||||
Gross Profit % of Segment Revenues | 8.5 | % | 1.0 | % | 7.5 | % | ||||||
Roasted coffee and other | (403 | ) | (237 | ) | 70.0 | % | ||||||
Gross Loss % of Segment Revenues | (16.2 | )% | (8.1 | )% | (8.1 | )% | ||||||
Commercial coffee | (407 | ) | (163 | ) | 149.7 | % | ||||||
Gross Loss % of Segment Revenues | (16.4 | )% | (5.5 | )% | (10.9 | )% | ||||||
Commercial hemp | (268 | ) | 152 | (276.3 | )% | |||||||
Gross Profit (Loss) % of Segment Revenues | (133.3 | )% | 82.6 | % | (215.9 | )% | ||||||
Total | $ | 19,754 | $ | 19,738 | 0.1 | % | ||||||
Gross Profit % of Revenues | 58.1 | % | 59.1 | % | (1.0 | )% | ||||||
Operating Expenses
For the three months ended September 30, 2019,2020, our operating expenses increased 12.3%decreased 13.5% to $28,217,000approximately $24,416,000 as compared to $25,118,000$28,217,000 for the three months ended September 30, 2018.
Distributor Compensation
For the three months ended September 30, 2019,2020, the distributor compensation paid to our independent distributors in the direct selling segment decreased 13.0%1.1% to $13,122,000approximately $13,262,000 from $15,076,000$13,122,000 for the three months ended September 30, 2018. This2019. The decrease was primarily attributable to the decrease inlower revenues. Distributor compensation as a percentage of direct selling revenues decreased towas 42.3% and 43.4% for the three months ended September 30, 2020 and 2019, as comparedrespectively.
Sales and Marketing
For the three months ended September 30, 2020, total sales and marketing expense decreased 31.1% to 44.0%approximately $3,053,000 from $4,432,000 for the three months ended September 30, 2018, primarily attributable to the decrease in revenues and changes in product mix.
In the direct selling segment, sales and marketing expense increased by 7.0%for the three months ended September 30, 2020 decreased 29.9% to $4,009,000 in the current quarterapproximately $2,811,000 from $3,747,000$4,009,000 for the same period last year,year. The decrease was primarily due to increased conventiondecreases in expenses related to conventions and distributor events, wages and benefits related to temporary labor costs, partially offset by loweran increase in marketing costs. expenses related to the rewards programs.
In the commercial coffee segment, sales and marketing expense increased by $40,000costs for the three months ended September 30, 2020 decreased 11.0% to approximately $227,000 from $255,000 in the current quarter compared to $215,000for the same period last year,year. The decrease was primarily due to increased advertising and compensation expense. Sales andlower marketing expense was $168,000 inexpenses.
In the commercial hemp segment.
General and Administrative
For the three months ended September 30, 2019,2020, total general and administrative expense increased 174.8%decreased 24.0% to $10,663,000approximately $8,101,000 from $3,880,000$10,663,000 for the three months ended September 30, 2018. 2019.
In the direct selling segment, general and administrative expense increased by 114.3%for the three months ended September 30, 2020 decreased 16.3% to $6,615,000 in the current quarterapproximately $5,536,000 from $3,087,000$6,615,000 for the same period last year. This increaseThe decrease was primarily due to an increasethe change in legal, accounting, computer expense and non-cash equity-based compensation expense of $1,476,000. This was partially offset by a decrease in intangible amortization expense of $171,000. In addition, the contingent liability revaluation adjustmentacquisition debt of $156,000 in the current quarter was a reduction in expense of $478,000three months ended September 30, 2020 compared to a reduction in expense of $2,618,000 for the same period last year. year, which reduced expenses.
In the commercial coffee segment, general and administrative costs increased by $1,126,000 or 142.0%for the three months ended September 30, 2020 decreased 68.0% to $615,000 from $1,919,000 in the current quarter compared to $793,000 infor the same period last year. ThisThe decrease was primarily due to an increase in wages, warehouse storage costs andlower profit-sharing expense of $863,000,$1,287,000 in the three months ended September 30, 2020 compared to a profit-sharing benefit of $247,000 inthe same period last year.
In the commercial hemp segment, general and administrative costs for the three months ended September 30, 2020 decreased 8.4% to $1,950,000 from $2,129,000 for the same period last year. GeneralThe decrease was primarily due to lower salaries, professional fees, and administrative expense was $2,129,000 in the commercial hemp segment, mostlylegal fees, partially offset by higher costs related to wages, supplies and general office costs.
Operating Loss
For the three months ended September 30, 2018,2020 and 2019, our direct selling segment recorded aoperating loss on impairment of intangible assets relatedwas $4,662,000 and $8,479,000, respectively. The decrease in our operating loss was primarily attributed to our acquisition of BeautiControl whereby
Other Income (Expense), net
For the three months ended September 30, 2019, we reported an operating loss of $8,479,0002020, net other expense was $557,000 as compared to an operating lossnet other income of $1,406,000$472,000 for the three months ended September 30, 2018.
Net interest expense decreased by $298,000$451,000 for the three months ended September 30, 2020 to $658,000, compared to $1,109,000 for the three months ended September 30, 2019, compared to $1,407,000 for the three months ended September 30, 2018.2019. Interest expense includes the imputed interest portion of the payments related to contingent acquisition debt of $344,000, interest payments to investors associated with our 2014 and 2019 private placements and debt transactions of $205,000, $97,000 related to our Crestmark agreement and interest paid for other operating debt of $136,000. Non-cash interest primarily related to amortization costs of $380,000 and $4,000 of other non-cash interest, offset by interest income of $57,000.
Other income from the change in other expensethe fair value of derivative liabilities decreased $2,356,000 for the three months ended September 30, 2018.2020 to $101,000 compared to $2,457,000 for the three months ended September 30, 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-free interest rate. Future changes in these factors may have a significant impact on the computed fair value of ourthe Company’s derivative liabilities. As such, we expect future changes in the fair value of the warrants and may vary significantly from period to period (seeperiod. (See Notes 8 & 9 to the condensed consolidated financial statements).
We recorded a non-cash loss on warrants of $876,000 for the three months ended September 30, 2019 as a result of modification of the warrant terms of certain holders of 2014 warrants and preferred warrants to include additional shares of restricted common stock we issued as an inducement fee to upon exercise of their warrants. In addition, one holder of a 2014 Warrant included a change in the exercise price and extended the expiration period of the warrant. We also amended the expiration period of warrants issued to the placement agent for his assistance with the 2014 Warrant modification (see(See Note 11,10 to the condensed consolidated financial statements).
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. We have 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 evidences and have determined that it is more likely than not that the deferred tax assets arewill not more likely than not to be realized. A valuation allowance remains on the U.S., state and foreign tax attributes that are likely to expire before realization. We haveAt December 31, 2019, we had approximately $146,000$75,000 in AMT refundable credits, and we expectit expects that $73,000a substantial portion will be refunded in 2019.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 $133,000$147,000 which is our estimated federal, state and foreign income tax benefit for the three months ended September 30, 2019.2020. The difference between the effective tax rate and the federal statutory rate of 21% is due to the permanent differences, change in valuation allowance, state taxes (net of federal benefit), and foreign tax rate differential.
Net Loss
For the three months ended September 30, 2020 and 2019, wethe Company reported a net loss of $5,072,000 and $7,874,000, as compared to net loss of $8,410,000 for the three months ended September 30, 2018.respectively. The primary reason for the decrease in net loss when compared to the prior period was due to the decrease in total other expense of $7,417,000 and the increase in income tax benefit of $192,000, offset by the increase in operating loss of $7,073,000.
Nine months ended September 30, 20192020 compared to nine months ended September 30, 2018
Revenues
For the nine months ended September 30, 2019,2020, our revenues decreased 10.7%9.1% to $112,789,000approximately $102,525,000 as compared to $126,331,000$112,789,000 for the nine months ended September 30, 2018.2019. During the nine months ended September 30, 2019,2020, we derived 84.9%90.5% of our revenue from our direct selling sales, and approximately 14.6%8.5% of our revenue from our commercial coffee sales and approximately 0.5%1.0% from our commercial hemp segment.
For the nine months ended September 30, 2019,2020, direct selling segment revenues decreased by $10,637,000approximately $3,050,000 or 10.0%3.2% to $95,800,000$92,750,000 as compared to $106,437,000$95,800,000 for the nine months ended September 30, 2018. This2019. The decrease was primarily attributed to a decrease the continued impact of $11,058,000 in revenues from existing business, partially offset by revenues from new acquisitions of $421,000. The decrease in existing business was primarily due to aCOVID-19 that has disrupted various supply chains affecting product availability and the year-over-year decline in the number of ordering distributors resulting from the Company’s inability to hold distributor events and customers, partially offset by an increase in average order amount per distributor.
For the nine months ended September 30, 2019,2020, commercial coffee segment revenues decreased by $3,430,000$7,689,000 or 17.2%46.7% to $16,464,000$8,775,000 as compared to $19,894,000$16,464,000 for the nine months ended September 30, 2018. This decrease was primarily related our green coffee business of $10,251,000, attributable to the change in recognition of H&H Export revenue in 2019 to milling and processing services related to the green coffee business.2019. The decrease in sales from green coffeerevenue was offset by increasesattributed to decreases in milling and processing services of approximately $6,416,000 and an increase in$5,881,000, roasted coffee business of $405,000.
For the nine months ended September 30, 2020, commercial hemp segment recordedrevenues increased by $475,000 to $1,000,000 as compared to $525,000 in revenues fromfor the nine months ended September 30, 2019, which represented a partially nine months of revenues. The increase was primarily attributed to higher sales made by KII.of the hemp product lines and tolling services.
Nine Months Ended September 30, | |||
| Segment Revenues | 2019 | 2018 | Percentage Change (2) |
(Restated) (1) | |||
| Direct selling | $95,800 | $106,437 | (10.0)% |
| As a % of Revenue | 84.9% | 84.3% | 0.6% |
| Commercial coffee: | |||
| Processed green coffee | 1,046 | 11,297 | (90.7)% |
| As a % of Segment Revenue | 6.4% | 56.8% | (50.4)% |
| Milling and processing services | 6,416 | - | N/A% |
| As a % of Segment Revenue | 39.0% | -% | N/A% |
| Roasted coffee and other | 9,002 | 8,597 | 4.7% |
| As a % of Segment Revenue | 54.7% | 43.2% | 11.5% |
| Total commercial coffee | 16,464 | 19,894 | (17.2)% |
| As a % of Revenue | 14.6% | 15.7% | (1.1)% |
| Commercial hemp | 525 | - | N/A% |
| As a % of Revenue | 0.5% | - | N/A% |
| Total Revenues | $112,789 | $126,331 | (10.7)% |
Nine Months Ended September 30, | ||||||||||||
2020 | 2019 | Percentage Change | ||||||||||
Direct selling | $ | 92,750 | $ | 95,800 | (3.2 | )% | ||||||
As a % of Revenue | 90.5 | % | 84.9 | % | 5.6 | % | ||||||
Processed green coffee | 773 | 1,046 | (26.1 | )% | ||||||||
As a % of Segment Revenue | 8.8 | % | 6.4 | % | 2.4 | % | ||||||
Milling and processing services | 535 | 6,416 | (91.7 | )% | ||||||||
As a % of Segment Revenue | 6.1 | % | 39.0 | % | (32.9 | )% | ||||||
Roasted coffee and other | 7,467 | 9,002 | (17.1 | )% | ||||||||
As a % of Segment Revenue | 85.1 | % | 54.7 | % | 30.4 | % | ||||||
Commercial coffee | 8,775 | 16,464 | (46.7 | )% | ||||||||
As a % of Revenue | 8.5 | % | 14.6 | % | (6.0 | )% | ||||||
Commercial hemp | 1,000 | 525 | 90.5 | % | ||||||||
As a % of Revenue | 1.0 | % | 0.5 | % | 0.5 | % | ||||||
Total Revenues | $ | 102,525 | $ | 112,789 | (9.1 | )% | ||||||
Cost of Revenues
For the
nine months ended September 30,The direct selling segment cost of revenues decreased 5.9%increased 0.9% to approximately $31,325,000 as compared to $31,056,000 when compared to $32,993,000 for the same period last year, primarily due to the decrease in revenues discussed above, partially offset by an increase in inventory adjustments.
The commercial coffee segment cost of revenues decreased 52.8%increased 9.8% to approximately $9,962,000 as compared to $9,071,000 when compared to $19,232,000 for the same period last year. This wasnine months ended September 30, 2019, primarily attributable to the shift inaway from revenue
The commercial hemp segment cost of revenues increased to approximately $1,651,000 as compared to $395,000 for the nine months ended September 30, 2019, which represented a partial nine months of cost of revenues. The increase was primarily attributable to higher manufacturing consulting fees, direct labor costs, and supply and material costs.
Gross Profit (Loss)
For the nine months ended September 30, 2020, gross profit decreased 17.5% to approximately $59,587,000 as compared to $72,267,000 for the nine months ended September 30, 2019. Gross profit as a creditpercentage of $324,000 or 103.1% of commercial coffee segment revenues for the nine months ended September 30, 2019. This2020 and 2019 was primarily due to pricing true ups related to fluctuations in market coffee pricing on current period final invoicing related to prior period sales recorded, which can have a negative effect on margins.
Gross profit in the direct selling segment decreased by 11.8%5.1% to $64,744,000approximately $61,425,000 from $73,444,000 in the prior period primarily as a result of the decrease in revenues discussed above and the increase in expense related to inventory adjustments. Gross profit as a percentage of revenues in the direct selling segment decreased to 67.6% for the
Gross loss in the commercial coffee segment was approximately $1,187,000 compared to 3.3% ingross profit of $7,393,000 for the same period last year.
Gross loss in the commercial hemp segment was approximately $651,000 compared to gross profit of $130,000 for the nine months ended September 30, 2019, which represented a partial nine months of gross profit. Gross loss as a percentage of revenues for the nine months ended September 30, 2020 was 65.1%. Gross profit as a percentage of revenues for the nine months ended September 30, 2019 was 24.8%. The increase in the gross loss was primarily attributable to cost of goods sold increasing at a higher rate than revenues in 2020 compared to 2019.
Below is a table of gross profit (loss) by segment (in thousands) and revenues on milling and processing services duringgross profit (loss) as a percentage of segment revenues:
Nine Months Ended September 30, | ||||||||||||
2020 | 2019 | Percentage Change | ||||||||||
Direct selling | $ | 61,425 | $ | 64,744 | (5.1 | )% | ||||||
Gross Profit % of Segment Revenues | 66.2 | % | 67.6 | % | (1.4 | )% | ||||||
Processed green coffee | (822 | ) | 1,370 | (160.0 | )% | |||||||
Gross Profit (Loss) % of Segment Revenues | (9.4 | )% | 8.3 | % | (17.7 | )% | ||||||
Milling and processing services | 535 | 6,416 | (91.7 | )% | ||||||||
Gross Profit % of Segment Revenues | 6.1 | % | 39.0 | % | (32.9 | )% | ||||||
Roasted coffee and other | (900 | ) | (393 | ) | 129.0 | % | ||||||
Gross Loss % of Segment Revenues | (10.3 | )% | (2.4 | )% | (7.9 | )% | ||||||
Commercial coffee | (1,187 | ) | 7,393 | (116.1 | )% | |||||||
Gross Profit (Loss) % of Segment Revenues | (13.5 | )% | 44.9 | % | (58.4 | )% | ||||||
Commercial hemp | (651 | ) | 130 | (600.8 | )% | |||||||
Gross Profit (Loss) % of Segment Revenues | (65.1 | )% | 24.8 | % | (89.9 | )% | ||||||
Total | $ | 59,587 | $ | 72,267 | (17.5 | )% | ||||||
Gross Profit % of Revenues | 58.1 | % | 64.1 | % | (6.0 | )% | ||||||
Operating Expenses
For the nine months ended September 30, 2020, our operating expenses decreased 19.2% to approximately $74,778,000 as compared to $92,541,000 for the nine months ended September 30, 2019. Gross profit from the salesThe decrease included lower stock-based compensation and equity-based compensation for services of processed green coffee was $1,370,000 or 8.3% of the commercial coffee segment revenues. Gross profit from milling$11,567,000 and processing services was $6,416,000 or 39.0% of the commercial coffee segment revenues. Increases$2,850,000, respectively, in the gross profit are offset by the gross loss in our roasted coffee business of $393,000.
Nine Months Ended September 30, | |||
| Segment Gross Profit | 2019 | 2018 | Percentage Change (2) |
(Restated) (1) | |||
| Direct selling | $64,744 | $73,444 | (11.8)% |
| Gross Profit % of Segment Revenues | 67.6% | 69.0% | (1.4)% |
| Commercial coffee: | |||
| Processed green coffee | 1,370 | 720 | 90.3% |
| Gross Profit % of Segment Revenues | 8.3% | 3.6% | 4.7% |
| Milling and processing services | 6,416 | - | N/A% |
| Gross Profit % of Segment Revenues | 39.0% | -% | N/A% |
| Roasted coffee and other | (393) | (58) | (577.6)% |
| Gross Profit % of Segment Revenues | (2.4)% | (0.3)% | (2.1)% |
| Total commercial coffee | 7,393 | 662 | 1,016.8% |
| Gross Profit % of Segment Revenues | 44.9% | 3.3% | 41.6% |
| Commercial hemp | 130 | - | N/A% |
| Gross Profit % of Segment Revenues | 24.8% | - | N/A% |
| Total | $72,267 | $74,106 | (2.5)% |
| Gross Profit % of Revenues | 64.1% | 58.7% | 5.4% |
Distributor Compensation
For the
nine months ended September 30,Sales and Marketing
For the
nine months ended September 30,In the direct selling segment, sales and marketing expense increased by 3.3% to $10,213,000 for the
In the commercial coffee segment, sales and marketing costs increased by 25.1% to $812,000expense for the
In the commercial hemp segment, sales and marketing expense for the nine months ended September 30, 2020 decreased to approximately $56,000 from $212,000 for the same period last year, which represented a partial nine months of commercial hemp sales and marketing expense. The decrease was primarily due to increasedreduced advertising costs and compensation expense. Salespromotion expenses.
General and marketing expense were $212,000 inAdministrative
For the commercial hemp segment for the
In the direct selling segment, general and administrative expense increased by 132.0% to $29,112,000 for the
In the commercial coffee segment, general and administrative costs increased by 156.9% to $6,192,000expense for the
In the commercial hemp segment, general and administrationadministrative expense infor the commercial coffee segment would havenine months ended September 30, 2020 increased by 97.8%. Thisto $5,573,000 from $3,491,000 for the same period last year, which represented a partial nine months of general and administrative expense. The increase was primarily due to an increase in wages, warehouse storagehigher costs and profit-sharing expense of $1,331,000, compared to a profit-sharing benefit of $719,000 in the same period last year. General and administrative expense was $3,491,000 in the commercial hemp segment, and was mostly related to wages, suppliesequity-based compensation for services of $325,000, salaries and general office costs.
Operating Loss
For the nine months ended September 30, 2018,2020, our direct selling segment recorded aoperating loss on impairment of intangible assets related to our acquisition of BeautiControl wherebywas $15,191,000 as compared $20,274,000 for the underlying intangible assets were impaired and recorded a loss on impairment of intangible assets of approximately $2,200,000 (see Note 6, to the condensed consolidated financial statements).
Other Expense, net
For the first quarter of 2019 as discussed above. Excluding the increase in equity-based compensation expense, we would have reported an operating loss of $7,308,000 for the
Net interest expense decreased by $990,000$1,761,000 for the nine months ended September 30, 2020 to $1,917,000 compared to $3,678,000 for the
Other income of $164,000.
We recorded a non-cash loss on warrants of $876,000 for the threenine months ended September 30, 2019 as a result of modification of the warrant terms of certain holders of 2014 warrants and preferred warrants to include additional shares of restricted common stock we issued as an inducement fee to upon exercise of their warrants. In addition, one holder of a 2014 Warrant included a change in the exercise price and extended the expiration period of the warrant. We also amended the expiration period of warrants issued to the placement agent for his assistance with the 2014 Warrant modification (see(See Note 11,10 to the condensed consolidated financial statements).
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. WeAt December 31, 2019, we have determinedevaluated the realizability of the deferred tax asset, based upon achieved and estimated future results and through consideration of all positive and negative evidences and have determined that it is more likely than not that the deferred tax assets arewill not more likely than not to be realized. A valuation allowance remains on the U.S., state and foreign tax attributes that are likely to expire before realization. We haveAt December 31, 2019, we had approximately $146,000$75,000 in AMT refundable credits, and we expectit expects that $73,000a substantial portion will be refunded in 2019.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 $61,000$163,000 which is our estimated federal, state and foreign income tax benefit for the
Net Loss
For the
nine months ended September 30,Adjusted EBITDA
EBITDA (earnings before interest, income taxes, depreciation and amortization) as adjusted to remove the effect of stock-based compensation expense, equity-based compensation expense, and the non-cash loss on impairment of intangible assets, non-cash loss on extinguishmentamortization of debt non-cashdiscounts and issuance costs, the gain on debt extinguishment, the loss on modification of warrants, and the change in the fair value of the derivatives, or "Adjusted EBITDA," decreased
Management 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 Companycompany 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 andstock-based compensation expense, equity-based compensation expense non-cash loss on impairment of intangible assets, non-cash loss on extinguishmentfor services, amortization of debt non-cashdiscount and issuance costs, the gain on debt extinguishment, the loss on modification of warrants, 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 loss for the three and nine months ended September 30, 20192020 and 20182019 is included in the table below (in thousands):
Three months ended | Nine months ended | |||
September 30, (unaudited) | September 30, (unaudited) | |||
2019 | 2018 | 2019 (Restated) (1) | 2018 | |
| Net loss | $(7,874) | $(8,410) | $(20,423) | $(11,332) |
| Add/Subtract: | ||||
| Interest, net | 1,109 | 1,407 | 3,678 | 4,668 |
| Income tax (benefit) provision | (133) | 59 | (61) | 219 |
| Depreciation | 617 | 463 | 1,694 | 1,365 |
| Amortization | 1,249 | 724 | 2,505 | 2,416 |
| EBITDA | (5,032) | (5,757) | (12,607) | (2,664) |
| Add/Subtract: | ||||
| Equity-based compensation | 2,169 | 689 | 16,400 | 1,141 |
| Loss on impairment of intangible assets | - | 2,200 | - | 2,200 |
| Loss on extinguishment of debt | - | - | - | 1,082 |
| Loss on modification of warrants | 876 | - | 876 | - |
| Change in the fair value of warrant derivative | (2,457) | 5,538 | (4,344) | 4,634 |
| Adjusted EBITDA | $(4,444) | $2,670 | $325 | $6,393 |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net loss | $ | (5,072 | ) | $ | (7,874 | ) | $ | (15,403 | ) | $ | (20,423 | ) | ||||
Add/Subtract: | ||||||||||||||||
Interest, net | 658 | 1,109 | 1,917 | 3.678 | ||||||||||||
Income tax benefit | (147 | ) | (133 | ) | (163 | ) | (61 | ) | ||||||||
Depreciation | 635 | 617 | 1,968 | 1,694 | ||||||||||||
Amortization | 600 | 1,249 | 1,840 | 2,505 | ||||||||||||
EBITDA (loss) | (3,326 | ) | (5,032 | ) | (9,841 | ) | (12,607 | ) | ||||||||
Add/Subtract: | ||||||||||||||||
Stock-based compensation | 252 | 661 | 777 | 12,418 | ||||||||||||
Equity-based compensation for services | 221 | 1,508 | 1,132 | 3,982 | ||||||||||||
Amortization of debt discounts | 392 | 390 | 1,099 | 924 | ||||||||||||
Gain on debt extinguishment | (24 | ) | - | (48 | ) | - | ||||||||||
Change in the fair value of warrant derivative | (101 | ) | (2,457 | ) | (1,542 | ) | (4,344 | ) | ||||||||
Loss on modification of warrants | - | 876 | - | 876 | ||||||||||||
Adjusted EBITDA (loss) | $ | (2,586 | ) | $ | (4,054 | ) | $ | (8,423 | ) | $ | 1,249 | |||||
Liquidity and Capital Resources
Sources of Liquidity
At September 30, 20192020 we had cash and cash equivalents of approximately $7,270,000$1,238,000 as compared to cash and cash equivalents of $2,879,000$4,463,000 as of December 31, 2018.
Cash Flows
Cash used in operating activities.activities. Net cash used in operating activities for the nine months ended September 30, 20192020 was $7,762,000$2,075,000 as compared to net cash used in operating activities of $4,732,000$7,762,000 for the nine months ended September 30, 2018.2019. Net cash used in operating activities in 2020 consisted of a net loss of 15,403,000, partially offset by $7,623,000 in changes in operating assets and liabilities and net non-cash operating expenses of $5,705,000. Net cash used in operating activities in 2019 consisted of a net loss of $20,423,000 and $5,726,000 in changes in operating assets and liabilities, offset by net non-cash operating expenses of $18,387,000.
Net non-cash operating expenses in 2020 included $3,808,000 in depreciation and amortization, $777,000 in stock-based compensation expense, $1,132,000 in equity-based compensation expense, $1,099,000 in amortization of debt discounts, $337,000 in allowances for notes receivable, $101,000 in loss on disposal of property and equipment, $200,000 in loss on impairment of inventory, and $1,919,000 in non-cash operating expense, partially offset by $1,542,000 related to the change in fair value of warrant derivative liability, $1,640,000 related to the change in fair value of contingent acquisition debt, $324,000 for an allowance related to the over issuance of shares which was recorded as other receivable, $84,000 related to the decrease in inventory reserve, the decrease in the allowance for doubtful accounts of $30,000, and the gain on debt extinguishment of $48,000.
Net non-cash operating expenses in 2019 included $4,199,000 in depreciation and amortization, $12,418,000 in stock-based compensation expense, $924,000 in amortization of debt discounts and issuance costs, $3,982,000 in equity issuance costs, $889,000 in increase in inventory reserves, $281,000 in stock issuance cost related to true-up shares, $876,000 loss on warrant modification and $73,000 in deferred taxes, partially offset by $4,344,000 related to the change in fair value of warrant derivative liability and $911,000 related to the change in fair value of contingent liability.
Changes in operating assets and liabilities in 2020 were attributable to increases in working capital, primarily related to changes in inventory of $554,000, prepaid expenses and other current assets of $337,000 accounts payable of $336,000, accrued distributor compensation of $1,003,000, deferred revenues of $6,584,000 and accrued expenses and other liabilities of $982,000. Decreases in working capital primarily related to changes in accounts receivable of $111,000, other assets of $395,000, operating lease liabilities of $1,599,000, and other long-term liabilities of $68,000.
Changes in operating assets and liabilities in 2019 were attributable to decreases in working capital related to changes in accounts receivable of $5,389,000, inventory of $958,000, prepaid expenses and other current assets of $1,411,000, accrued distributor compensation of $37,000, deferred revenues of $307,000, and income taxes receivable of $233,000. Increases in working capital related to changes in accounts payable of $454,000 and accrued expenses and other liabilities of $2,155,000.
Cashusedin investingactivities
. Net cash used in investing activities for the nine months ended September 30,Net cash used in investing activities in 2019 included $2,310,000 in payments made towards the construction of a large mill in Nicaragua, $1,000,000 in cash paid related to the acquisition of Khrysos, offset by cash acquired of $75,000 and $288,000 for the purchase of land for Khrysos. The remaining expenditures consisted of primarily leasehold improvements and other purchases of property and equipment.
Cashprovided by financingactivities
. Net cash provided by financing activities for the nine months ended September 30, 2020 was $2,883,000 as compared to $18,206,000 for the nine months ended September 30,Net cash provided by financing activities consisted of net proceeds of $15,319,000 from issuance of equity and convertible notes, $5,214,000 from the exercise of stock options and warrants and $102,000 from at the market issuance of shares, offset by $275,000 from net payments on line of credit, $108,000 in payments to reduce notes payable, $568,000 in payments related to convertible notes payable, $333,000 in payments related to contingent acquisition debt, $1,099,000 in payments related to capital lease financing obligations and $46,000 in dividends paid.
Future 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 losses during the nine months ended September 30, 2020 of $15,403,000 and $20,423,000 for the nine months ended September 30, 2019. Net cash used in operating activities was $2,075,000 for the nine months ended September 30, 2020 compared to $7,762,000 for the nine months ended September 30, 2019 compared to net2019. Our cash used in operating activities of $4,732,000 for the nine months endedand cash equivalents totaled $1,238,000 at September 30, 2018.2020. 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 will need to further reduce our expenses from current levels. As discussed in Other Relationship Transactions in Note 1 to the condensed consolidated financial statements, we could experience further restraint on liquidity if, in the unlikely event,
Historically, we have financed our operations did not generate sufficient cash to meet our operating needs and we supplemented theprimarily through revenue generated from operationssales 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 spent, and expect to continue to spend, a substantial amount of funds in connection with significant cash proceeds from several debt andimplementing our business strategy. Additionally, we may seek to access the public or private equity offerings. We raisedmarkets when conditions are favorable due to 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 equity, convertible notes offerings and the usesale of securities may be limited by the rules of the ATM Agreement.
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 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, 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 Quarterly 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.hereof. We are also considering additional alternatives, including, but not limited to 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, 2019.
Contractual Obligations
At September 30, 2020, our total purchase obligations are related to our commercial coffee segment and were approximately $1,507,000 compared to $4,219,000 at December 31, 2019. The decrease was primarily due to the end of contracts agreements.
There were no material changes from thosethe other contractual obligations disclosed in our most recent annual report.
Critical Accounting Policies
The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, 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 for the year ended December 31, 2018.
Recent Accounting Pronouncements
Recent accounting pronouncements are disclosed in Note 1 to the accompanying condensed consolidated financial statements of this Quarterly Report on Form 10-Q/A.
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.
Update on Prior Period Disclosure Controls and Procedures
Commercial Coffee Segment
In April 2019, we filed our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of September 30, 2019, the end of the quarterly fiscal period covered by this quarterly report. Based on2018 Form 10-K disclosing that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that there was a material weakness in the Company’s internal control over financial reporting that was identified during the fourth quarter of the year ended December 31, 2018, and the first, second and third quarters of 2019we identified a material weakness (“2018 Material Weakness”) for theour 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 transactionstransactions. 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 withinin our commercial coffee segment.
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 there waswe have a material weakness in our control procedures related to acquisitions.
These material weaknesses resulted in restatements to our financial statements for the Company’squarters 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 that was identified during the first quarter of 2019required under Sarbanes-Oxley Act Section 404(b) for the commercial hemp segment relatingyear ending December 31, 2020.
(a)Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining 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 as of September 30, 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 as of 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, has 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 having properexpect that our disclosure controls and procedures and our internal control processes will prevent all error and controls in place in regard to accounting for significant transactions related to acquisitions.
Based on the evaluation of our disclosure controls and procedures as of the end of the period covered by this report and upon that discovery, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report although we have made improvements, our disclosure controls and procedures were still not effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and 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 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 restated our Unaudited Condensed Consolidated Balance Sheetnot maintained an effective control environment to provide reasonable assurance relating to operations, reporting, and Unaudited Condensed Consolidated Statement of Cash Flows as of September 30, 2019. In addition, we have restated our Unaudited Condensed Consolidated Statements of Operations and Unaudited Condensed Consolidated Statements of Stockholders’ Equitycompliance for the three and nine months ended September 30, 2019 and we have restated our Unaudited Condensed Consolidated Statementpurpose of Comprehensive Loss formeeting the nine months ended September 30, 2019.
Deficiencies in the Controls over Monitoring. We have not maintained effective controls we concluded our acquisitionover monitoring to provide reasonable assurance relating to operations, reporting, and compliance for the purpose of Khrysos Global, Inc.,meeting the commercial hemp segment,requirements set forth in the 2013 COSO Framework. More specifically, the valuation of certain fixed assets and the valuation of stock issued as consideration related to the acquisition was not appropriately fair valued. As a result, 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 adequate review process oreffective 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 over acquisitions resultingthroughout our Company, including our subsidiaries, which can lead to inconsistent accounting treatment of transactions. The lack of sufficient personnel has also resulted in a misstatementfailure 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 statements. This representedreporting. 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 weaknesserrors.
Deficiencies related to information technology control design and operating effectiveness weaknesses. The Company did not have formalized information technology policies and procedures which 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.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of September 30, 2020, the end of the quarterly fiscal period covered by this quarterly report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that there were seven general categories of deficiencies in our internal control over financial reporting. Relatedreporting which individually and in aggregate lead to material weaknesses. Although no material misstatements or omissions in our financial statements or disclosures were identified, the quartermaterial weaknesses in internal controls could have resulted in material misstatements or omissions to our financial statements or disclosures.
The material weaknesses did not result in any adjustments in the current period ended March 31, 2019 we have restated our Unaudited Condensed Consolidated Balance Sheet, the Unaudited Condensed Consolidated Statement of Stockholders’ Equity, and the Unaudited Condensed Consolidated Statement of Cash Flows as of September 30, 2019.
(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 nine months ended September 30, 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 September 30, 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 on 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 management. 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 these actions will remediate material weaknesses. The material weaknesses will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
ITEM 1. LEGAL PROCEEDINGS
We are from time to time, the subject of claims and suits arising out of matters related to our business. We are a 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. It is not possible to predict the final resolution of the current litigation to which we are party to, and the impact of certain of these matters on our business, results of operations, and financial condition 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. RISK 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 for the year ended December 31, 2019, as filed with the SEC on April 15, 2019,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 as filed withfor the SEC on April 15,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 for the year ended December 31, 2019.
We cannot assure you that our 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 Nasdaq Capital Market and notified us that trading in the Company securities would be suspended on November 20, 2020. The Nasdaq Listing Council did not call the matter for review and the staff determination to delist the Company which became final on January 4, 2021.
As a result of the delisting from the Nasdaq Capital Market, our common stock trades on the OTC Pink Market operated by OTC Markets. The delisting has depressed our stock price, substantially limited liquidity of our common stock and materially adversely affect our ability to raise capital on acceptable terms. Delisting from the Nasdaq 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 filedmany investors require current financial information in order to make an investment decision. Although there can be no assurance that once our SEC filings are current that we be able to raise capital, we anticipate having a difficult time raising capital until such time as we are current with theour SEC on April 15, 2019.
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 as of September 30, 20192020 have been prepared and presented on a basis assuming we will continue as a going concern. We haveThe Company has sustained significant net losses during the nine months ended September 30, 20192020 of $20,423,000 compared to $11,332,000 in the nine months ended September 30, 2018.$15,403,000. Net cash used in operating activities was $7,762,000$2,075,000 for the nine months ended September 30, 2019 compared to net cash used in operating activities of $4,732,000 for the nine months ended September 30, 2018. As discussed in Other Relationship Transactions in Note 1 to the condensed consolidated financial statements, we could experience further restraint on liquidity if we do not collect the accounts receivable balance with H&H Export in full, which we believe is not likely based on current negotiations. We do2020. The Company does not currently believe that its existing cash resources are sufficient to meet ourthe Company’s anticipated needs over the next twelve months from the date hereof. Based on our current cash levels as of September 30, 2019,2020, 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 management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. Due to errors in our financial statements for the
At the filing date of this Quarterly Report on Form 10-Q, we had outstanding an aggregate of $11,090,000 in principal amount of outstanding secured notes payable, which include $3,090,000 in principal amount of secured debt related to the balance of our Company2019 PIPE Notes from our 2019 private placement. The 2019 PIPE Notes are secured by all of the equity we hold in KII. These PIPE Notes originally were due between February 2021 and other factors as our BoardJuly 2021. We amended the 2019 PIPE Notes with certain note holders of Directors may deem relevant from timean aggregate of $2,440,000 in the principal amount to time. We may be requiredextend due dates to fund distributions from working capital, proceedsbetween February and March 2022. At the filing date of this offering or a saleQuarterly Report on Form 10-Q, the Company was in default of assetsthe terms of settlement set forth in the amendments. (See Note 13 to the extent distributions exceed earnings or cash flows from operations. Funding distributions from working capital would restrictcondensed consolidated financial statements.)
In March 2019, we issued an aggregate $2,000,000 in principal amount of secured debt which related to two-year secured promissory notes (“2019 Promissory Notes”) which are secured by all of the equity we hold in KII. In February 2021, we entered into an amendment with the holders of these 2019 Promissory Notes, extending the maturity date to May 2022 and increasing the interest rate to 16% paid monthly until the notes are paid in full. As an inducement for the amendment to extend the maturity date, we issued each note holder 200,000 shares of our operations. If we are required to sell assets to fund distributions, such asset sales may occur at a time or in a manner that is not consistent with our disposition strategy. If we borrow to fund distributions, our leverage ratios and future interest costs would increase, thereby reducing our earnings and cash available for distribution from what they otherwise would have been. We may not be able to pay distributions in the future.common stock. In addition, some of our distributions may be considered a return of capital for income tax purposes. If we decide to make distributions in excess of our current and accumulated earnings and profits, such distributions would generally be considered a return of capital for federal income tax purposes to the extentissued one of the holder’s adjusted tax basis in its shares. A return of capital is not taxable, but it has the effect of reducing the holder’s adjusted tax basis in its investment. If distributions exceed the adjusted tax basis ofnote holders a holder’s shares, they will be treated as gain from the sale or exchange of such stock.
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 its rights under the pledge 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 increaseagreed upon payment schedule of principal and interest payments and the issuance of 1,000,000 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 market priceaccordance 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 will not necessarily resultheld by them to secure the credit note under a security agreement with Mr. Grover. The credit note matured in an increase inDecember 2020. At the market pricefiling 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 Series D Preferred Stock. The market valueoutstanding debt, including the terms of the Series D Preferred Stock may depend more on dividend and interest rates for other preferred stock, commercial paper and other investment alternatives and our actual and perceived ability to pay dividends on, and in the event of dissolution satisfy the liquidation preference with respect to, the Series D Preferred Stock.
All sales of our common stock that were not registered under the Securities Act of 1933, as amended (the “Securities Act”) have been previously disclosed in our filings with the Securities and Exchange Commission except for the sales of unregistered securities set forth below.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
In December 2018, CLR entered into a credit agreement with Ignition Capital, LLC (“Ignition Capital”),Carl Grover pursuant to which Ignition Capital agreedCLR borrowed $5,000,000 from Mr. Grover and in exchange issued to provide investor relations services.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 September 30, 2020 and December 31, 2019. In accordanceaddition, 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 September 30, 2020 and December 31, 2019, the First Amendment, for services performed, we issued 55,000 shares of restricted common stock. We issued the securities in reliance on the exemption from registration provided for under Section 4(a)(2)outstanding principal balance of the Securities Act.
The placement agent Corinthian Partners, LLC received 1,000 shares of common stock for the fifth tranche. Each note matures 24 months after issuance, bearsCredit Note accrues interest at a rate of six percent (6%)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. WeIn 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 securities in relianceCredit 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 exemption from registration provided for under Section 4(a)(2)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 Securities Act. We reliedCredit Note. At the filing date of this Quarterly Report on this exemption from registration for private placements basedForm 10-Q, the Company was in part on the representations made the investors with respect to their status as accredited investors, as such term is defined in Rule 501(a)default of the Securities Act.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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, File No. 000-54900, filed with the Securities and Exchange Commission on June 7, 2017) | ||
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 21, 2018) | ||
Certificate of Amendment to the Certificate of Incorporation (Incorporated by reference to the Company’s Form 8-K, File No. 001-38116, filed with the Securities and Exchange Commission on October 4, 2018) | ||
Certificate of Designations, Rights and Preferences of the 9.75% Series D Cumulative Redeemable Perpetual Preferred Stock | ||
Certificate of Increase to the Certificate of Designations, Rights and Preferences of the 9.75%Series D Cumulative Redeemable Perpetual Preferred Stock (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, File No. 000-54900, filed with the | ||
31.1 | 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. * | |
31.2 | 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. * | |
32.1 | 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. * | |
32.2 | 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 |
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 | |
William Thompson | ||
Chief Financial Officer | ||
(Principal Financial Officer) | ||