Notes to Consolidated Financial Statements
December 31, 2019 and 2018
Note 1. Description of Business and Basis of
Presentation
Nature of Business
Youngevity International, Inc. (the “Company”), founded
in 1996, operates 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 and (iii)
the commercial hemp segment where the Company 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. During the year ended December 31, 2018 the Company
operated in two business segments, its direct selling segment and
its commercial coffee segment. During the first quarter of
2019, through the acquisition
of the assets of Khrysos Global, Inc. the Company added the
commercial hemp as a third business segment to its operations as
further discussed below.
Information on the operations of the Company’s three segments
is as follows:
●
Direct selling segment is operated through 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 operates in
Indonesia, Malaysia, and Japan through its sales force of
independent distributors. .
●
Commercial coffee segment is operated through the Company’s
subsidiaries CLR Roasters LLC (“CLR”) and its
wholly-owned subsidiary, Siles Plantation Family Group S.A.
(“Siles”).
●
Commercial hemp segment is operated through the Company’s
subsidiaries Khrysos Industries, Inc., a Delaware corporation
(“KII”), which acquired the assets of Khrysos Global
Inc., a Florida corporation (“Khrysos Global”), in
February 2019, and the wholly-owned subsidiaries, Khrysos Global,
INXL Laboratories, Inc., a Florida corporation (“INXL”)
and INX Holdings, Inc., a Florida corporation
(“INXH”).
In the following text, the terms “we,”
“our,” and “us” may refer, as the context
requires, to the Company or collectively to the Company and its
subsidiaries.
Non-reliance of Previously Issued Financial Statements
On October 16, 2020 the Company filed a notice of non-reliance on
previously issued financial statements with the Securities and
Exchange Commission (“SEC”), reporting that the
Company’s Audit Committee determined that the unaudited
condensed consolidated financial statements for the quarters ended
March 31, 2019, June 30, 2019 and September 30, 2019 contained in
the Company’s quarterly reports on Form 10-Q previously filed
with the SEC on May 20, 2019, August
14, 2019 and November 18, 2019 should no longer be relied upon.
Similarly, related press releases, earnings releases, and investor
communications describing the Company’s unaudited condensed
consolidated financial statements for those periods should no
longer be relied upon. As a result, the Company intends to file a
restatement related to these periods as soon as practicable. The
intended restatements are related to the Company’s commercial
coffee segment and the commercial hemp segment, further details are
summarized below:
Commercial Coffee Segment
During the Company’s 2019 annual audit, the Company reviewed
revenues related to CLR, specifically the 2019 green coffee sales
program, for sales made by the Company to its joint venture
partner, Hernandez, Hernandez, Export Y Compania Limitada
(“H&H’) and for sales recorded to major independent
customers. These sales were originally recorded at gross (revenue
recorded without reduction for cost to purchase the
inventory).
As part of the review, the Company assessed whether the 2019 green
coffee sales to H&H depicted the transfer of promised goods or
services to H&H in an amount that reflects the consideration to
which the Company expects to be entitled in exchange for those
goods or services. For sales made to larger independent customers,
the Company assessed whether revenue was recognizable.
For both reviews, the following five steps were applied to review
if the core revenue recognition principles were meet:
●
Step 1: Identify the contract with the customer
●
Step 2: Identify the performance obligations in the
contract
●
Step 3: Determine the transaction price
●
Step 4: Allocate the transaction price to the performance
obligations in the contract
●
Step 5: Recognize revenue when the company satisfies a performance
obligation
During this review process the Company focused on identifying the
performance obligations in the contracts with H&H. The
Company’s review indicated that per the underlying terms and
conditions of the contracts entered into with H&H, (the
provider of the “wet” green coffee and the buyer of the
processed coffee), that CLR is assigned the green coffee beans as
coffee is delivered to its mill processing facility. Assignment of
the coffee is defined as taking of physical possession of the green
coffee for the purpose of processing the green coffee. Under the
assignment CLR is responsible for insuring all reasonable and
necessary actions to ensure the coffee beans are safeguarded during
processing at the Company’s coffee mill. CLR does not take
ownership and does not incur financial risk associated with the
coffee as it is delivered to its mill. Based on the above
assessment, management has concluded that CLR does not control the
green coffee before it is provided to H&H, at the point of sale
to H&H.
Management has determined that when CLR provides the processed
green coffee to H&H, the goods or services provided to H&H
is the performance obligation to provide milling services for the
green coffee. As such, the Company is the agent for the milling
services.
Management has also determined that since the Company does not
control the green coffee beans at the point of delivery to the
mill, and that legal title to the green coffee beans is transferred
momentarily, before the green coffee beans are sold back to
H&H, that the Company is therefore an agent in sales
transactions of green coffee beans to H&H.
Therefore, management has determined that for green coffee sales
made by the Company to its joint venture partner, H&H Export,
the Company should have recorded these sales at net of costs to
purchase inventory, which reflects the value of the performance
obligation to provide milling services. For the year ended December
31, 2019, the Company is reporting its revenue for coffee when sold
to H&H Export at net.
With regard to sales made to major independent customers, the
Company focused on if recognition of revenue thresholds were met
and if the company had satisfied its performance obligation and
could reasonably expect payment for fulling these performance
obligations. The Company determined that for certain sales to
larger customers, these thresholds were not met, and therefore
revenue should not have been recognized.
The Company intends to restate its quarterly reports on Form 10-Q
for the three months ended March 31, 2019, three and six months
ended June 30, 2019, and for the three and nine months ended
September 30, 2019 related to this change in revenue recognition.
(See Note 3 under “Other Related Party
Transactions” for further
discussion related to H&H Export.)
Commercial Hemp Segment
In conjunction with the Company’s 2019 annual audit the
Company concluded that certain fixed assets acquired in the
acquisition of KII and the share price valuation for the common
stock issued as consideration were not fairly valued as of the
closing date February 12, 2019 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. The Company intends to restate its quarterly reports
on Form 10-Q for the three months ended March 31, 2019, three and
six months ended June 30, 2019, and for the three and nine months
ended September 30, 2019. (See Note 2 under “Khrysos Global, Inc.” for further discussion regarding this
acquisition.)
Summary of Significant Accounting Policies
A summary of the Company’s significant accounting policies
consistently applied in the preparation of the accompanying
consolidated financial statements follows:
Basis of Presentation
The Company consolidates all majority owned subsidiaries,
investments in entities in which the Company has controlling
influence and variable interest entities where it has been
determined to be the primary beneficiary. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Variable Interest Entities
The Company consolidates all variable interest entities in which it
holds a variable interest and is the primary beneficiary of the
entity. Generally, a variable interest entity (“VIE”)
is a legal entity with one or more of the following
characteristics: (a) the total at risk equity investment is not
sufficient to permit the entity to finance its activities without
additional subordinated financial support from other parties; (b)
as a group the holders of the equity investment at risk lack any
one of the following characteristics: (i) the power, through voting
or similar rights, to direct the activities of the entity that most
significantly impact its economic performance, (ii) the obligation
to absorb the expected losses of the entity, or (iii) the right to
receive the expected residual returns of the entity; or (c) some
equity investors have voting rights that are not proportional to
their economic interests, and substantially all of the entity's
activities either involve, or are conducted on behalf of, an
investor that has disproportionately few voting rights. The primary
beneficiary of a VIE is required to consolidate the VIE and is the
entity that has (a) the power to direct the activities of the VIE
that most significantly impact the VIE's economic performance, and
(b) the obligation to absorb losses of the VIE or the right to
receive benefits from the VIE that could potentially be significant
to the VIE.
In determining whether it is the primary beneficiary of a VIE, the
Company considers qualitative and quantitative factors, including,
but not limited to: which activities most significantly impact the
VIE's economic performance and which party has the power to direct
such activities; the amount and characteristics of Company's
interests and other involvements in the VIE; the obligation or
likelihood for the Company or other investors to provide financial
support to the VIE; and the similarity with and significance to the
business activities of Company and the other investors. Significant
judgments related to these determinations include estimates about
the current and future fair values and performance of these VIEs
and general market conditions.
Related Party Transaction Policy and Procedures
Pursuant to the Company’s Related Party Transaction and
Procedures, the Company’s executive officers, directors, and
principal stockholders, including their immediate family members
and affiliates, are prohibited from entering into a related party
transaction with the Company without the prior consent of its audit
committee or its independent directors. Any request for the Company
to enter into a transaction with an executive officer, director,
principal stockholder, or any of such persons’ immediate
family members or affiliates, must first be presented to the
Company’s audit committee for review, consideration and
approval. The request shall include a description of the
transaction and the aggregate dollar amount. In determining whether
to approve, ratify, disapprove or reject a related party
transaction, the audit committee shall take into account,
among other factors it deems appropriate, whether the related party
transaction is entered into on terms no less favorable to the
Company than terms generally available to an unaffiliated
third-party under the same or similar circumstances; the results of
an appraisal, if any; whether there was a bidding process and the
results thereof; review of the valuation methodology used and
alternative approaches to valuation of the transaction; and the
extent of the related person’s interest in the transaction.
The Company’s audit committee
approves only those agreements that, in light of known
circumstances, are in, or are not inconsistent with, its best
interests, as its audit committee determines in the good faith
exercise of its discretion.
Segment Information
The Company has three 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, specializing in gourmet coffee. The
commercial hemp segment 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
determination that the Company has three reportable segments is
based upon the guidance set forth in Accounting Standards
Codification (“ASC”) Topic 280, “Segment
Reporting.”
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 and 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 year ended December 31, 2019 of approximately
$51,998,000 and $20,070,000 for the year ended December 31, 2018.
Net cash used in operating activities was approximately $14,337,000
and $12,352,000 for the years ended December 31, 2019 and 2018,
respectively. The Company anticipates similar continued results for
the year 2020.
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 Annual Report on Form 10-K. 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 cast substantial doubt upon the Company’s
ability to continue as a going concern.
The Company has and continues to take the following actions to
alleviate the cash used in operations.
The Company reported total revenue of $147,442,000 a decrease of
approximately 9.2% for the twelve-months ending December 31, 2019
when 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.
With regard to the possible effect the COVID-19 coronavirus will
have on the Company, to date, the outbreak of the COVID-19
coronavirus has 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 has taken actions to mitigate the impact of
these stay at home orders have on warehouse and shipping operations
but cannot assert that continuing stay at home orders or further
restrictive orders will not have an impact on these operations. The
Company has 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
moving forward. Additionally, certain of the Company’s
third-party suppliers may have been negatively impacted by stay at
home orders. Accordingly, the Company is considering alternative
product sourcing in the event that product supply becomes
problematic. Due to these current and possible incremental impacts
related to the COVID-19 virus, 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 if
COVID-19 coronavirus or another such virus continues to expand
globally and throughout the U.S.
In addition, the outbreak of the COVID-19 coronavirus could disrupt
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 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 our affairs.
In January 2020, the Company issued an additional 11,375 shares of
Series D preferred stock upon the partial exercise by the
underwriters in the Company’s public offering of Series D
preferred stock of the overallotment option granted to such
underwriters. The overallotment shares were sold at a price to the
public of $22.75 per share, generating additional gross proceeds of
approximately $259,000. (See Note 10)
In March 2020, the Company closed the initial
tranche of its March 2020 private placement debt offering of up to
an aggregate of $5,000,000 in the principal amount together with up
to 250,000 shares of common stock. The Company entered into a
securities purchase agreement with Daniel J. Mangless,
and issued to Mr. Mangless a note in
the principal amount of $1,000,000 due December 31, 2020 and
bearing interest at 18.00% per annum. The Company received proceeds
of $1,000,000. Mr. Mangless received 50,000 shares of the
Company’s common stock in connection with his
investment.
The Company continues to seek and obtain additional 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.
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.
Accounts Receivable
Accounts receivable are recorded net of an allowance for doubtful
accounts. Accounts receivable are considered delinquent when the
due date on the invoice has passed. The Company records its
allowance for doubtful accounts based upon its assessment of
various factors including past experience, the age of the accounts
receivable balances, the credit quality of its customers, current
economic conditions and other factors that may affect
customers’ ability to pay. Accounts receivable are written
off against the allowance for doubtful accounts when all collection
efforts by the Company have been unsuccessful.
Inventory and Cost of Revenues
The Company purchases its inventory from multiple third-party
suppliers at competitive prices. Inventory is stated at the lower
of cost or net realizable value, net of a valuation allowance. Cost
is determined using the first-in, first-out method. 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 with a definite life
are taken into consideration.
Cost of revenues includes the cost of inventory, shipping and
handling costs, royalties associated with certain products,
transaction banking costs, warehouse labor costs and depreciation
on certain assets.
Deferred Issuance Costs
Deferred issuance costs include stock and warrant issuance costs
and debt discounts of approximately $1,127,000 and $1,717,000, at
December 31, 2019 and 2018, respectively, which are associated
with the Company’s private placement transactions and its
credit agreement with Carl Grover. Issuance costs are included net
of convertible notes payable and notes payable on the Company's
consolidated balance sheets. Deferred issuance costs are
amortized over the life of the notes to interest expense. (See
Notes 6 and 7)
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 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 consolidated balance sheets. Once the harvest
is complete, the harvest costs are then recognized as the inventory
value. Deferred costs associated with the harvest at December 31,
2019 and 2018 were approximately $350,000 and $400,000,
respectively, and are included in prepaid expenses and other
current assets on the Company’s consolidated balance
sheets.
Property and Equipment
Property and equipment are recorded at historical cost.
Depreciation is provided in amounts sufficient to relate the cost
of depreciable assets to operations over the estimated useful lives
of the related assets. The straight-line method of depreciation and
amortization is followed for financial statement purposes.
Leasehold improvements are amortized over the shorter of the life
of the respective lease or the useful life of the improvements.
Estimated service lives range from 3 to 39 years. When such assets
are sold or otherwise disposed of, the cost and accumulated
depreciation are removed from the accounts, and any resulting gain
or loss is reflected in operations in the period of disposal. The
cost of normal maintenance and repairs is charged to expense as
incurred. Significant expenditures that increase the useful life of
an asset are capitalized and depreciated over the estimated useful
life of the asset.
Coffee trees, land improvements and equipment specifically related
to the plantations are stated at cost, net of accumulated
depreciation. Depreciation of coffee trees and other equipment
is reported on a straight-line basis over the estimated useful
lives of the assets (25 years for coffee trees, between 5 and 15
years for equipment and land improvements).
Property and equipment are considered long-lived assets and are
evaluated for impairment whenever events or changes in
circumstances indicate their net book value may not be recoverable.
Management has determined that no impairment of its property and
equipment occurred at December 31, 2019 or 2018.
Operating and Financing Leases
The Company leases certain office space, warehouses, distribution
centers, manufacturing centers, and equipment. A contract is or
contains a lease if the contract conveys the right to control the
use of identified property, plant, or equipment (an identified
asset) for a period of time in exchange for
consideration.
In general, the Company’s leases include one or more options
to renew, with renewal terms that generally vary from one to ten
years. The exercise of lease renewal options is generally at the
Company’s sole discretion. The depreciable life of assets and
leasehold improvements are limited by the expected lease term,
unless there is a transfer of title or purchase option reasonably
certain of exercise.
The Company’s lease agreements do not contain any material
residual value guarantees or material restrictive covenants. Leases
with an initial term of twelve months or less are not
recorded on the Company’s consolidated balance
sheets, and the Company does not separate non-lease components from
lease components. Lease cost is recognized on a straight-line basis
over the lease term.
Finance lease right-of-use assets are amortized over their
estimated useful lives, as the Company does believe that it is
reasonably certain that options which transfer ownership will be
exercised. In general, for the majority of the Company’s
material leases, the renewal options are not included in the
calculation of its right-of-use assets and lease liabilities, as
the Company does not believe that it is reasonably certain that
these renewal options will be exercised. Periodically, the Company
assesses its leases to determine whether it is reasonably certain
that these options and any renewal options could be reasonably
expected to be exercised.
The majority of the Company’s leases are for real estate and
equipment. In general, the individual lease contracts do not
provide information about the rate implicit in the lease. Because
the Company is not able to determine the rate implicit in its
leases, it instead generally uses its incremental borrowing rate to
determine the present value of lease liabilities. In determining
its incremental borrowing rate, the Company reviewed the terms of
its leases, its senior secured credit facility, swap rates, and
other factors.
Business Combinations
The Company accounts for business combinations under the
acquisition method and allocates the total purchase price for
acquired businesses to the tangible and identified intangible
assets acquired and liabilities assumed, based on their estimated
fair values. When a business combination includes the exchange of
the Company’s common stock, the value of the common stock is
determined using the closing market price at the date such shares
were tendered to the selling parties. The fair values assigned to
tangible and identified intangible assets acquired and liabilities
assumed are based on management or third-party estimates and
assumptions that utilize established valuation techniques
appropriate for the Company’s industry and each acquired
business. 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 at the acquisition date) of
total net tangible and identified intangible assets acquired. A
liability for contingent consideration, if applicable, is recorded
at fair value at the acquisition date. In determining the fair
value of such contingent consideration, management estimates the
amount to be paid based on probable outcomes and expectations on
financial performance of the related acquired business. The fair
value of contingent consideration is reassessed quarterly, with any
change in the estimated value charged to operations in the period
of the change. Increases or decreases in the fair value of the
contingent consideration obligations can result from changes in
actual or estimated revenue streams, discount periods, discount
rates and probabilities that contingencies will be
met.
Intangible Assets
Intangible assets are comprised of distributor organizations,
trademarks and tradenames, customer relationships, internally
developed software and non-compete agreements. The
Company's acquired intangible assets, which are subject to
amortization over their estimated useful lives, are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an intangible asset may not be
recoverable. An impairment loss is recognized when the carrying
amount of an intangible asset exceeds its fair value. The Company
evaluates long-lived assets for impairment whenever events or
changes in circumstances indicate their net book value may not be
recoverable. The Company first considers whether indicators of
impairment are present. If indicators are present, the Company will
perform a recoverability test by comparing the sum of the estimated
undiscounted future cash flows attributable to the asset (group) in
question to its carrying amount (as a reminder, entities cannot
record an impairment for a held and used asset unless the asset
first fails this recoverability test). If the undiscounted cash flows used in the test
for recoverability are less than the long-lived assets
(group’s) carrying amount, the Company will then determine
the fair value of the long- lived asset (group) and recognize an
impairment loss, if any, if the carrying amount of the long-lived
asset (group) exceeds its fair value. For the year ended December
31, 2018, the Company recorded a loss on impairment of intangible
assets related to the Company’s acquisitions of
BeautiControl, Inc. and Future Global Vision, Inc. and recorded a
loss on impairment of intangible assets of approximately $2,550,000
and $625,000, respectively. While these charges had no impact on
the Company’s business operations, cash balances or operating
cash flows, they resulted in significant losses during the
reporting periods. For the year ended December 31, 2019, the
Company determined that there were indicators of impairment present
for long-lived assets related to the Company’s commercial
hemp segment, as result a test for recoverability concluded that
the carrying amount of the long-lived asset (group) did not exceed
its fair value. As a result, the Company recorded a loss on
impairment of intangible assets related to the acquisition of
Khrysos Global of approximately $8,461,000. (See Note
2)
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 at 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, “Intangibles —
Goodwill and Other”, goodwill and other intangible assets with
indefinite lives are not amortized but are tested for impairment on
an annual basis or whenever events or changes in circumstances
indicate that the carrying amount of these assets may not be
recoverable. The Company conducts annual reviews for goodwill and
indefinite-lived intangible assets in the fourth quarter or
whenever events or changes in circumstances indicate that the
carrying amounts of the assets may not be fully
recoverable.
The Company first assesses qualitative factors to determine whether
it is more likely than not (a likelihood of more than 50%) that
goodwill is impaired. The testing is generally performed at the
“reporting unit” level. A reporting unit is the
operating segment, or a business one level below that operating
segment (referred to as a component) if discrete financial
information is prepared and regularly reviewed by management at the
component level. The Company has determined that its reporting
units for goodwill impairment testing are the Company’s
reportable segments. After considering the totality of events and
circumstances, the Company determines whether it is more likely
than not that goodwill is not impaired. If impairment is
indicated, the amount by which the carrying amount exceeds the
reporting unit’s fair value is recognized as a goodwill
impairment, however, the loss recognized should not exceed the
total amount of goodwill allocated to that reporting
unit.
The Company first assess qualitative factors to determine
whether it is necessary to perform the quantitative goodwill
impairment test. If the qualitative assessment determines it is
necessary, the Company the performs a quantitative impairment test
shall be used to identify goodwill impairment and measure the
amount of a goodwill impairment loss to be recognized (if any).
The Company determined no impairment
of its goodwill occurred for the year ended December 31,
2018. At the end of 2019 the Company’s qualitative
testing determined that a quantitative test was not required for
its direct selling segment and its commercial coffee segment. The
Company’s quantitative testing for its commercial hemp
segment led the Company to recognize an impairment loss of
$6,831,000.
Derivative Financial Instruments
The Company reviews the terms of convertible debt and equity
instruments it issues to determine whether there are derivative
instruments, including an embedded conversion option that is
required to be bifurcated and accounted for separately as a
derivative financial instrument. In circumstances where a host
instrument contains more than one embedded derivative instrument,
including a conversion option, that is required to be bifurcated,
the bifurcated derivative instruments are accounted for as a
single, compound derivative instrument. In connection with the
Company’s private placements, the Company may issue warrants
to purchase shares of its common stock and record embedded
conversion features which are accounted for as derivative
liabilities, rather than as equity.
The Company recognizes and measures the warrants and the
embedded conversion features in accordance with ASC Topic
815, Derivatives and
Hedging. The accounting
guidance sets forth a two-step model to be applied in determining
whether a financial instrument is indexed to an entity’s own
stock, which would qualify such financial instruments for a scope
exception. This scope exception specifies that a contract that
would otherwise meet 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.
Derivative liabilities are recorded at their estimated fair value
at the issuance date and are revalued at each subsequent reporting
date. The Company will continue to revalue the derivative liability
on each subsequent balance sheet date until the securities to which
the derivative liabilities relate are exercised or expire. (See
Note 8)
Various factors are considered in the pricing models the Company
uses to value the derivative liabilities, including its current
stock price, the remaining life, the volatility of its stock price,
and the risk-free interest rate. Future changes in these factors
may have a significant impact on the computed fair value of the
liability. As such, the Company expects future changes in the fair
values to continue and may vary significantly from period to
period. The warrant and embedded liability and revaluations
have not had a cash impact on working capital, liquidity or
business operations.
The discount from the face value of the convertible acquisition
debt, together with the stated interest on the instrument, is
amortized over the life of the instrument through periodic charges
to interest expense, using the effective interest
method.
The Company does not use derivative instruments to hedge exposures
to cash flow, market or foreign currency.
Fair Value Measurements
Fair value measurements are performed in accordance with the
guidance provided by ASC Topic 820, “Fair Value Measurements
and Disclosures.” ASC
Topic 820 defines fair value as the price that would be received
from selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
Where available, fair value is based on observable market prices or
parameters or derived from such prices or parameters. Where
observable prices or parameters are not available, valuation models
are applied.
ASC Topic 820 establishes a fair value hierarchy that requires an
entity to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. Assets and
liabilities recorded at fair value in the financial statements are
categorized based upon the hierarchy of levels of judgment
associated with the inputs used to measure their fair value.
Hierarchical levels directly related to the amount of subjectivity
associated with the inputs to fair valuation of these assets and
liabilities, are as follows:
Level 1 – Quoted prices in active markets for identical
assets or liabilities that an entity has the ability to
access.
Level 2 – Observable inputs other than quoted prices included
in Level 1, such as quoted prices for similar assets and
liabilities in active markets; quoted prices for identical or
similar assets and liabilities in markets that are not active; or
other inputs that are observable or can be corroborated by
observable market data.
Level 3 – Unobservable inputs that are supportable by little
or no market activity and that are significant to the fair value of
the asset or liability.
The carrying amounts of the Company’s financial instruments,
including cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities, finance lease obligations and
deferred revenue approximate their fair values based on their
short-term nature. The carrying amount of the Company’s
long-term notes payable approximates its fair value based on
interest rates available to the Company for similar debt
instruments and similar remaining maturities.
The fair value of the contingent acquisition debt is evaluated each
reporting period using projected revenues, discount rates, and
projected timing of revenues. Projected contingent payment amounts
are discounted back to the current period using a discount rate.
Projected revenues are based on the Company’s most recent
internal operational budgets and long-range strategic plans.
Increases in projected revenues will result in higher fair value
measurements. Increases in discount rates and the time to payment
will result in lower fair value measurements. Changes in any of
those inputs in isolation may result in a significantly different
fair value measurement.
The estimated fair value of the Company’s contingent
acquisition debt and warrant derivative liabilities is recorded
using significant unobservable measures and other fair value inputs
and is therefore classified as a Level 3 financial
instrument.
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 compensation in the Company’s consolidated
statements of operations. Due to the short-term nature of the
contract with the customers, the Company accrues all distributor
compensation expense in the month earned and pays the compensation
the following month.
The Company also charges fees to become a distributor, and earn a
position in the network genealogy, which are recognized as revenue
in the period received. The Company’s distributors are
required to pay a one-time enrollment fee and receive a welcome kit
specific to that country or region that consists of forms, policy
and procedures, selling aids, access to our distributor website and
a genealogy position with no down line distributors.
The
Company has determined that most contracts will be completed in
less than one year. For those transactions where all performance
obligations will be satisfied within one year or less, the Company
is applying the practical expedient outlined in ASC 606-10-32-18.
This practical expedient allows the Company not to adjust promised
consideration for the effects of a significant financing component
if the Company expects at contract inception the period between
when the Company transfers the promised good or service to a
customer and when the customer pays for that good or service will
be one year or less. For those transactions that are expected to be
completed after one year, the Company has assessed that there are
no significant financing components because any difference between
the promised consideration and the cash selling price of the good
or service is for reasons other than the provision of
financing.
Deferred Revenues and Costs
At December 31, 2019 and 2018, the balance in deferred revenues was
approximately $1,943,000 and $2,312,000, respectively. Deferred
revenue related to the Company’s direct selling segment is
attributable to the Heritage Makers product line and for future
Company convention and distributor events.
Deferred revenues related to Heritage Makers were approximately
$1,795,000 and $2,153,000 at December 31, 2019 and 2018,
respectively. The deferred revenue represents Heritage
Maker’s obligation for points purchased by customers that
have not yet been redeemed for product. Cash received for points
sold is recorded as deferred revenue. Revenue is recognized when
customers redeem the points and the product is
shipped.
Deferred costs relate to Heritage Makers prepaid commissions that
are recognized in expense at the time the related revenue is
recognized. At December 31, 2019 and 2018, the balance in deferred
costs was approximately $254,000 and $364,000, respectively, and
was included in prepaid expenses and other current
assets.
Deferred revenues related to pre-enrollment in upcoming conventions
and distributor events of approximately $148,000 and $159,000
at December 31, 2019 and 2018, respectively, relate primarily to
the Company’s 2020 and 2019 events. The Company does not
recognize revenue until the conventions or distributor events have
occurred.
Product Return Policy
All products, except food products and commercial coffee products
are subject to a full refund within the first 30 days of receipt by
the customer, subject to an advance return authorization procedure.
Returned product must be in unopened resalable condition. At both
December 31, 2019 and 2018, the Company had an allowance related to
product returns of $125,000 which is recorded with the direct
selling segment. Commercial coffee products are returnable only if
defective. Product returns for all three segments as a percentage
of our net sales during 2019 were less than 2% of our annual net
sales.
Shipping and Handling
Shipping and handling costs associated with inbound freight and
freight to customers, including independent distributors, are
included in cost of revenues. Shipping and handling fees charged to
customers are included in sales. Shipping expense was approximately
$8,179,000 and $8,801,000 for the years ended December 31, 2019 and
2018, respectively.
Distributor Compensation
In the direct selling segment, the Company utilizes a network of
independent distributors, each of whom has signed an agreement with
the Company, enabling them to purchase products at wholesale
prices, market products to customers, enroll new distributors for
their down-line and earn compensation on product purchases made by
those down-line distributors and customers.
The payments made under the compensation plans are the only form of
compensation paid to the distributors. Each product has a point
value, which may or may not correlate to the wholesale selling
price of a product. A distributor must qualify each month to
participate in the compensation plan by making a specified amount
of product purchases, achieving specified point levels. Once
qualified, the distributor will receive payments based on a
percentage of the point value of products sold by the
distributor’s downline. The payment percentage varies
depending on the qualification level of the distributor and the
number of levels of down-line distributors. There are also
additional incentives paid upon achieving predefined activity and
or down-line point value levels. There can be multiple levels of
independent distributors earning incentives from the sales efforts
of a single distributor. Due to the multi-layer independent sales
approach, distributor incentives are a significant component of the
Company’s cost structure. The Company accrues all distributor
compensation expense in the month earned and pays the compensation
the following month.
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. Potentially dilutive securities for
the years ended December 31, 2019 and 2018 were 11,916,270 and
9,128,489, respectively, detailed as follows:
|
|
|
|
|
|
|
|
Warrants
|
6,238,182
|
5,876,980
|
|
Preferred
stock conversions
|
275,931
|
274,990
|
|
Principal
conversions on convertible notes
|
312,571
|
107,140
|
|
Stock
options
|
4,637,642
|
2,394,379
|
|
Restricted
stock units
|
451,944
|
475,000
|
|
Total
|
11,916,270
|
9,128,489
|
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 year ended
December 31, 2019, the Company recorded a valuation gain on the
fair value of the warrant derivative liability net of tax of
approximately $1,543,000 which had a dilutive impact on the loss
per share.
|
|
|
|
|
|
|
|
Loss per Share - Basic
|
|
|
|
Numerator
for basic loss per share
|
$(52,668,000)
|
$(23,497,000)
|
|
Denominator
for basic loss per share
|
29,264,132
|
21,589,226
|
|
Loss
per common share – basic
|
$(1.80)
|
$(1.09)
|
|
|
|
|
|
Loss per Share - Diluted
|
|
|
|
Numerator
for basic loss per share
|
$(52,668,000)
|
$(23,497,000)
|
|
Adjust:
Fair value of dilutive warrants outstanding
|
(1,543,000)
|
–
|
|
Numerator
for diluted loss per share
|
$(54,211,000)
|
$(23,497,000)
|
|
|
|
|
|
Denominator
for basic loss per share
|
29,264,132
|
21,589,226
|
|
Plus:
Incremental shares underlying “in the money” warrants
outstanding
|
20,932
|
–
|
|
Denominator
for diluted loss per share
|
29,285,064
|
21,589,226
|
|
Loss
per common share - diluted
|
$(1.85)
|
$(1.09)
|
Foreign Currency Translation
The financial position and results of operations of the
Company’s foreign subsidiaries are measured using each
foreign subsidiary’s local currency as the functional
currency. Revenues and expenses of such subsidiaries have been
translated into U.S. dollars at average exchange rates prevailing
during the period. Assets and liabilities have been translated at
the rates of exchange on the balance sheet date. The resulting
translation gain and loss adjustments are recorded directly as a
separate component of stockholders’ equity, unless there is a
sale or complete liquidation of the underlying foreign
investments. Translation gains or losses resulting from
transactions in currencies other than the respective entities
functional currency are included in the determination of income and
are not considered significant to the Company for the years ended
December 31, 2019 and 2018.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net gains and losses
affecting stockholders’ equity that, under GAAP are excluded
from net income (loss). For the Company, the only items are the
cumulative foreign currency translation and net income
(loss).
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 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.
The Company is subject to income taxes in the United States
(“U.S.”) and certain foreign jurisdictions. The
calculation of the Company’s tax provision involves the
application of complex tax laws and requires significant judgment
and estimates. The Company evaluates the realizability of its
deferred tax assets for each jurisdiction in which it operates at
each reporting date and establishes a valuation allowance when it
is more likely than not that all or a portion of its deferred tax
assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable
income of the same character and in the same jurisdiction. The
Company considers all available positive and negative evidence in
making this assessment, including, but not limited to, the
scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies. In circumstances where
there is sufficient negative evidence indicating that deferred tax
assets are not more likely than not realizable, the Company will
establish a valuation allowance.
ASC 740 requires that all tax positions be evaluated using a
recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. Differences between tax
positions taken in a tax return and amounts recognized in the
financial statements are recorded as adjustments to income taxes
payable or receivable, or adjustments to deferred taxes, or both.
The Company believes that its accruals for uncertain tax positions
are adequate for all open audit years based on its assessment of
many factors including past experience and interpretation of tax
law. To the extent that new information becomes available, which
causes the Company to change its judgment about the adequacy of its
accruals for uncertain tax positions, such changes will impact
income tax expense in the period such determination is made. The
Company’s policy is to include interest and penalties related
to unrecognized income tax benefits as a component of income tax
expense.
In December 2017, H.R.1, known as the Tax Cuts and Jobs Act of 2017
(the "TCJA") was signed into law and included widespread changes to
the Internal Revenue Code (the “IRC”) including, among
other items, creation of new taxes on certain foreign earnings, a
deduction for certain export sales by a domestic C corporation, a
minimum tax on certain related party expenses and transactions. The
TCJA subjects certain U.S. shareholders to current tax on global
intangible low-taxed income ("GILTI") earned by certain foreign
subsidiaries. Conversely, foreign-derived intangible income
("FDII") will be taxed at a lower effective rate than the statutory
rate by allowing a tax deduction against the income. In addition to
GILTI and FDII, Congress passed the base erosion and anti-abuse tax
as part of the TCJA, which will impose a 5% effective tax rate on
corporations by disallowing certain related party expenses and
transactions and eliminating any associated foreign tax credits. We
have considered these new provisions as they are effective for tax
years starting after December 31, 2017 but determined that none
will likely apply for fiscal year 2019.
Among other things, the TCJA reduced the U.S. federal corporate tax
rate from 35% to 21% beginning in 2018, required companies to pay a
one-time transition tax on previously unremitted earnings of
non-U.S. subsidiaries that were previously tax deferred, and
created new taxes on certain foreign sourced earnings. The
Securities and Exchange Commission (the “SEC”) staff
issued Staff Accounting Bulletin (“SAB”) 118, which
provided guidance on accounting for enactment effects of the TCJA.
SAB 118 provided a measurement period of up to one year from the
TCJA’s enactment date for companies to complete their
accounting under ASC 740. In accordance with SAB 118, to the extent
that a company’s accounting for certain income tax effects of
the TCJA is incomplete but it is able to determine a reasonable
estimate, it must record a provisional estimate in its financial
statements. If a company cannot determine a provisional estimate to
be included in its financial statements, it should continue to
apply ASC 740 on the basis of the provisions of the tax laws that
were in effect immediately before the enactment of the
TCJA.
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 for
services from employees and non-employees. Under such provisions,
stock-based compensation cost is measured at the grant date, based
on the calculated fair value of the award, and is recognized as an
expense net of forfeitures, under the straight-line method, over
the vesting period of the equity grant. Forfeitures are recorded as
they occur.
The Company uses the Black-Scholes to estimate the fair value of
stock options. The use of a valuation model requires the Company to
make certain assumptions with respect to selected model inputs.
Expected volatility is 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 expected life assumed at
the date of the grant.
Other Income (Expense)
The Company records interest income, interest expense, and change
in derivative liabilities, as well as other non-operating
transactions, as other income (expense) on our consolidated
statements of operations.
Reclassification of Prior Year
Results
Certain prior year results reported in the consolidated statement
of operations deemed not to be material, have not been reclassified
within the 2018 prior year results and therefore will not reflect
the current year presentation. The Company has determined that the
reclassification would have no impact on the consolidated balance
sheet, the reported net loss in the consolidated statement of
operations, consolidated statements of stockholders' equity and on
the consolidated statement of cash flows.
Recently Adopted Accounting Pronouncements
In August 2018, the FASB issued ASU No.
2018-13, Fair Value Measurement (Topic
820): Disclosure Framework-Changes to the Disclosure Requirements
for Fair Value Measurement.
Topic 820 removes or modifies certain current disclosures and
adds additional disclosures. The changes are meant to provide more
relevant information regarding valuation techniques and inputs used
to arrive at measures of fair value, uncertainty in the fair value
measurements, and how changes in fair value measurements impact an
entity's performance and cash flows. Certain disclosures
in Topic 820 will need to be applied on a retrospective
basis and others on a prospective basis. Topic 820 is
effective for fiscal years, and interim periods within those years,
beginning after December 15, 2019. Early adoption is permitted upon issuance.
The Company adopted the provisions of
this guidance early on January 1, 2019 and the adoption of this
standard did not have a material impact on the Company’s
consolidated financial statements.
In June
2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation
(Topic 718): Improvements to Nonemployees Share-Based
Payment Accounting. The intention of ASU 2018-07 is to
expand the scope of Topic 718 to include share-based payment
transactions in exchange for goods and services from nonemployees.
These share-based payments will now be measured at grant-date fair
value of the equity instrument issued. Upon adoption, only
liability-classified awards that have not been settled and
equity-classified awards for which a measurement date has not been
established should be remeasured through a cumulative-effect
adjustment to retained earnings at the beginning of the fiscal year
of adoption. Topic 718 was effective for fiscal years beginning
after December 15, 2018. The Company
adopted the provisions of this guidance on January 1, 2019 and the
adoption of this standard did not have a material impact on the
Company’s consolidated financial
statements.
In
February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive
Income (Topic 220), Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income, Topic 220. The
amendments in this Update allow a reclassification from accumulated
other comprehensive income to retained earnings for stranded tax
effects resulting from the TCJA. Consequently, the amendments
eliminate the stranded tax effects resulting from the TCJA and will improve the usefulness of
information reported to financial statement users. However, because
the amendments only relate to the reclassification of the income
tax effects of the TCJA, the underlying guidance that requires that
the effect of a change in tax laws or rates be included in income
from continuing operations is not affected. The amendments in this
Update also require certain disclosures about stranded tax effects.
Topic 220 is effective for fiscal years, and interim periods within
those years, beginning after December 15, 2018. The Company adopted the provisions of this
guidance on January 1, 2019 and the adoption of this standard did
not have a material impact on the Company’s consolidated
financial statements.
In July
2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing
Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic
815): (Part I) Accounting for Certain Financial Instruments with
Down Round Features, (Part II) Replacement of the Indefinite
Deferral for Mandatorily Redeemable Financial Instruments of
Certain Nonpublic Entities and Certain Mandatorily Redeemable
Noncontrolling Interests with a Scope Exception. Topic 260
allows companies to exclude a down round feature when determining
whether a financial instrument (or embedded conversion feature) is
considered indexed to the entity’s own stock. As a result,
financial instruments (or embedded conversion features) with down
round features may no longer be required to be classified as
liabilities. A company will recognize the value of a down round
feature only when it is triggered, and the strike price has been
adjusted downward. For equity-classified freestanding financial
instruments, such as warrants, an entity will treat the value of
the effect of the down round, when triggered, as a dividend and a
reduction of income available to common shareholders in computing
basic earnings per share. For convertible instruments with embedded
conversion features containing down round provisions, entities will
recognize the value of the down round as a beneficial conversion
discount to be amortized to earnings. The guidance in Topic 260 is
effective for fiscal years beginning after December 15, 2018, and
interim periods within those fiscal years. Early adoption is
permitted, and the guidance is to be applied using a full or
modified retrospective approach. The Company adopted Topic 260, Topic 480 and Topic
815 effective January 1, 2019 using the modified retrospective
approach. The new guidance requires companies to exclude any down
round feature when determining whether a freestanding equity-linked
financial instrument (or embedded conversion option) is considered
indexed to the entity’s own stock when applying the
classification guidance in ASC 815-40. Upon adoption of the new
guidance, existing equity-linked financial instruments (or embedded
conversion options) with down round features must be reassessed as
liability classification may no longer be required. As a result,
the Company determined in regard to its 2018 warrants the
appropriate treatment of these warrants that were initially
classified as derivative liabilities should now be classified as
equity instruments. The Company determined that the liability
associated with the 2018 warrants should be remeasured and adjusted
to fair value on the date of the change in classification with the
offset to be recorded through earnings and then the fair value of
the warrants should be reclassified to equity. The Company
recorded the change in the fair value of the 2018 warrants as of
the date of change in classification to earnings. The fair value of
the 2018 warrants in the amount of $1,494,000 at the date of change
in classification was reclassified from warrant derivative
liability to additional paid in capital as a result of the change
in classification of the warrants. (See Note 8)
In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other (Topic
350): Simplifying the Test for Goodwill Impairment. This ASU
simplifies the test for goodwill impairment by removing Step 2 from
the goodwill impairment test. Companies will now perform the
goodwill impairment test by comparing the fair value of a reporting
unit with its carrying amount, recognizing an impairment charge for
the amount by which the carrying amount exceeds the reporting
unit’s fair value not to exceed the total amount of goodwill
allocated to that reporting unit. An entity still has the option to
perform the qualitative assessment for a reporting unit to
determine if the quantitative impairment test is necessary. The
amendments in this update are effective for goodwill impairment
tests in fiscal years beginning after December 15, 2019 for public companies, with early
adoption permitted for goodwill impairment tests performed after
January 1, 2017. The Company adopted
the provisions of this guidance on January 1, 2019 and the adoption
of this standard did not have a material impact on the
Company’s consolidated financial statements. (See Notes 1 and
5)
In February
2016, FASB established
Topic 842, Leases, by issuing ASU No. 2016-02, Leases (Topic
842) which required
lessees to recognize leases on-balance sheet and disclose key
information about leasing arrangements.
Topic 842 was
subsequently amended by ASU No. 2018-01, Land Easement Practical
Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to
Topic 842, Leases; ASU No. 2018-11, Targeted
Improvements; ASU No.
2018-20, Narrow-Scope Improvements for
Lessors; and ASU
2019-01, Codification
Improvements. The new standard
establishes a right-of-use model (ROU) that requires a lessee to
recognize a ROU asset and lease liability on the balance sheet for
all leases with a term longer than 12 months. Leases are classified as finance or
operating, with classification affecting the pattern and
classification of expense recognition in the income statement. The
amendments were adopted by the
Company on January 1,
2019. A modified
retrospective transition approach is required, applying the
standard to all leases existing at the date of initial application.
The Company elects to use its effective date as its date of initial
application. Consequently, financial information
will not be
updated, and the disclosures required under the new standard
will not be
provided for dates and periods before January 1, 2019. The new standard provides a number of optional
practical expedients in transition. The Company elected the
“package of practical expedients”, which permits the
Company not to reassess under the new standard prior conclusions
about lease identification, lease classification and initial
direction costs. In addition, the Company elected the practical
expedient to use hindsight when determining lease terms. The
practicable expedient pertaining to land easement is not applicable
to the Company. The Company continues to assess all of the effects
of adoption, with the most significant effect relating to the
recognition of new ROU assets and lease liabilities on the
Company’s consolidated balance sheet for real estate
operating leases. The
Company adopted the provisions of this guidance on January 1, 2019
and accordingly recognized additional operating liabilities of
approximately $5,509,000
with corresponding ROU assets of the same amount based on the
present value of the remaining minimum rental payments under
current leasing standards for existing operating
leases.
The
Company does not believe that any recently issued effective
pronouncements, or pronouncements issued but not yet effective, if
adopted, would have a material effect on the Company’s
consolidated financial statements.
Note 2. Acquisitions and Business Combinations
During 2019 and 2018, the Company entered into a total of four
acquisitions which are detailed below. The acquisitions were
conducted to allow the Company to enter into the hemp market and
expand the Company’s distributor network within the direct
selling segment, enhance and expand its product portfolio, and
diversify its product mix. As a result of the Company’s
business combinations, the Company’s distributors and
customers will have access to the acquired company’s products
and the acquired company’s distributors and customers will
gain access to products offered by the Company.
As such, the major purpose for the business combinations was to
increase revenue and profitability. The acquisitions were
structured as asset purchases which resulted in the recognition of
certain intangible assets.
During the year ended December 31, 2018, the Company adjusted the
preliminary purchase price for one of its 2017 acquisitions which
resulted in an adjustment to the related intangibles and contingent
debt in the amount of $629,000. In addition, during the year ended
December 31, 2018, the Company removed the contingent debt
associated with the Nature’s Pearl acquisition from 2016 due
to a breach of the asset purchase agreement by Nature's Pearl and
amended certain terms of the existing agreement. As a result, the
Company is no longer obligated under the related asset purchase
agreement to make payments. During the year ended December 31,
2018, the Company recorded a reduction to the acquisition debt for
Nature’s Pearl in the amount of approximately $1,246,000 with
a corresponding credit to general and administrative expense in the
statements of operations.
2019 Acquisitions
BeneYOU
On October 31, 2019, the Company entered into an asset purchase
agreement with an effective date of November 1, 2019, with BeneYOU,
LLC, a Utah limited liability company (“BeneYOU”), and
Ryan Anderson (the “BeneYOU Representing Party”), for
the Company to acquire certain assets of BeneYOU including all of
the outstanding equity of BeneYOU Holding, LLC, a Utah limited
liability company (“BeneYOU Holding”), collectively
“BeneYOU”. In accordance with the asset purchase
agreement, the Company also acquired BeneYOU’s customer and
distributor organization lists, all intellectual property, product
formulations, products, product packaging, product registrations,
licenses, marketing materials, sales tools and swag, and all
saleable inventory. BeneYOU’s flagship brand Jamberry has an
extensive line of nail products with a core competency in social
selling, and two other brands including Avisae which focuses on the
gut health and the M.Global brand of products that includes
hydration products.
The Company is obligated to make monthly payments based on a
percentage of the BeneYOU
distributor revenue derived from sales of the Company’s
products and a percentage of royalty revenue derived from sales of
BeneYOU products until the earlier of the date that is ten years
from the closing date or such time as the Company has paid to
BeneYOU aggregate cash payments of the BeneYOU distributor revenue
and royalty revenue equal to the maximum aggregate purchase price
of $3,500,000. In addition, the Company paid an acquisition
liability payment of $200,000 on the closing date, which reduced
the maximum aggregate purchase price to $3,300,000.
The contingent consideration’s estimated fair value at the
date of acquisition was approximately $2,648,000
as determined by management using a
discounted cash flow methodology. The acquisition related costs,
such as legal costs and other professional fees were minimal and
expensed as incurred.
The purchase agreement contains customary representations,
warranties and covenants of the Company, BeneYOU and the BeneYOU
Representing Party. Subject to certain customary limitations the
BeneYOU Representing Party have agreed to indemnify the Company and
BeneYOU against certain losses related to, among other things,
breaches of the BeneYOU Representing Party’s representations
and warranties, certain specified liabilities and the failure to
perform covenants or obligations under the purchase
agreement.
The Company recorded the fair value (in thousands) at the date of
acquisition of the acquired tangible and intangible assets and
liabilities as follows:
|
Contingent
consideration
|
$2,648
|
|
Aggregate purchase
price
|
$2,648
|
The
following table summarizes the fair values of the assets acquired
and liabilities assumed in November 2019 (in
thousands):
|
Current assets
(excluding inventory)
|
$408
|
|
Inventory (net of
$469 reserve)
|
441
|
|
Trademarks and
trade name
|
343
|
|
Distributor
organization
|
1,175
|
|
Customer
relationships
|
44
|
|
Non-compete
agreement
|
277
|
|
Goodwill
|
669
|
|
Current
liabilities
|
(709)
|
|
Net assets
acquired
|
$2,648
|
The estimated fair value of intangible assets acquired of
$1,839,000 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, distributor
organization, customer relationships and non-compete agreement and
are being amortized over their estimated useful life of 5 years, 9
years, 5 years and 4 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.
Goodwill of $669,000 was recognized as the excess purchase price
over the acquisition-date fair value of net assets acquired.
Goodwill is estimated to 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.
Revenues from BeneYOU included in the consolidated statement of
operations within the direct selling segment for the year ended
December 31, 2019 were approximately $1,989,000.
The pro-forma effect assuming the business combination with
BeneYOU discussed above had occurred
at the beginning of the year 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 acquire substantially all
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.
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. In addition, the Company agreed to pay the sellers
$1,500,000 in cash towards the AEPA of which $1,000,000 was paid to
Khrysos Global and the Khrysos Representing Party during 2019, and
the remaining cash payment of $500,000 is to be paid in 2020. At
December 31, 2019, the Company’s remaining liability of
$500,000 was outstanding and recorded as accrued expenses on the
consolidated balance sheet.
In conjunction with the acquisition and organization of KII, the
Company retained Dwayne Dundore as President of KII. Previously
agreed-upon equity compensation in the form of warrants that was to
be provided as part of the closing to Dwayne Dundore by the Company
were terminated as a result of Mr. Dundore’s acceptance as an
employee with the Company. Effective September 17, 2020, Mr.
Dundore was no longer employed with KII or the
Company.
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.
Restatement Note - related to the Acquisition of Khrysos Global,
Inc.
In conjunction with the Company’s 2019 annual audit the
Company concluded that certain fixed assets acquired in the
acquisition and the share price valuation for the common stock
issued as consideration were not fairly valued as of the closing
date February 12, 2019 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. The Company intends to restate its quarterly reports
on Form 10-Q for the three months ended March 31, 2019, three and
six months ended June 30, 2019, and for the three and nine months
ended September 30, 2019.
The Company has estimated 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
|
|
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
|
The
following table summarizes the estimated and as adjusted fair
values of the assets acquired and liabilities assumed in February
2019 (in thousands):
|
|
Fair
Value as Originally Reported
|
|
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
|
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
acquired as currently reported of $6,831,000 is recognized as the
excess purchase price over the acquisition-date fair value of net
assets acquired. In connection with the Company’s annual
impairment test in 2019, the full amount of goodwill recognized of
$6,831,000 was determined to be impaired. (See Note
5)
The costs related to the acquisition are included in legal and
accounting fees and were expensed as incurred.
Revenues from KII included in the consolidated statement of
operations for the year ended December 31, 2019 were approximately
$887,000.
The pro-forma effect assuming the business combination with KII
discussed above had occurred at the beginning of the year is not
presented as the information was not available.
2018 Acquisitions
Doctor’s Wellness Solutions Global LP
(ViaViente)
On
March 1, 2018, the Company
acquired certain assets of Doctor’s Wellness Solutions Global
LP (“ViaViente”).
ViaViente is the distributor of The ViaViente Miracle, a highly
concentrated, energizing whole fruit puree blend that is rich in
antioxidants and naturally occurring vitamins and
minerals.
The Company is obligated to make monthly payments based on a
percentage of the ViaViente
distributor revenue derived from sales of the Company’s
products and a percentage of royalty revenue derived from sales of
ViaViente’s products until the earlier of the date that is
five years from the closing date or such time as the Company has
paid to ViaViente aggregate cash payments of the ViaViente
distributor revenue and royalty revenue equal to the maximum
aggregate purchase price of $3,000,000. In addition, the Company
entered into an inventory consignment agreement whereby the Company
agreed to pay an additional royalty fee on specific inventory items
up to $750,000. The $750,000 is in addition to the $3,000,000
aggregate purchase price and is included in the estimated fair
value of the contingent debt. The inventory consignment royalty
fees are applied to the maximum aggregate purchase
price.
The contingent consideration’s estimated fair value at the
date of acquisition was $1,375,000 as determined by management
using a discounted cash flow methodology. The acquisition related
costs, such as legal costs and other professional fees were minimal
and expensed as incurred.
The assets acquired were recorded at estimated fair values as of
the date of the acquisition. During the year ended December 31,
2018, the Company reviewed the initial valuation of $1,375,000 and
reduced it by $749,000. The contingent liability was also reduced
by $749,000.
The revenue impact from the ViaViente acquisition, included in the
consolidated statements of operations for the year ended December
31, 2018 was approximately $1,542,000.
The pro-forma effect assuming the business combination with
ViaViente discussed above had occurred
at the beginning of the year is not presented as the information
was not available.
Nature Direct
On
February 12, 2018, the Company
acquired certain assets and liabilities of Nature Direct. Nature
Direct, is a manufacturer and distributor of essential oil based
nontoxic cleaning and care products for personal, home and
professional use.
The Company is obligated to make monthly payments based on a
percentage of the Nature Direct distributor revenue derived from sales of the
Company’s products and a percentage of royalty revenue
derived from sales of the Nature Direct products until the earlier of the date that is
twelve years from the closing date or such time as the Company has
paid to Nature Direct aggregate
cash payments of the Nature Direct distributor revenue and royalty revenue equal to
the maximum aggregate purchase price of
$2,600,000.
The contingent consideration’s estimated fair value at the
date of acquisition was $1,085,000 as determined by management
using a discounted cash flow methodology. The acquisition related
costs, such as legal costs and other professional fees were minimal
and expensed as incurred. The Company received approximately
$90,000 of inventories from Nature Direct and paid for the
inventory and assumed liabilities of $50,000. This payment is
applied to the maximum aggregate purchase price.
The assets acquired were recorded at estimated fair values as of
the date of the acquisition. During the year ended December 31,
2018, the Company reviewed the initial valuation of $1,085,000 and
reduced it by $560,000. The contingent liability was also reduced
by $560,000.
The revenue impact from the Nature Direct acquisition, included in the consolidated
statements of operations for the year ended December 31, 2018 was
approximately $1,308,000.
The pro-forma effect assuming the business combination with
Nature Direct discussed above had
occurred at the beginning of the year is not presented as the
information was not available.
Contingent Acquisition Debt
The Company’s contingent acquisition debt at December 31,
2019 and 2018 was approximately $8,611,000 and $8,261,000,
respectively, and was attributable to debt associated with the
Company’s direct selling segment.
Note 3. Agreements with Variable Interest Entities and Related
Party Transactions
FDI Realty, LLC
FDI Realty, LLC (“FDI Realty”) is the owner and lessor
of the building previously partially occupied by the Company for
its sales and marketing office in Windham, NH until December 2015.
A former officer of the Company is the single member of FDI
Realty.
At December 31, 2017 the Company believed it held a variable
interest in FDI Realty, for which the Company was not deemed to be
the primary beneficiary. The Company concluded, based on its
qualitative consideration of the terminated lease agreement, and
the role of the single member of FDI Realty, that the single member
is the primary beneficiary of FDI Realty. In making these
determinations, the Company considered that the single member
conducts and manages the business of FDI Realty, is authorized to
borrow funds on behalf of FDI Realty, is the sole person authorized
and responsible for conducting the business of FDI Realty and is
obligated to fund the obligations of FDI Realty. The Company
believed it was a co-guarantor of FDI Realty’s mortgages on
the building, however, at December 31, 2017, the Company determined
that the fair value of the guarantees was not significant and
therefore did not record a related liability.
During the year ended December 31, 2018, the Company determined
that based on the current circumstances as it relates to certain
agreements existing among the Company and FDI Realty, including but
not limited to an amended and restated equity purchase agreement
which was executed in October 2011 and FDI Realty’s failure
to meet its obligations under the amended purchase agreement, the
Company no longer holds a variable interest in FDI
Realty.
Other Related Party Transactions
Hernandez, Hernandez, Export Y Company and H&H Coffee Group
Export Corp.
The Company’s wholly-owned subsidiary, CLR, is associated
with Hernandez, Hernandez, Export Y Company
(“H&H”), a Nicaragua company, through sourcing
arrangements to procure Nicaraguan grown green coffee beans. As
part of the 2014 Siles acquisition, CLR engaged the owners of
H&H, Alain Piedra Hernandez (“Mr. Hernandez”) and
Marisol Del Carmen Siles Orozco (“Ms. Orozco”), as
employees to manage Siles.
H&H is a sourcing agent that purchases raw green coffee beans
from the local producers in Nicaragua and supplies CLR’s mill
with unprocessed green coffee for processing. CLR does not have a
direct relationship with the local producers and is dependent on
H&H to negotiate agreements with local producers for the supply
and provide to CLR’s mill raw unprocessed green coffee to CLR
in a timely and efficient manner. In addition, CLR’s largest
customer for green coffee beans was H&H Export during the year
ended December 31, 2019. 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.
CLR made purchases from H&H Export of
approximately $9,891,000 of unprocessed green coffee for the year
ended December 31, 2018, that approximated 45%, of total
coffee segment purchases for use in
selling processed green coffee to other third parties and for use
in CLR’s Miami roasting facilities. CLR did not have any
purchases of unprocessed green coffee from H&H Export during
the year ended December 31, 2019.
During the year ended December 31, 2019, CLR recorded net revenues
from green coffee milling and processing services of approximately
$6,416,000 and during the year ended December 31, 2018 recorded
revenues from sales of processed green coffee beans of $3,938,000,
to H&H Export. At December 31, 2019 and 2018, CLR's accounts
receivable balance for customer related revenue from H&H Export
were $8,707,000 and $673,000, respectively, of which the full
amount was past due at December 31, 2019. As a result, the
Company has reserved $7,871,000 as bad debt related to
H&H’s accounts receivable balance, which was net of collections through
December 31, 2020. (See Note
11)
In addition, the Company has collaborated with H&H, the
Company’s green coffee supplier and H&H Export, and other
third parties in Nicaragua to develop a sourcing solution by
entering into the Finance, Security and Accounts
Receivable/Accounts Payable Monetization Agreement (the “FSRP
Agreement”.) The FSRP Agreement is 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. Under the FSRP Agreement, management has
assessed the collectability of accounts receivable from H&H
Export.
The Company initially expected that through this agreed upon
financing arrangement that the Company would collect the
outstanding accounts receivable balance in full during the 2020
growing season. However, given the COVID crisis’ impact on
the 2020 growing season and the continued delay in full payment of
the 2019 receivable balances, management considers the H&H
Export receivable impaired at December 31, 2019.
Advance
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 is
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 $5,340,000,
was not collected as of December 31, 2020, and therefore $5,340,000
was recognized as an allowance for collectability at the end of
December 31, 2019.
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
years ended December 31, 2019 CLR made payments of approximately $2,150,000 and $900,000
during the year ended December 31, 2018 in advance of the
agreement, towards the Matagalpa Mill project. In addition,
$391,117 was paid for operating equipment in 2019.
At
December 31, 2019, CLR contributed a total of $3,441,000 towards
the Matagalpa Mill project, which is included in construction in
process within property and equipment, net on the Company's
consolidated balance sheets. At December 31, 2019, the Nicaraguan
Partner contributed a total of $1,922,000 towards the Matagalpa
Mill project. CLR’s remaining portion of $1,650,000 was paid
during 2020, in addition $912,606 was paid for operating equipment.
At December 31, 2019, the Matagalpa Mill was in construction and
was not ready for full operations.
During 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 December 31, 2019, the
value of the shares was approximately $397,000 based on the stock
price at December 31, 2019. Management reviewed the amount due in
conjunction with the impact of the underlying COVID crisis and has
determined that the receivable balance of $397,000, was more than
likely to be uncollected as of December 31, 2019, and therefore the
full amount was recognized as an allowance for collectability at
December 31, 2019.
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, a leased mill, 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
expense for the year ended December 31, 2019 was $1,060,000
compared to a profit-sharing benefit of $910,000 in the same period
last year, which is included in accrued expenses on the
Company’s balance sheets.
In addition, 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 in January 2019. The
shares of common stock issued were valued at $7.50 per
share.
Joint Venture Agreement in Nicaragua for Hemp Processing Center
between the CLR and KII and Nicaraguan partner
On April 20 and July 29, 2020, CLR and KII (the U.S.
Partners) entered into agreements (“Hemp Joint Venture
Agreement”) with H&H Export and Fitracomex, Inc. (“Fitracomex”)
(collectively “The Nicaraguan Partners”) and
established the hemp joint venture (the “Nicaraguan Hemp Grow
and Extractions Group” or the “Hemp Joint
Venture”).
The
agreement calls for H&H Export to 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.
The
agreement calls for Nicaraguan Partners to 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.
Additionally,
the U.S. Partners’ parent company Youngevity International
Inc., subject to the approval of The Nasdaq Stock Market
(“Nasdaq”) agreed to issue 1,500,000 shares of its
restricted common stock, par value per share, to Fitracomex. In
accordance with the Hemp Joint Venture Agreement, in July 2020 the
Parent Company issued to Fitracomex the agreed upon shares of
restricted common stock. The U.S. Partners agreed to issue warrants
to Fitracomex for the purchase 5,000,000 shares of the Parent
Company common stock at an exercise price of US $1.50, exercisable
for a term of five (5) years after completion of the construction and upon the approval by the
Parent Company’s stockholders of the proposed
issuance. In addition, the U.S. Partners agreed to use
its best efforts to register the resale of the shares of the Parent
Company’s common stock to Fitracomex under the U.S.
Securities Act of 1933, as amended (the "Securities Act"), and make
any necessary applications with Nasdaq to list the
shares.
The
U.S. Partners and H&H Export will serve as the managing
partners with 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 among the partners as follows:
twenty five percent (25%) to the Nicaraguan Partners and seventy
five percent (75%) to the U.S. Partners.
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, described as “H&H Coffee
Liability”, 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 MA
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 of strictly high grown coffee
(approximately 825,000 pounds of 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 $5,340,000 related to the H&H notes
receivable during the year ended December 31, 2019 due to
H&H’s repayment history and risks associated with
redemption of the receivable in coffee.
Other Agreement between CLR and H&H
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 our common stock at a price of $2.00 with an expiration
date of three years, in lieu of an obligation due from CLR to
H&H as relates to a sourcing and supply agreement with H&H
and H&H Export. The warrants were outstanding at both December
31, 2019 and 2018.
Related Party Transactions
Richard Renton
Richard
Renton was a member of the board of directors until February 11,
2020 and owns and operates WVNP, Inc., a supplier of certain
inventory items sold by the Company. The Company made
purchases of approximately $228,000 and $151,000 from WVNP Inc.,
for the years ended December 31, 2019 and 2018, respectively.
In addition, Mr. Renton is a distributor of the Company and was
paid distributor commissions for the years ended December 31, 2019
and 2018 of approximately $366,000 and $363,000,
respectively.
Carl Grover
Carl Grover was the sole beneficial owner of in excess of 5% of the
Company’s outstanding common shares and beneficial owner of
3,293,643 shares of common stock at December 31, 2019.
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.
In December 2018, CLR entered into a credit agreement with Mr.
Grover pursuant to which CLR borrowed $5,000,000 from Mr. Grover
and in exchange issued to him a $5,000,000 credit note. In
addition, Siles, as guarantor, executed a separate Guaranty
Agreement (“Guaranty”). In connection with the
credit agreement, the Company issued
to Mr. Grover a four-year warrant to purchase 250,000 shares of its
common stock, exercisable at $6.82 per share, and a four-year
warrant to purchase 250,000 shares of the Company’s common
stock, exercisable at $7.82 per share, pursuant to a warrant
purchase agreement with Mr. Grover. At December 31, 2019, the
balance of the borrowing from the credit agreement with Mr. Grover
was approximately $4,085,000, net of debt discounts. (See Note
6)
Mr. Grover held the following warrants exercisable into an
aggregate of 2,248,975 shares of common stock at December 31, 2019:
(i) a 2014 warrant exercisable for 182,366 shares of common stock, (ii) a 2015 warrant
exercisable for 200,000 shares of common stock, (iii) three 2017
warrants exercisable for an aggregate of 735,030 shares of common
stock, (iv) a 2018 warrant exercisable for 631,579 shares of common
stock, and (v) two 2018 warrants exercisable for an aggregate of
500,000 shares of common stock.
In addition, Mr. Grover owned 2,986,908 shares of common stock at
December 31, 2019 which included: (i) 1,122,233 shares issued from
the conversion of his 2017 PIPE Notes to common stock, (ii) 428,571
shares issued from the conversion of his 2015 Note to common stock,
(iii) 747,664 shares issued from the conversion of his 2014 PIPE
Notes to common stock, (iv) 650,242 shares from the partial
exercise and inducement shares issued with the exercise of the 2014
warrants, and (v) 38,198 shares of common stock. (See Note
7)
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 aggregate 2017 warrants of to
purchase 6,262 shares of common stock remained outstanding at
December 31, 2019.
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 December 31, 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 immediately exercisable.
2400 Boswell LLC
In March 2013, the Company acquired 2400 Boswell for approximately
$4,600,000. 2400 Boswell is the owner and lessor of the building
occupied by the Company for its corporate office and warehouse in
Chula Vista, California. The purchase was from an immediate family
member of the Company’s Chief Executive Officer and consisted
of approximately $248,000 in cash, approximately $334,000 of debt
forgiveness and accrued interest, and a promissory note of
approximately $393,000, payable in equal payments over 5 years and
bears interest at 5.0%. Additionally, 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%. The current interest rate as of December 31, 2019 was
7.5%. The lender will adjust the interest rate on the first
calendar day of each change period. The Company and its Chief
Executive Officer are both co-guarantors of the mortgage. As of
December 31, 2019, the balance on the long-term mortgage is
approximately $3,143,000 and the balance on the promissory note is
zero.
JJL Equipment Holding, LLC
In connection with the acquisition of Khrysos Global, the Company
held a deposit of $233,000 on December 31, 2019 from JJL Equipment
Holding, LLC (“JJL Equipment”) for an equipment
purchase. Temple Leigh Dundore, a member of the Khrysos
Representing Party and wife of Dwayne Dundore, who was the
President of KII through September 2020, 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 is recorded in other
current liabilities in the consolidated balance sheet at December
31, 2019.
Daniel J. Mangless
Daniel J. Mangless, was a beneficial owner of in excess of 5% of
the Company’s outstanding shares of common stock due to his
beneficial ownership of 1,780,000 shares of common stock at
December 31, 2019 which included 63,000 shares of common stock
issued from the conversion of his Series C convertible preferred
stock to common stock, and 63,000 shares of common stock issued
from the exercise of his December 2018 warrant, 250,000 shares of
common stock issued from his February 2019 securities purchase
agreement, 250,000 shares of common stock issued from his June 2019
securities purchase agreement, and 904,000 shares of common stock
held by him at December 31, 2019. Mr. Mangless also owns a February
2019 warrant exercisable for 250,000 shares of common stock which
he acquired in connection with a February 2019 securities purchase
agreement. During 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.
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)
Note 4. Revenues
Following the expiration of the Company’s EGC status on
December 31, 2018 the Company adopted ASC Topic 606,
Revenue from
Contracts with Customer (“Topic 606”) on January 1, 2018 using
the modified retrospective method applied to those contracts which
were not completed as of January 1, 2018.
There was no impact to retained earnings at January 1, 2018, or to
revenue for the year ended December 31, 2018, after adopting Topic
606, as revenue recognition and timing of revenue did not change as
a result of implementing Topic 606.
Revenue Recognition
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 where the Company has determined it is
the agent with regard to the green coffee beans is recorded at net
or recorded to reflect only the milling services provided. Sales
taxes in domestic and foreign jurisdictions are collected from
customers and remitted to governmental authorities, all at the
local level, and are accounted for on a net basis and therefore are
excluded from revenues.
Commercial Hemp. In the
commercial hemp segment, the Company manufactures commercial
hemp-based CBD extraction and post-processing equipment, and
end-to-end processor of CBD isolate, distillate, water soluble
isolate and water-soluble distillate. 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 equipment, intellectual capital, production
consultancy, tolling services, and wholesale CBD channel sales
capabilities. The Company is also engaged in hemp-based CBD
extraction technology including tolling processing which converts
hemp biomass to hemp extracts such as CBD oil, distillate and
isolate. The Company offers customers turnkey manufacturing
solutions in extraction services and end-to-end processing systems.
In addition, the Company owns a laboratory testing facility that
provides a broad range of capabilities in regard to formulation,
quality control, and testing standards with our CBD products,
including potency analysis for the Company’s supply partners
of hemp derived CBD products.
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.
Disaggregated Revenue
The following table summarizes disaggregated revenue by segment (in
thousands):
|
|
|
|
|
|
|
|
Direct
selling
|
$127,011
|
$138,855
|
|
Processed
green coffee
|
1,046
|
12,281
|
|
Milling
and processing services
|
6,416
|
–
|
|
Roasted
coffee and other
|
12,082
|
11,309
|
|
Commercial
coffee
|
19,544
|
23,590
|
|
Commercial
hemp
|
887
|
–
|
|
Total
|
$147,442
|
$162,445
|
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 in current
liabilities on the Company’s consolidated balance sheets and
includes deferred revenue and customer deposits. 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. Contract
Liabilities are classified as short-term as all performance
obligations are expected to be satisfied within the next twelve
months.
At December 31, 2019 and 2018, deferred revenues were approximately
$1,943,000 and $2,312,000, respectively. The Company records
deferred revenue related to its direct selling segment which is
primarily attributable to the Heritage Makers product line and
represents Heritage Maker’s obligation for points purchased
by customers that have not yet been redeemed for product. In
addition, deferred revenues include future Company convention and
distributor events.
Of the
deferred revenue at December 31, 2018, the Company recognized
revenue of approximately $1,549,000 from the Heritage Makers
product line and approximately $228,000 from the Company’s
convention and distributor events during the year ended December
31, 2019. No deferred revenues were recognized with the commercial
coffee or the commercial hemp segment for the year ended December
31, 2019.
As part of the adoption of the ASC Topic 606, the Company elected
to use the practical expedient to account for shipping and handling
activities as fulfillment costs, which are recorded in cost of
revenues.
Note 5. Selected Consolidated Balance Sheet
Information
Accounts Receivable, net
Net accounts receivable consists of the following (in
thousands):
|
|
|
|
|
|
|
|
Accounts
receivable
|
$11,142
|
$4,263
|
|
Allowance
for doubtful accounts
|
(8,240)
|
(235)
|
|
Accounts
receivable, net
|
$2,902
|
$4,028
|
At December 31, 2019 and 2018, CLR's accounts receivable balance
for customer related revenue by H&H Export were approximately
$8,707,000 and $673,000, respectively, of which the full amount was
past due at December 31, 2019. As a result, we have reserved
$7,871,000 as bad debt related to the accounts receivable balance
at December 31, 2019 which is net of collections through
December 31, 2020. (See Note
11)
Inventory
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
Finished
goods
|
$14,890
|
$11,300
|
|
Raw
materials
|
11,694
|
12,744
|
|
Total
inventory
|
26,584
|
24,044
|
|
Reserve
for excess and obsolete inventory
|
(3,878)
|
(2,268)
|
|
Inventory,
net
|
$22,706
|
$21,776
|
The inventory reserve amount for excess and obsolete inventory as
of December 31, 2019, includes the addition of approximately
$469,000 acquired in the Company’s acquisition of BeneYOU LLC
(See Note 2.) Excluding, the addition of BeneYou, LLC the change in
the Company’s reserve for excess and obsolete inventory is
$1,141,000.
Property and Equipment, net
Property and equipment consist of the following (in
thousands):
|
|
|
|
|
|
|
|
Building
|
$4,789
|
$3,879
|
|
Leasehold
improvements
|
2,948
|
3,024
|
|
Land
|
3,307
|
2,544
|
|
Land
improvements
|
606
|
606
|
|
Producing
coffee trees
|
553
|
553
|
|
Manufacturing
equipment
|
9,568
|
5,825
|
|
Furniture
and other equipment
|
2,050
|
1,885
|
|
Computer
software
|
1,420
|
1,420
|
|
Computer
equipment
|
2,648
|
2,665
|
|
Vehicles
|
326
|
222
|
|
Construction
in process
|
6,562
|
1,966
|
|
Total property and
equipment, gross
|
34,777
|
24,589
|
|
Accumulated
depreciation
|
(11,461)
|
(9,484)
|
|
Total
property and equipment, net
|
$23,316
|
$15,105
|
Depreciation expense totaled approximately $2,134,000 and
$1,819,000 for the years ended December 31, 2019 and 2018,
respectively.
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):
|
|
|
|
Assets
|
|
|
Operating
lease right-of-use assets
|
$8,386
|
|
Finance lease right-of-use assets
(1)
|
10,521
|
|
Total
lease assets
|
$18,907
|
|
Liabilities
|
|
|
Operating
lease liabilities, current portion
|
$1,740
|
|
Finance
lease liabilities, current portion
|
736
|
|
Total
lease liabilities, current portion
|
2,476
|
|
Operating
lease liabilities, net of current portion
|
6,646
|
|
Finance
lease liabilities, net of current portion
|
408
|
|
Total
lease liabilities
|
$9,530
|
|
(1)
|
Finance lease right-of-use assets are recorded within property and
equipment, net of accumulated amortization of approximately
$1,367,000 at December 31, 2019.
|
Operating and finance lease costs were as follows (in
thousands):
|
Lease Cost
|
Classification
|
|
|
Operating
lease cost
|
Sales
and marketing, general and administrative
|
$1,508
|
|
Finance
lease cost:
|
|
|
|
Amortization
of leased assets
|
Depreciation
and amortization
|
712
|
|
Interest
on lease liabilities
|
Interest
expense, net
|
128
|
|
Total
operating and finance lease cost
|
|
$2,348
|
Operating lease cost for the year ended December 31, 2018 was
approximately $1,475,000.
Scheduled annual lease payments were as follows (in
thousands):
|
|
|
|
|
Years
ending December 31:
|
|
|
|
2020
|
$2,159
|
$807
|
|
2021
|
1,900
|
387
|
|
2022
|
1,464
|
17
|
|
2023
|
969
|
13
|
|
2024
|
637
|
7
|
|
Thereafter
|
2,921
|
2
|
|
Total
lease payments
|
10,050
|
1,233
|
|
Less
imputed interest
|
(1,664)
|
(89)
|
|
Present
value of lease liabilities
|
$8,386
|
$1,144
|
The weighted-average remaining lease term and weighted-average
discount rate used to calculate the present value of lease
liabilities are as follows:
|
Lease Term and Discount Rate
|
|
|
Weighted-average
remaining lease term (in years)
|
|
|
Operating
leases
|
6.8
|
|
Finance
leases
|
1.6
|
|
Weighted-average
discount rate
|
|
|
Operating
leases
|
5.47%
|
|
Finance
leases
|
4.57%
|
Assets
Intangible assets consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributor
organizations
|
$15,735
|
$10,418
|
$5,317
|
$14,559
|
$9,575
|
$4,984
|
|
Trademarks
and trade names
|
8,430
|
2,539
|
5,891
|
7,337
|
1,781
|
5,556
|
|
Customer
relationships
|
10,442
|
6,413
|
4,029
|
10,398
|
5,723
|
4,675
|
|
Internally
developed software
|
720
|
657
|
63
|
720
|
558
|
162
|
|
Non-compete
agreement
|
277
|
11
|
266
|
–
|
–
|
–
|
|
Intangible
assets
|
$35,604
|
$20,038
|
$15,566
|
$33,014
|
$17,637
|
$15,377
|
Amortization expense related to intangible assets was approximately
$2,401,000 and $2,879,000 for the years ended December 31, 2019 and
2018, respectively.
For the year ended December 31, 2019, the Company recorded a loss
on impairment of intangible assets related to the acquisition of
Khrysos Global of approximately $8,461,000. (See Note
2)
At December 31, 2019, future expected amortization expense related
to definite lived intangible
assets was as follows (in thousands):
|
Years
ending December 31,
|
|
|
2020
|
$2,439
|
|
2021
|
2,358
|
|
2022
|
2,336
|
|
2023
|
2,257
|
|
2024
|
1,638
|
|
Thereafter
|
2,889
|
|
Total
|
$13,917
|
The weighted-average remaining amortization period for intangibles
assets at December 31, 2019 was approximately 5.3
years.
Trademarks and trade names, which do not have legal, regulatory,
contractual, competitive, economic, or other factors that limit the
useful lives are considered indefinite lived assets and are not
amortized but are tested for impairment on an annual basis or
whenever events or changes in circumstances indicate that the
carrying amount of these assets may not be recoverable. At December
31, 2019 and 2018, approximately $1,649,000 in trademarks and
tradenames from business combinations have been identified as
having indefinite lives.
During
the year ended December 31, 2018, the
Company also determined that the underlying intangible assets
associated with its BeautiControl, Inc. and Future Global Vision,
Inc., acquisitions were impaired and recorded a loss on impairment
of intangible assets in our direct selling segment of approximately
$3,175,000.
Goodwill
Goodwill activity by reportable segment consists of the following
(in thousands):
|
|
|
|
|
|
|
Balance
at December 31, 2018
|
$3,009
|
$3,314
|
$–
|
$6,323
|
|
Goodwill
recognized
|
669
|
–
|
6,831
|
7,500
|
|
Loss
on impairment of goodwill
|
–
|
–
|
(6,831)
|
(6,831)
|
|
Balance
at December 31, 2019
|
$3,678
|
$3,314
|
$–
|
$6,992
|
Based on results of the 2019 annual goodwill impairment test, the
Company recorded a loss on impairment of goodwill of $6,831,000
which represented the full amount of goodwill recognized in
connection with the acquisition of Khrysos Global in February 2019.
The impairment was driven by a decline in the estimated fair value
primarily due to the reduction in the profitability forecasts, as
well as increased working capital requirements which increased the
commercial hemp segment’s carrying value. (See Note
2)
A
hybrid method valuation approach was used to determine the fair
value of the commercial hemp segment which included (i) the income
approach (also referred to as a discounted cash flow or DCF), which
is dependent upon estimates for future revenue, operating income,
depreciation and amortization, income tax payments, working capital
changes, and capital expenditures, as well as, expected long-term
growth rates for cash flows; (ii) the guideline public company
method, which uses valuation metrics from similar publicly-traded
companies, and (iii) the transactional method, which compares
valuation results from other businesses that have recently been
sold or acquired in the same industry. All of these approaches are
affected by economic conditions related to industry as well as
conditions in the U.S. capital markets.
To
determine fair value, the income approach method, guideline public
company method and transactional method were weighted 50%, 25% and
25%, respectively. The three methods returned value indications
that were supportive of one another and corroborative of the value
conclusion.
The
fair value measurement was calculated using unobservable inputs to
the discounted cash flow method, which are classified as Level 3
within the fair value hierarchy under GAAP. The key assumptions
used to estimate the fair values of the commercial hemp segment
were:
●
Compounded
annual revenue growth rates;
●
Average
operating margins;
●
Terminal
value capitalization rate (capitalization rate); and
●
Guideline
company valuations.
Of the
key assumptions, the discount rates and the capitalization rate are
market driven. These rates are derived from the use of market data
and employment of the capital asset pricing model. The
Company-dependent key assumptions are the compounded annual revenue
growth rates and the average operating margins and are subject to
much greater influence from the Company’s actions. The
Company used discount rates that are commensurate with the risk and
uncertainty inherent in the commercial hemp segment and in its
internally developed forecasts. Actual results may differ from
those assumed in the forecasts and changes in assumptions or
estimates could materially affect the determination of the fair
value of a reporting unit, and therefore could affect the amount of
potential impairment.
Inherent
in the development of the present value of future cash flow
projections are assumptions and estimates derived from a review of
the Company’s expected revenue growth rates, profit margins,
business plans, cost of capital, and tax rates. The Company also
makes assumptions about future market conditions, market prices,
interest rates, and changes in business strategies. Changes in
assumptions or estimates could materially affect the determination
of the fair value of a reporting unit and, therefore, could
eliminate the excess of fair value over the carrying value of a
reporting unit entirely and, in some cases, could result in
impairment.
The Company determined no impairment of its goodwill occurred for
the year ended December 31, 2018.
Note 6. Notes Payable and Line of Credit
Credit Note
In December 2018, CLR entered into a credit agreement
(“Credit Note”) with Mr. Grover pursuant to which CLR
borrowed $5,000,000 from Mr. Grover and in exchange issued to him a
$5,000,000 Credit Note. In addition,
CLR’s subsidiary Siles, as guarantor, executed a separate
Guaranty Agreement (“Guaranty”). The
Credit Note is secured by CLR’s green coffee inventory,
subordinate to certain debt owed to Crestmark Bank and pari passu with certain holders of
notes issued by the borrowers of the company in 2014. At both
December 31, 2019 and 2018, the outstanding principal balance of
the Credit Note was $5,000,000. As of the date of this filing, CLR
is in default regarding the settlement terms of the Credit Note and
the Credit Note remains outstanding; however, demand for payment
has not been made.
The
credit note accrues interest at 8.00% per annum and is paid
quarterly. All principal and accrued interest under the credit note
is due and payable on December 12, 2020. The credit note contains
customary events of default including the Company or Siles failure
to pay its obligations, commencing bankruptcy or liquidation
proceedings, and breach of representations and warranties. Upon the
occurrence of an event of default, the unpaid balance of the
principal amount of the credit note together with all accrued but
unpaid interest thereon, may become, or may be declared to be, due
and payable by Mr. Grover and shall bear interest from the due date
until such amounts are paid at the rate of 10.00% per annum. In
connection with the credit agreement, the Company issued to Mr.
Grover a four-year warrant to purchase 250,000 shares of its common
stock, exercisable at $6.82 per share (“Warrant 1”),
and a four-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 3.00% fee on the transaction with Mr. Grover and issued to the
advisor’s designee a four-year warrant to purchase 50,000
shares of the Company’s common stock, exercisable at $6.33
per share.
The Company recorded debt discounts of approximately $1,469,000
related to the fair value of warrants issued in the transaction and
$175,000 of transaction issuance costs both of which are amortized
to interest expense over the life of the credit note. The Company
recorded amortization of approximately $699,000 and $30,000 related
to the debt discount and issuance cost during the years ended
December 31, 2019 and 2018, respectively. At December 31, 2019 and
2018, the combined remaining balance of the debt discounts and
issuance cost was approximately $915,000 and $1,614,000,
respectively.
Promissory Notes
In
March 2019, the Company entered into a two-year secured promissory
note (“Note” or “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 Notes pay 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. At
December 31, 2019, the outstanding principal balance of the Notes
was $2,000,000. The promissory notes
are secured by all equity in KII.
On
February 18, 2021, the Company entered into amendment agreements
extending the Notes, see Note 14 for further discussion. As of the
date of this filing the Notes remain outstanding and the Company is
in default of the terms of settlement set forth in the amendment
agreements.
In
conjunction with the promissory note, the Company also issued
20,000 shares of the Company’s common stock for each
$1,000,000 invested and a five-year warrant to purchase 20,000
shares of the Company’s common stock at a price of $6.00
per share for each $1,000,000
invested. The Company issued in the aggregate 40,000 shares of
common stock and 40,000 warrants with the
Notes.
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 promissory
notes. The Company recorded amortization of approximately $123,000
related to the debt discount and issuance cost related to the
promissory notes during the year ended December 31, 2019. At
December 31, 2019, the combined remaining balance of the debt
discount and issuance costs was approximately
$228,000.
2400 Boswell Mortgage Note
In March 2013, the Company acquired 2400 Boswell for approximately
$4,600,000. 2400 Boswell is the owner and lessor of the building
occupied by the Company for its corporate office and warehouse in
Chula Vista, California. The purchase was from an immediate family
member of the Company’s Chief Executive Officer and consisted
of approximately $248,000 in cash, approximately $334,000 of debt
forgiveness and accrued interest, and a promissory note of
approximately $393,000, payable in equal payments over 5 years and
bears interest at 5.0%. Additionally, 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%. At December 31, 2019 and 2018, the interest rate was
7.50% and 7.75%, respectively. The lender will adjust the interest
rate on the first calendar day of each change period. The Company
and its Chief Executive Officer are both co-guarantors of the
mortgage. As of December 31, 2019 and 2018, the balance on the
long-term mortgage was approximately $3,143,000 and $3,217,000,
respectively, and the balance on the promissory note is
zero.
Khrysos Mortgage Notes
In conjunction with the Company’s acquisition of Khrysos
Global, the Company assumed an interest only mortgage for
properties located in Clermont, FL in the amount of $350,000 with
all principal due in September 2021 and interest paid monthly at a
rate of 8.00% per annum. In addition, the Company assumed a
mortgage of approximately $177,000 for properties located in
Mascotte, FL with all unpaid principal due in June 2023 and
interest paid monthly at a rate of 7.00% per annum. At December 31,
2019, the aggregate outstanding principal balance on the mortgages
was approximately $528,000.
In February 2019, the Company purchased a 45-acre tract of land in
Groveland, FL (“Groveland”), for $750,000, which is
intended to host a research and development facility, a greenhouse
and allocate a portion for farming. The Company paid $300,000 as a
down payment and assumed a mortgage of $450,000. Unpaid principal
is due in February 2024 and interest is paid monthly at a rate of
6.00% per annum. At December 31, 2019, the remaining mortgage
balance was approximately $440,000.
In February 2021, the Company determined that
certain properties acquired with the February 2019 KII acquisition
were redundant after KII moved its primary operations to Orlando,
FL thereby no longer needing multiple locations.
The Company determined that its
original plan for use of the 45-acres discussed above is no longer
viable as KII shifted its focus back to its primary core business
of extraction of cannabinoids and the production of products for
sale with the cannabinoids. Currently KII has listed for sale its
Clermont, FL property which was used as a testing laboratory
facility. On May 26, 2021, the Groveland property was sold for
$800,000. KII’s remaining
production property in Mascotte, FL is expected to be listed for
sale by the end of 2021.
Lending Agreements
In July 2018, the Company entered into lending
agreements with three separate entities and received loans in the
total amount of $1,907,000, net of loan fees to be paid back over
an eight-month period on a monthly basis. Payments were made
monthly and comprised of principal and accrued interest with an
effective interest rate between 15% and 20%. The
Company’s outstanding balance related to the lending
agreements was approximately $504,000 at December 31, 2018, and is
included in other current liabilities on the Company’s
balance sheet. The loans were paid in full in the first quarter of
2019.
M2C Purchase Agreement
In March 2007, the Company entered into an agreement to purchase
certain assets of M2C Global, Inc., a Nevada corporation, for
$4,500,000. The agreement required payments totaling
$500,000 in three installments during 2007, followed by monthly
payments in the amount of 10.00% of the sales related to the
acquired assets until the entire note balance is paid. At
December 31, 2019 and 2018, the carrying value of the liability was
approximately $1,027,000 and $1,071,000, respectively.
Other Notes
The Company’s other notes relate to loans for commercial vans
at CLR in the amount of $71,000 and $96,000 at December 31, 2019
and 2018, respectively, which expire at various dates through
2023.
Line of Credit
In November 2017, CLR entered into a loan and security agreement
with Crestmark Bank (“Crestmark”) providing for a line
of credit related to accounts receivables resulting from sales of
certain products that includes borrowings to be advanced against
acceptable eligible inventory related to CLR. In December 2017, the
loan and security agreement were amended to increase the maximum
overall borrowing to $6,250,000. The line of credit may not exceed
an amount which is the lesser of (a) $6,250,000 or (b) the sum of
up (i) to 85% of the value of the eligible accounts; plus, (ii) the
lesser of $1,000,000 or 50% of eligible inventory or 50% of the
amount calculated in (i) above, plus (iii) the lesser of $250,000
or eligible inventory or 75% of certain specific inventory
identified within the agreement.
The agreement contains certain financial and nonfinancial covenants
with which the Company must comply to maintain its borrowing
availability and avoid penalties. At December 31, 2019, the Company
was in compliance with the covenants. As of the filing date of this
Annual Report on Form 10-K, the Company is not in compliance with
the covenants under the terms of the agreement, specifically
related to the delay in the Company’s filings of its
financial statements for the year ended December 31, 2019 and for
the quarters ended March 31, 2020, June 30, 2020, September 30,
2020, December 31, 2020, and March 31, 2021, however the Company
has received a waiver of such covenants. Delays could result in the
Company being in default for not providing the required quarterly
financial information in a timely manner and Crestmark calling the
loan balance due immediately.
The outstanding principal balance of the line of credit bears
interest based upon a 360-day year with interest charged for each
day the principal amount is outstanding including the date of
actual payment. The interest rate is a rate equal to the prime rate
plus 2.50% with a floor of 6.75%. At December 31, 2019 and 2018,
the interest rate was 7.25% and 8.00%, respectively. In addition,
other fees are incurred for the maintenance of the loan in
accordance with the agreement. Other fees may be incurred in the
event the minimum loan balance of $2,000,000 is not maintained. The
agreement was effective until November 16, 2020 and will continue
to be effective for additional one-year terms unless written notice
of termination is provided to Crestmark not less than thirty days
to the end of any renewal term.
The Company and Stephan Wallach entered into a corporate guaranty
and personal guaranty, respectively, with Crestmark guaranteeing
payments in the event that the Company’s commercial coffee
segment CLR were to default. In addition, David Briskie, the
Company’s president and chief financial officer, personally
entered into a guaranty of validity representing the
Company’s financial statements so long as the indebtedness is
owed to Crestmark, maintaining certain covenants and
guarantees.
The Company’s outstanding line of credit liability related to
the Crestmark Loan was approximately $2,011,000 and $2,256,000 at
December 31, 2019 and 2018, respectively.
Note 7. Convertible Notes Payable
The Company’s total convertible notes payable at December 31,
2019 and 2018, net of debt discount outstanding consisted of the
amount set forth in the following table (in
thousands):
|
|
|
|
|
|
|
|
6.00%
Convertible Notes (2019 PIPE Notes), principal
|
$3,090
|
$–
|
|
Debt
discounts
|
(415)
|
–
|
|
Carrying
value of 2019 PIPE Notes
|
2,675
|
–
|
|
|
|
|
|
8.00%
Convertible Notes (2014 PIPE Notes), principal
|
25
|
750
|
|
Debt
discounts
|
–
|
(103)
|
|
Carrying
value of 2014 PIPE Notes
|
25
|
647
|
|
Total
carrying value of convertible notes payable
|
$2,700
|
$647
|
Unamortized debt discounts and issuance costs are included with
convertible notes payable, net of debt discount on the consolidated
balance sheets.
2014 PIPE Notes
Between July and September 2014, the Company entered into note
purchase agreements (the “2014 PIPE Note” or
“2014 PIPE Notes”) related to its private placement
offering (the “2014 private placement”) with seven
accredited investors pursuant to which the Company raised aggregate
gross proceeds of $4,750,000 and sold units consisting of five year
senior secured convertible 2014 PIPE Notes in the aggregate
principal amount of $4,750,000 that were convertible into 678,568
shares of our common stock, at a conversion price of $7.00 per
share, and warrants to purchase 929,346 shares of common stock at
an exercise price of $4.60 per share. The 2014 PIPE Notes bear
interest at a rate of 8.00% per annum and interest is paid
quarterly in arrears.
In September 2019, the Company extended the maturity date of one
holder of a 2014 PIPE Note for one year, with interest being paid
under the original terms of 8.00% per annum and interest paid
quarterly in arrears. All other 2014 PIPE Notes have been settled.
At December 31, 2019 and 2018, the remaining principal balance of
the 2014 PIPE Notes was $25,000 and $750,000, respectively. The
remaining 2014 PIPE Note of $25,000 was paid in September
2020.
In October 2018, the Company entered into an a stockholder approved
agreement with Mr. Grover to exchange all amounts owed under the
2014 PIPE Note held by him in the principal amount of $4,000,000
for (i) 747,664 shares of the Company’s common stock at a
conversion price of $5.35 per share and (ii) a four-year warrant to
purchase 631,579 shares of common stock at an exercise price of
$4.75 per share. Upon the closing, the Company issued Ascendant Alternative
Strategies, LLC (or its designees), which acted as the
Company’s advisor in connection with a debt exchange
transaction, 30,000 shares of common stock in accordance with an
advisory agreement and four-year warrants to purchase 80,000 shares
of common stock at an exercise price of $5.35 per share and
four-year warrants to purchase 70,000 shares of common stock at an
exercise price of $4.75 per share.
The Company considered the guidance of ASC 470-20, Debt:
Debt with
Conversion and Other Options and ASC 470-60, Debt: Debt Troubled Debt
Restructuring by Debtors and
concluded that the 2014 PIPE Note held by Mr. Grover should be
recognized as a debt modification for an induced conversion of
convertible debt under the guidance of ASC 470-20. The Company
recognized all remaining unamortized discounts of approximately
$679,000 immediately subsequent to the transaction date as interest
expense. The fair value of the warrants and additional shares
issued were recorded as a loss on induced debt conversion on the
consolidated statement of operations in the amount of $4,706,000
during the year ended December 31, 2018, with the corresponding
entry recorded to equity.
In 2014, the Company initially recorded debt discounts of
$4,750,000 related to the beneficial conversion feature and related
detachable warrants. The beneficial conversion feature discount and
the detachable warrants discount are amortized to interest expense
over the life of the 2014 PIPE Notes. The unamortized debt
discounts recognized with the debt exchange was approximately
$679,000. The Company recorded approximately $94,000 and $795,000,
respectively, of amortization of the debt discounts during the
years ended December 31, 2019 and 2018. At December 31, 2018, the
remaining balance of the debt discounts was approximately $94,000.
At December 31, 2019, the debt discounts relating to the 2014 PIPE
Notes were fully amortized.
In 2014, the Company paid approximately $490,000 in expenses
including placement agent 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 were amortized to interest expense over the term of
the 2014 PIPE Notes. The Company recorded approximately $10,000 and
$82,000 of amortization of the issuance costs during the years
ended December 31, 2019 and 2018, respectively. At December 31,
2018, the remaining balance of the issuance costs was approximately
$10,000. At December 31, 2019, all issuance costs relating to the
2014 private placement and debt exchange were fully
amortized.
2015 PIPE Notes
Between October and November 2015, the Company entered into note
purchase agreements (the “2015 PIPE Note” or
“2015 PIPE Notes”) related to its private placement
offering (the “2015 private placement”) with three
accredited investors pursuant to which the Company raised cash
proceeds of $3,188,000 in the offering and converted $4,000,000 of
debt from the Company’s private placement in January 2015 to
this offering in consideration of the sale of aggregate units
consisting of three-year senior secured convertible 2015 PIPE Notes
in the aggregate principal amount of $7,188,000, convertible into
1,026,784 shares of common stock at a conversion price of $7.00 per
share, subject to adjustment as provided therein; and five-year
warrants exercisable to purchase 479,166 shares of the
Company’s common stock at a price of $9.00 per share. The
2015 PIPE Notes paid interest at a rate of 8.00% per annum and
interest was paid quarterly in arrears with all principal and
unpaid interest due at maturity on October 12, 2018.
In October 2018, Mr. Grover exercised his right to convert all
amounts owed under the 2015 PIPE Note in the principal amount of
$3,000,000 into 428,571 shares of common stock at a conversion rate
of $7.00 per share. At December 31, 2018, the 2015 PIPE Notes were
fully converted, and no principal remained
outstanding.
During 2017, in connection with the 2017 private placement three
investors from the 2015 private placement converted their 2015 PIPE
Notes in the aggregate amount of $4,200,000 including principal and
accrued interest thereon into new convertible notes for an equal
principal amount in the 2017 private placement as discussed below.
The Company accounted for the conversion of the notes as an
extinguishment in accordance with ASC 470-20 and ASC
470-50.
The Company recorded issuance debt discounts associated with the
2015 PIPE Notes of $309,000 related to the beneficial conversion
feature and the detachable warrants. The beneficial conversion
feature discount and the detachable warrants discount were
amortized to interest expense over the term of the 2015 PIPE Notes.
The Company recorded approximately $36,000 of the debt discounts
amortization during the year ended December 31, 2018 and was
recorded as interest expense. At December 31, 2018, the debt
discounts related to the 2015 PIPE Notes were fully
amortized.
The Company paid $786,000 in expenses including placement
agent fees relating to issuance costs with the 2015 private
placement. The issuance costs were amortized to interest expense
over the term of the 2015 PIPE Notes. The Company recorded
approximately $92,000 of the amortization of issuance costs during
the year ended December 31, 2018. At December 31, 2018, all
issuance costs relating to the 2015 PIPE Notes were fully
amortized.
In addition, the Company issued warrants to the placement agent in
connection with the 2015 PIPE Notes which were valued at
approximately $384,000. These warrants were not protected against
down-round financing and accordingly, were classified as equity
instruments and the corresponding deferred issuance costs were
amortized to interest expense over the term of the 2015 PIPE Notes.
At December 31, 2018, the Company recorded approximately $45,000 of
amortization relating to the issuance costs from the warrants. At
December 31, 2018, the issuance costs related to the warrants were
fully amortized.
2017 PIPE Notes
Between July and August 2017, the Company entered into note
purchase agreements (the
“2017 PIPE Note” or “2017 PIPE Notes”)
related to its private placement offering (“2017 private
placement”) with accredited investors pursuant to
which the Company raised aggregate gross cash proceeds of
approximately $3,054,000 in the offering and converted $4,200,000
of debt from the 2015 PIPE Notes for an aggregate principal amount of approximately
$7,254,000. The Company's used the proceeds from the 2017
private placement for working capital purposes.
In March 2018, the Company completed the Series B offering pursuant
to which the Company sold 381,173 shares of Series B convertible
preferred stock and received aggregate gross proceeds of
$3,621,000, which triggered the automatic conversion of the 2017
PIPE Notes to common stock. The 2017 PIPE Notes consisted of
three-year senior secured convertible notes in the aggregate
principal amount of approximately $7,254,000, which converted into
1,577,033 shares of common stock at a conversion price of $4.60 per
share, and three-year warrants exercisable to purchase 970,581
shares of the Company’s common stock at a price per share of
$5.56 (the “2017 Warrants”). The 2017 Warrants were not
impacted by the automatic conversion of the 2017 PIPE
Notes.
As a result of the Company completing a preferred stock transaction
with aggregate gross proceeds of more than $3,000,000 for the
purpose of raising capital, the 2017 PIPE Notes automatically
converted to common stock prior to the maturity date.
The
Company accounted for the automatic conversion of the 2017 PIPE Notes as an extinguishment in
accordance with ASC 470-20 and ASC 470-50, and as such the related
debt discounts, issuance costs and bifurcated embedded conversion
feature were adjusted as part of accounting for the conversion.
The Company recorded a non-cash
extinguishment loss on debt of $1,082,000 during the year ended
December 31, 2018 as a result of the conversion of the 2017 PIPE
Notes. This loss represents the difference between the carrying
value of the 2017 PIPE Notes and embedded conversion feature and
the fair value of the shares that were issued. The fair value of
the shares issued was based on the stock price on the date of the
conversion.
At December 31, 2018, the 2017 PIPE Notes were fully converted, and
no principal remained outstanding. The 2017 PIPE Notes would have matured in July
2020 and bore interest at a rate of 8.00% per annum. For twelve
months following the closing, the investors in the 2017 private
placement had the right to participate in any future equity
financings, subject to certain conditions.
The
Company recorded debt discounts associated with the 2017 PIPE Notes of $330,000 related to the
bifurcated embedded conversion feature. The embedded conversion
feature was amortized to interest expense over the term of the
2017 PIPE Notes. During the
year ended December 31, 2018, the Company recorded approximately
$28,000 of amortization related to the debt discount
cost.
The Company paid $1,922,000 in expenses including placement
agent fees relating to the issuance costs with the 2017
private placement. The issuance costs were being amortized to
interest expense over the term of the 2017 PIPE Notes.
During the year ended December 31, 2018, the Company recorded
approximately $136,000 of amortization related to the warrant
issuance cost.
The
Company issued the placement agent a three-year warrant to purchase
179,131 shares of the Company’s common stock at an exercise
price of $5.56 per share and 22,680 shares of the Company’s
common stock. The issuance costs were
amortized to interest expense over the term of the 2017 PIPE
Notes. During the year ended December 31, 2018, the Company recorded approximately $53,000 of
amortization related to the issuance costs.
2019 PIPE Notes
Between
February and July 2019, the Company closed five tranches related to
the 2019 private placement debt offering, pursuant to which the
Company offered for sale up to $10,000,000 in principal amount of
notes (the “2019 PIPE Notes”), with each investor
receiving 2,000 shares of common stock for each $100,000 invested.
The Company entered into subscription agreements with thirty-one
accredited investors, that had a substantial pre-existing
relationship with the Company, pursuant to which the Company
received aggregate gross proceeds of $3,090,000 and issued 2019
PIPE Notes in the aggregate principal amount of $3,090,000 and an
aggregate of 61,800 shares of common stock. The placement agent
received 15,450 shares of common stock for the closed tranches.
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. (See Note 14)
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 year
ended December 30, 2019, the Company recorded approximately
$256,000 of amortization related to the debt
discounts.
Debt Maturities
The following summarizes the maturities of notes payable and line
of credit (See Note 6) and convertible notes payable (in
thousands):
|
Years
ending December 31,
|
|
|
2020
|
$7,227
|
|
2021
|
1,454
|
|
2022
|
4,365
|
|
2023
|
325
|
|
2024
|
532
|
|
Thereafter
|
3,431
|
|
Total
|
$17,334
|
In February 2021, the two March 2019 promissory notes totaling
$2,000,000 which bear interest at a rate of 8.00% per annum and
matured in March 2021, were extended by way of an amendment to the
notes (the “8% Note Amendment”) to extend the maturity
date to March 2022 which is reflected in the table above. In
addition, the Company agreed to increase the interest rate to 16%
per annum. As of the date of this filing, the Company is in default
of the terms of settlement set forth in the 8% Note
Amendment.
Between February and March 2021, the 2019 6% Notes totaling
$1,190,000 that were maturing in February and March 2021 were
extended by way of an amendment to the convertible notes (the
“6% Note Amendments”), whereby the Company agreed to
make certain principal payments as agreed upon within the
amendment, extending the maturity dates between February 2022 and
March 2022 which is reflected in the table above. In addition, the
Company agreed to increase the interest rate between 12% and 16%
per annum. As of the date of this filing, the Company is in default
of the terms of settlement set forth in the 6% Note
Amendments.
Note 8. Derivative Financial Instruments
Warrants
Between August and October of 2018, the Company issued 630,526
three-year warrants to investors in the 2018 private placement. The
exercise price of the warrants is protected against down-round
financing throughout the term of the warrant. Pursuant to ASC Topic
815, the fair value of the warrants of approximately $1,689,000 was
recorded as a derivative liability on the issuance
dates. The estimated fair values of the warrants were
computed at issuance using a Monte Carlo pricing model. The
Company adopted ASU No. 2017-11 effective January 1, 2019 and
determined that it’s 2018 warrants were to no longer be
classified as a derivative, as a result of the adoption and
subsequent change in classification of the 2018 warrants, the
Company reclassed approximately $1,494,000 of warrant derivative
liability to equity.
In January 2018, the Company approved an amendment to its warrant
agreements issued to the placement agent, pursuant to which
warrants were issued to purchase 179,131 shares of the
Company’s common stock as compensation associated with the
Company’s 2017 private placement. The warrant amendment
amended the transfer provisions of the warrants and removed the
down-round price protection provision. As a result of this change
in terms, the Company considered the guidance of ASC 815-40-35-8 in
regard to the appropriate treatment related to the modification of
these warrants that were initially classified as derivative
liabilities. In accordance with the guidance, the warrants should
now be classified as equity instruments.
The Company determined that the liability associated with the 2018
warrants should be remeasured and adjusted to fair value on the
date of the modification with the offset to be recorded through
earnings and then the fair value of the warrants should be
reclassified to equity. The Company recorded the change in the
fair value of the July 2017 warrants as of the date of modification
to earnings. The fair value of the modified warrants at the date of
modification, in the amount of $284,000 was reclassified from
warrant derivative liability to additional paid in capital as a
result of the change in classification of the
warrants.
The estimated fair value of the outstanding warrant derivative
liabilities was $1,542,000 and $9,216,000 at December 31, 2019 and
2018, respectively.
Increases or decreases in the fair value of the derivative
liability are included as a component of total other expense in the
accompanying consolidated statements of operations for the
respective period. The changes to the derivative liability for
warrants resulted in a decrease of $5,502,000 and an increase of
$4,645,000 for the years ended December 31, 2019 and 2018,
respectively.
The estimated fair value of the warrants was computed at December
31, 2019 and 2018 using the Monte Carlo option pricing models,
using the following assumptions:
|
|
|
|
|
|
|
|
Stock
price volatility
|
64.10
|
83.78% –
136.76%
|
|
Risk-free
interest rates
|
1.59% –
1.60%
|
2.47% –
2.58%
|
|
Annual
dividend yield
|
0
|
0
|
|
Expected
life (in years)
|
0.58 – 0.96
|
0.58 – 2.76
|
In addition, management assessed the probabilities of future
financing assumptions in the valuation models.
Embedded Conversion Derivatives
In
March 2018, the Company completed the Series B offering and raised
in excess of $3,000,000 of aggregate gross proceeds which triggered
an automatic conversion of the 2017
PIPE Notes to common stock. As a result, the related
embedded conversion option was extinguished with the 2017 PIPE Notes. The Company did not
revalue the embedded conversion liability associated with the
2017 PIPE Notes as the change
in the fair value was insignificant.
Note 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 December 31, 2019
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Contingent
acquisition debt, current portion
|
$1,263
|
$–
|
$–
|
$1,263
|
|
Contingent
acquisition debt, less current portion
|
7,348
|
–
|
–
|
7,348
|
|
Warrant
derivative liability
|
1,542
|
–
|
–
|
1,542
|
|
Total
derivative liabilities
|
$10,153
|
$–
|
$–
|
$10,153
|
|
|
Fair Value at December 31, 2018
|
|
|
|
|
|
|
|
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
derivative liabilities
|
$17,477
|
$–
|
$–
|
$17,477
|
The following table reflects the activity for the Company’s
warrant derivative liability associated with the Company’s
private placements measured at fair value using Level 3 inputs (in
thousands):
|
Balance
at December 31, 2017
|
$3,365
|
|
Issuance
|
1,689
|
|
Adjustments
to estimated fair value
|
4,645
|
|
Adjustment
related to warrant exercises
|
(199)
|
|
Adjustment
related to the modification of warrants (Note 10)
|
(284)
|
|
Balance
at December 31, 2018
|
9,216
|
|
Issuance
|
399
|
|
Adjustments
to estimated fair value
|
(5,502)
|
|
Adjustment
related to warrant exercises
|
(1,077)
|
|
Adjustments
related to the reclassification of warrants to equity
|
(1,494)
|
|
Balance
at December 31, 2019
|
$1,542
|
The following table reflects the activity for the Company’s
embedded conversion feature derivative liability associated with
the 2017 PIPE Notes measured at fair value using Level 3 inputs (in
thousands):
|
Balance
at December 31, 2017
|
$200
|
|
Adjustment
related to the conversion of the 2017 PIPE Notes
|
(200)
|
|
Balance
at December 31, 2019 and 2018
|
$–
|
The following table reflects the activity for the Company’s
contingent acquisition debt measured at fair value using Level 3
inputs (in thousands):
|
Balance
at December 31, 2017
|
$14,404
|
|
Liabilities
acquired
|
2,460
|
|
Liabilities
settled
|
(165)
|
|
Adjustments
to liabilities included in earnings
|
(6,600)
|
|
Adjustment
to purchase price
|
(1,838)
|
|
Balance
at December 31, 2018
|
8,261
|
|
Liabilities
acquired
|
2,648
|
|
Liabilities
settled
|
(460)
|
|
Adjustments
to liabilities included in earnings
|
(1,838)
|
|
Balance
at December 31, 2019
|
$8,611
|
The weighted-average discount rate used to determine the fair value
of contingent acquisition debt was 18.42% at both December 31, 2019
and 2018.
During
the year ended December 31, 2019 and 2018, the net adjustment to
the fair value of the contingent acquisition debt was a decrease of
approximately $1,838,000 and $6,600,000, respectively, and was
included in the Company’s statement of operations in general
and administrative expenses.
In 2018, the Company recorded a decrease to the contingent
acquisition debt of $1,246,000 as a result of the removal of the
debt associated with its 2016 acquisition of Nature's Pearl whereby
the Company was no longer obligated under the related asset
purchase agreement to make payments.
Note 10. Stockholders’ Equity
The Company’s Certificate of Incorporation, as amended,
authorizes the issuance of two classes of stock to be designated
“common stock” and “preferred
stock”.
At December 31, 2019, the total number of shares of stock which the
Company has authority to issue was 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 was
designated as Series A preferred stock (ii) 1,052,631 was
designated as Series B preferred stock, (iii) 700,000 was
designated as Series C preferred stock, and (iv) 650,000 was
designated as Series D 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, $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 its registration statement on Form S-3 (the
“Shelf”) was limited until such time the market value
of its voting securities held by non-affiliates is $75 million or
more. During the year ended December 31, 2019, the Company raised
net proceeds under the Shelf in the aggregate of approximately
$12,371,000 from the issuance of the Company’s preferred
stock series D offering and the ATM noted below. During the year
ended December 31, 2018, the Company did not use the Shelf. The
Company is no longer eligible to use the Shelf.
Common Stock
At December 31, 2019 and 2018 there were 30,274,601 and 25,760,708
shares of common stock outstanding, respectively. The
holders of the common stock are entitled to one vote for each share
held at all meetings of stockholders (and written actions in lieu
of meetings).
Stock Offerings
2019 Share Purchase Agreements
In June 2019, the Company entered into a securities purchase
agreement with one accredited investor that had a substantial
pre-existing relationship with the Company pursuant to which the
Company sold 250,000 shares of common stock at an offering price of
$5.50 per share. The Company received gross proceeds of
$1,375,000.
In February 2019, the Company entered into a purchase agreement
with one accredited investor that had a substantial pre-existing
relationship with the Company pursuant to which the Company sold
250,000 shares of common stock at an offering price of $7.00 per
share. Pursuant to the purchase agreement, the Company also issued
to the investor a three-year warrant to purchase 250,000 shares of
common stock at an exercise price of $7.00. The Company received
gross proceeds of $1,750,000. Consulting fees to the placement
agent for arranging the purchase agreement included the issuance of
5,000 shares of restricted shares of the Company’s common
stock with a fair value of $7.00 per share, and three-year warrants
to purchase 100,000 shares of common stock expiring in February
2022 priced at $10.00. 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 cash
commissions were paid.
2019 Promissory Notes
In March 2019, the Company entered into a two-year secured
promissory note with two accredited investors that the Company had
a substantial pre-existing relationship with and from whom the
Company raised cash proceeds in the aggregate of $2,000,000. The
promissory notes are secured by all equity in KII. In consideration
of the promissory notes, the Company issued 20,000 shares of common
stock and five-year warrants to purchase 20,000 shares of common
stock at a price per share of $6.00 for each $1,000,000 invested.
The promissory notes pay 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 Company issued in
the aggregate 40,000 shares of common stock and 40,000 warrants
with the Notes. The Company used the Black-Scholes
option-pricing model to estimate the aggregate fair value of the
warrants issued to be $138,000 at the time of issuance as direct
issuance costs and recorded as a debt discount and is being
amortized as expense over the life of the promissory notes. The
aggregate fair value of the shares issued was based on the closing
price of the Company’s common stock on the closing date was
approximately $212,000 was recorded as a debt discount and is being
amortized as expense over the life of the promissory
notes.
2019 Private Placement - Convertible Notes
Between February and July 2019, the Company closed five tranches
related to the 2019 January private placement debt offering,
pursuant to which the Company offered 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
issued an aggregate of 61,800 shares of common stock as a result of
the 2019 private placement. The placement agent received 15,450
shares of common stock for the closed tranches. The 2019 PIPE Notes
are secured by all equity in KII. The aggregate fair value of the
shares issued was based on the closing price of the Company’s
common stock on the closing date was approximately $451,000 was
recorded as a debt discount and is being amortized as expense over
the life of the promissory notes. (See Note 14)
2018 Private Placement
Between
August 2018 and October 2018, the Company completed its 2018
private placement and entered into securities purchase agreements
with nine investors with whom the Company had a substantial
pre-existing relationship pursuant to which the Company sold an
aggregate of 630,526 shares of common stock at an offering price of
$4.75 per share. In addition, the Company issued the investors an
aggregate of 150,000 additional shares of common stock as an
advisory fee and issued the investors three-year warrants to
purchase an aggregate of 630,526 shares of common stock at an
exercise price of $4.75 per share. The
fair value of the warrants as issuance was approximately
$1,689,000.
The Company adopted ASU No. 2017-11 effective January 1, 2019 and
determined that the 2018 warrants were to no longer be classified
as a derivative, as a result of the adoption and subsequent change
in classification of the 2018 warrants, the Company reclassed
approximately $1,494,000 of warrant derivative liability to equity.
(See Note 8) At December 31,
2019 and 2018, 448,420 and 630,526 warrants, respectively, were
outstanding.
The
purchase agreement requires the Company to issue the investor
additional shares of the Company’s common stock in the event
that the average of the 15 lowest closing prices for the
Company’s common stock during the period beginning on August
31, 2018 and ending on the date 90 days from the effective date of
the registration statement (the “subsequent pricing
period”) is less than $4.75 per share. The additional common
shares to be issued are calculated as the difference between the
common stock that would have been issued using the average price of
such lowest 15 closing prices during the subsequent pricing period
less shares of common stock already issued pursuant to the 2018
private placement. Notwithstanding the foregoing, in no event may
the aggregate number of shares issued by the Company, including
shares of common stock issued, shares of common stock underlying
the warrants, the shares of common stock issued as advisory shares
and true-up shares exceed 2.9% of the Company’s issued and
outstanding common stock at August 31, 2018 for each $1,000,000
invested in the Company.
The
true-up share feature was considered to be embedded in the specific
common shares purchased by each investor, by way of the purchase
agreement. As the economic characteristics and risks of the true-up
share feature are clearly and closely related to the common stock
host contract, the true-up share feature was not separately
recognized in the private placement transaction.
The
aggregate gross proceeds of approximately $2,995,000 from the aggregate
closings of the 2018 private placement were first allocated to the
investor warrants, with an aggregate initial fair value of
approximately $1,689,000, with the residual amount allocated to the
common stock issued in the offering, including the common stock
issued to each investor as an advisory fee. The net cash proceeds to the Company from the
2018 private placement were
approximately $2,962,000 after deducting advisory fees, closing and
issuance costs.
2015 Convertible Note
In
October 2018, Mr. Grover, an investor in the Company’s 2014
and 2015 private placements, exercised his right to convert all
amounts owed under the note issued to him in the 2015 private
placement in the principal amount of $3,000,000 which matured in
October 2018, into 428,571 shares of common stock (at a conversion
rate of $7.00 per share), in accordance with its stated terms. (See
Note 7)
2014 Convertible Note – Debt Exchange
In October 2018, the Company entered into an agreement with Mr.
Grover to exchange all amounts owed under the 2014 Note held by him
in the principal amount of $4,000,000 which matured in July 2019,
for 747,664 shares of the Company’s common stock, at a
conversion price of $5.35 per share and a four-year warrant to
purchase 631,579 shares of common stock at an exercise price of
$4.75 per share. The warrant to purchase 747,664 shares of common
stock remained outstanding at both December 31, 2019 and 2018. The
agreement was subject to shareholder approval which was received on
December 5, 2018.
A FINRA
broker dealer acted as the Company’s advisor in connection
with the debt exchange. Upon the closing of the debt exchange, the
Company subsequently received shareholder approval to issue the
broker dealer 30,000 shares of common stock, a four-year warrant to
purchase 80,000 shares of common stock at an exercise price of
$5.35 per share and a four-year warrant to purchase 70,000 shares
of common stock at an exercise price of $4.75 per share.
The warrants to purchase an aggregate
150,000 shares remained outstanding at both December 31, 2019 and
2018.
2018 Note Payable
In
December 2018, CLR entered into a credit agreement with Mr. Grover
pursuant to which CLR borrowed $5,000,000 from Mr. Grover and in
exchange issued to him a $5,000,000 credit note. In addition, CLR’s subsidiary Siles, as
guarantor, executed a separate Guaranty Agreement
(“Guaranty”). In connection with the credit
agreement, the Company issued to Mr. Grover a four-year warrant to
purchase 250,000 shares of its common stock, exercisable at $6.82
per share and a four-year warrant to purchase 250,000 shares of its
common stock, exercisable at $7.82 per share, pursuant to a warrant
purchase agreement with Mr. Grover. The Company also entered into
an advisory agreement with Ascendant, a third party not affiliated
with Mr. Grover, in connection with the credit agreement, pursuant
to which the Company agreed to pay to Ascendant a 3.00% fee on the
transaction with Mr. Grover and issued to Ascendant a four-year
warrant to purchase 50,000 shares of its common stock, exercisable
at $6.33 per share.
2019 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.
Preferred Stock
Series A Preferred Stock
The Company has 161,135 shares of Series A preferred stock
outstanding at December 31, 2019, and December 31, 2018 and accrued
dividends of approximately $150,000 and $137,000, respectively. The
holders of the Series A preferred stock are entitled to receive a
cumulative dividend at a rate of 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 preferred
stock is convertible into common stock at a conversion rate of
one-tenth of a share. The holders of Series A preferred 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 preferred stock have no
voting rights, except as required by law.
Series B Preferred Stock
In March 2018, the Company completed the Series B offering,
pursuant to which the Company sold 381,173 shares of Series B
preferred stock at an offering price of $9.50 per share. Each share
of Series B preferred stock is initially convertible at any time,
in whole or in part, at the option of the holders, at a conversion
price of $4.75 per share, into 2 shares of common stock and
automatically converts into 2 shares of common stock on its
two-year anniversary of issuance.
In connection with the Series B offering, the Company issued the
placement agent 38,117 warrants as compensation, exercisable at
$5.70 per share and expire in February 2023. The Company determined
that the warrants should be classified as equity instruments and
used Black-Scholes to estimate the fair value of the warrants
issued to the placement agent of $75,000 at the issuance date March
30, 2018. At December 31, 2019 and 2018, 6,098 warrants issued to
the placement agent remain outstanding.
The Company received gross proceeds in aggregate of $3,621,000. The
net proceeds to the Company from the Series B offering were
$3,289,000 after deducting commissions, closing and issuance
costs.
The Company has 129,332 and 129,437 shares of Series B preferred
stock outstanding at December 31, 2019 and 2018, respectively.
During the year ended December 31, 2019, the Company received
notice of conversion for 105 shares of Series B preferred stock
which converted to 210 shares of common stock. During the year
ended December 31, 2018, the Company received notice of conversion
for 251,736 shares of Series B preferred stock which converted to
503,472 shares of common stock.
The shares of Series B preferred stock issued in the Series B
offering were sold pursuant to the Company’s registration
statement, which was declared effective on February 13, 2018. Upon
the receipt of the proceeds of the Series B offering, the 2017 PIPE
Notes in the principal amount of approximately $7,254,000
automatically converted into 1,577,033 shares of common
stock.
Upon liquidation, dissolution or winding up of the Company, each
holder of Series B preferred stock shall be entitled to receive a
distribution, to be paid in an amount equal to $9.50 for each and
every share of Series B preferred stock held by the holders of
Series B 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, or any other class or series of stock ranking junior to the
Series B preferred stock.
Pursuant to the certificate of designation, the Company has agreed
to pay cumulative dividends on the Series B preferred stock from
the date of original issue at a rate of 5.0% per annum payable
quarterly in arrears on or about the last day of March, June,
September and December of each year, beginning June 30,
2018.
At December 31, 2019 and 2018, accrued dividends were approximately
$15,000 and $11,000, respectively. During the years ended December
31, 2019 and 2018, a total of approximately $51,000 and $77,000,
respectively, of dividends was paid to the holders of the Series B
preferred stock. The Series B preferred stock ranks senior to the
Company’s outstanding Series A preferred stock and the common
stock with respect to dividend rights and rights upon liquidation,
dissolution or winding up. Holders of the Series B preferred stock
have no voting rights.
Series C Preferred Stock
Between August and October 2018, the Company closed three tranches
of its Series C offering, pursuant to which the Company sold
697,363 shares of Series C preferred stock at an offering price of
$9.50 per share and agreed to issue two-year warrants to
purchase up to 1,394,726 shares of the Company’s common stock
at an exercise price of $4.75 per share to Series C preferred
holders that voluntary convert their shares of Series C preferred
stock to the Company’s common stock within two-years from the
issuance date. Each share of Series C preferred stock was
initially convertible at any time, in whole or in part, at the
option of the holders, at an initial conversion price of $4.75 per
share, into 2 shares of common stock and automatically converts
into 2 shares of common stock on its two-year anniversary of
issuance.
The Series C preferred stock was automatically redeemable at a
price equal to its original purchase price plus all accrued but
unpaid dividends in the event the average of the daily volume
weighted average price of the Company’s common stock for the
30 days preceding the two-year anniversary date of issuance is less
than $6.00 per share. As redemption was outside of the
Company’s control, the Series C preferred stock was
classified in temporary equity at issuance. At December 31, 2018,
all of the shares of Series C preferred stock were converted to
common stock and the Company issued 1,394,726 warrants. At December
31, 2018, no shares of Series C preferred stock remained
outstanding.
In connection with the Series C offering, the Company issued the
placement agent 116,867 warrants as compensation, exercisable at
$4.75 per share and expire in December 2020. The Company determined
that the warrants should be classified as equity instruments and
used Black-Scholes to estimate the fair value of the warrants
issued to the placement agent of $458,000 at the issuance date in
December 2018. At December 31, 2019 and 2018, 17,724 and 116,867,
respectively, of warrants issued to the placement agent remained
outstanding.
The Company received aggregate gross proceeds totaling
approximately $6,625,000. The net proceeds to the Company from the
Series C offering were approximately $6,236,000 after deducting
commissions, closing and issuance costs.
The Company paid cumulative dividends on the Series C preferred
stock from the date of original issue at a rate of 6.00% per
annum payable quarterly in arrears on or about the last day of
March, June, September and December of each year, beginning
September 30, 2018. During the year ended December 31, 2018,
approximately $51,000 of dividends was paid to the holders of the
Series C preferred stock.
The contingent obligation to issue warrants was considered an
outstanding equity-linked financial instrument and therefore was
recognized as equity-classified warrants, initially measured at
relative fair value of approximately $3,727,000, resulting in an
initial discount to the carrying value of the Series C preferred
stock.
Due to the reduction of allocated proceeds to the contingently
issuable common stock warrants and Series C preferred stock, the
effective conversion price of the Series C 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 preferred stock. Since the conversion option of the Series
C 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 Series C
preferred stock of approximately $3,276,000.
Series D Preferred Stock
In September and December 2019, the Company closed
two tranches of its Series D offering (the “Series D
Offering”), pursuant to which the Company issued and sold a
total of 578,898 shares of its 9.75% Series D cumulative preferred
stock at a weighted average price to the public of $24.05 per
share, less underwriting discounts and commissions, pursuant to the
terms of the underwriting agreements that the Company entered into
with Benchmark, as representative of the several
underwriters. The 578,898 shares of Series D preferred stock
that were sold included 43,500 shares sold pursuant to the
overallotment option– that the Company granted to the underwriters. At
December 31, 2019, 36,809 overallotment shares were unissued and
available for purchase by the underwriters within 45 days from
December 17, 2019. In January 2020 the Company issued an additional
11,375 shares of Series D preferred stock upon the partial exercise
by the underwriters of the overallotment option granted to such
underwriters. (See Note 14)
The Series D preferred stock was approved for listing on the Nasdaq
Capital Market under the symbol “YGYIP,” and trading
the Series D preferred stock on Nasdaq commenced on September 20,
2019. The net proceeds to the Company from the Series D
Offering were approximately $12,269,000 after deducting
underwriting discounts and commissions and expenses which were paid
by the Company.
At December 31, 2019, a total of 650,000 shares of the preferred
stock was designated as Series D preferred stock. At December 31,
2019, the Company has available for issuance an additional 71,102
shares of Series D preferred stock. The Series D preferred stock
does not have a stated maturity date and is not subject to any
sinking fund or mandatory redemption provisions. The holders of the
Series D preferred stock are entitled to cumulative dividends from
the first day of the calendar month in which the Series D preferred
stock is issued and payable on the fifteenth day of each calendar
month, when, as and if declared by the Company's board of
directors. The Company’s board of directors has declared an
annual cash dividend of $2.4375 per share, or a monthly dividend of
$0.203125 per share, on the Series D preferred stock.
During the
year ended December 31, 2019, the Company paid $203,000 in cash
dividends to holders of Series D preferred stock.
At December 31, 2019, accrued
dividends payable to holders of record at December 31, 2019 were
approximately $118,000, which were paid in January
2020.
Upon liquidation, dissolution or winding up of the Company, each
holder of Series D preferred stock would be entitled to receive a
distribution, to be paid in an amount equal to $25.00 per share
held by the holders of Series D preferred stock, plus all accrued
and unpaid dividends in preference to any distribution or payments
made or any asset distributed to the holders of common stock, the
Series A preferred stock, the Series B preferred stock, the Series
C preferred stock or any other class or series of stock ranking
junior to the Series D preferred stock.
The Series D preferred stock is not redeemable by the Company prior
to September 23, 2022, except upon a change of control (as defined
in the certificate of designations). On and after such date, the
Company may, at its option, redeem the Series D preferred stock, in
whole or in part, at any time or from time to time, for cash at a
redemption price equal to $25.00 per share, plus any accumulated
and unpaid dividends to, but not including, the redemption date.
Upon the occurrence of a change of control, the Company may, at its
option, redeem the Series D preferred stock, in whole or in part,
within 120 days after the first date on which such change of
control occurred, for cash at a redemption price of $25.00 per
share, plus any accumulated and unpaid dividends to, but not
including, the redemption date. Holders of the Series D
preferred stock generally have no voting rights. The Company has
578,898 shares of Series D preferred stock outstanding at December
31, 2019.
Advisory Agreements
The
Company records the fair value of common stock issued in
conjunction with 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 was recorded through
equity and prepaid advisory fees included in prepaid expenses and other current
assets on the Company’s consolidated balance sheets
and amortized over the life of the service agreement. The stock issuance expense associated with the
amortization of advisory fees was recorded as stock issuance
expense and was included in general and administrative expense on
the Company’s consolidated statements of operations for the
years ended December 31, 2019 and 2018.
Capital Market Solutions, LLC
In July
2018, the Company entered into an agreement with Capital Market
Solutions, LLC (“Capital Market”), pursuant to which
Capital Market agreed to provide investor relations services for a
period of 18 months in exchange for 100,000 shares of restricted
common stock which were issued in advance of the service
period. In addition, the Company agreed to pay a cash base fee
of $300,000 of which $50,000 was paid in August 2018 and the
remaining balance was to be paid monthly in the amount of $25,000.
The Company subsequently extended the term of the Capital Market
agreement for an additional 24 months through December 31, 2021.
The Company also issued an additional 100,000 shares of restricted
common stock to Capital Market in advance of the service period and
paid $125,000 for additional fees. The
fair value of the shares issued was approximately
$1,226,000.
In January 2019, the Capital Market agreement was amended pursuant
to which the aggregate base fee increased to $525,000 and the
Company issued an additional 75,000 of restricted common stock,
with a fair value of $417,000. In addition, the Company issued to
Capital Market a four-year warrant to purchase 925,000 shares of
the Company’s common stock at $6.00 per share, vesting 50% at
issuance, 25% vesting in January 2020 and 25% vesting in January
2021.
During the years ended December 31, 2019 and 2018, the
Company recorded expense of $100,000 and $425,000,
respectively, in connection with the base fee. During the years
ended December 31, 2019 and 2018, the Company recorded
expense of approximately $514,000 and $102,000, respectively, in
connection with amortization of the stock issuance expense. During
the year ended December 31, 2019, the Company recorded
expense of approximately $2,466,000
in connection with amortization of
equity issuance expense related to fair value of the vested portion
of the warrant.
Corinthian Partners, LLC
In August 2019, the Company issued 600 shares of restricted common
stock to Corinthian Partners, LLC, the initial placement agent for
the issuance of the 2018 warrants which represented 10% of the
shares issued to certain investors. The fair value of the shares
issued of approximately $3,000 was fully expensed in
2019.
Greentree Financial Group, Inc.
In March 2018, the Company entered into an agreement
with Greentree Financial Group,
Inc. (“Greentree”), pursuant to which Greentree
agreed to provide investor relations services 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 years ended December 31, 2019 and 2018, the
Company recorded expense of approximately $178,000 and
$133,000, respectively, in connection with amortization of the
stock issuance.
I-Bankers Securities Incorporated
In April 2019, the Company entered into an agreement
with I-Bankers Securities Incorporated
(“I-Bankers”), pursuant to which I-Bankers agreed to
provide financial advisory services for a period of twelve months
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
year ended December 31, 2019, the Company recorded
expense of approximately $428,000 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. During the year ended
December 31, 2019, the Company did not engage in any financing
activity with I-Bankers.
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 years ended December 31, 2019 and
2018, the Company recorded expense of approximately
$119,000 and $89,000, respectively, in connection with amortization
of the stock issuance.
In
March 2019, the Ignition agreement was amended to provide
additional compensation of 55,000 shares of the Company’s
common stock for advisory fees and additionally 5,000 shares of the
Company’s common stock were issued in conjunction with one of
the Company’s equity transactions. Under the amended Ignition
agreement, the Company also issued a warrant convertible upon
exercise of 100,000 shares of the Company’s common stock
exercisable at $10.00 per share for a period of three years for
services provided by Ignition at the amendment date. The fair value
of the shares issued was approximately $384,000 and the fair value
of the warrant issued was approximately $414,000 and was fully
expensed as equity issuance cost and recorded as equity in
2019.
ProActive Capital Resources Group, LLC
The Company entered into an agreement with ProActive
Capital Resources Group, LLC (“PCG”) in
2015 pursuant to which PCG agreed to provide investor relations
services in exchange for fees paid in cash of $6,000 per month and
5,000 shares of restricted common stock to be issued upon
successfully meeting certain criteria in accordance with the
agreement. The Company issued in the aggregate 30,000 shares
of restricted common stock in connection with the PCG agreement
which ended in August 2018.
During the year ended December 31, 2018, the
Company issued 15,000 shares of restricted common stock under
this agreement and recorded equity issuance expense in general and
administrative expenses in the Company’s consolidated
statement of operations of approximately $31,000 in connection with
amortization of the stock issuance.
The Benchmark Company, LLC
In August 2019, the board of directors approved the issuance of
20,000 shares of restricted common stock to Benchmark for
investment banking services provided to the Company. The fair value
of shares issued was approximately $91,000 and was fully expensed
in 2019.
Warrants
At December 31, 2019 and 2018, warrants to purchase 6,238,182 and
5,876,980 shares, respectively, of the Company's common
stock at prices ranging from $2.00 to $10.00 were outstanding. At
December 31, 2019, 6,006,932 warrants are exercisable and expire at
various dates through March
2024 and have a weighted
average remaining term of approximately 1.8 years, a
weighted average exercise price of $4.65, and are included in the
table below at December 31, 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 is presented in the following
table:
|
Balance
at December 31, 2017
|
2,710,066
|
|
Issued
|
3,511,815
|
|
Expired
/ cancelled
|
(120,606)
|
|
Exercised
|
(224,295)
|
|
Balance
at December 31, 2018
|
5,876,980
|
|
Issued
|
1,415,000
|
|
Expired
/ cancelled
|
–
|
|
Exercised
|
(1,053,798)
|
|
Balance
at December 31, 2019
|
6,238,182
|
Warrant Modification – loss on modification of
warrants
In July
2019, Mr. Grover, a beneficial owner of in excess of five percent
of the Company’s outstanding common shares, acquired 600,242
shares of 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 and issued to Mr. Grover
50,000 shares of restricted common stock as an inducement fee
(“Inducement Shares”) and agreed to extend the
expiration date of the remaining unexercised 2014 Warrant held by
him to December 15, 2020 with respect to 182,366 shares of common
stock, in addition the warrant exercise price was adjusted to
$4.75. The 2014 Warrant was classified as a liability.
Between
July and August 2019, two investors from the Company’s 2014
private placement acquired 34,238 shares in the aggregate of the
Company’s common stock upon exercise of their 2014 Warrants.
The investors used the proceeds from their 2014 Note in the amount
of $100,000 and $75,000 which was payable on July 31, 2019 and
August 14, 2019, respectively, by the Company and applied this
amount to the exercise of the warrants. In connection with the
exercise, the Company paid to the investor’s the remaining
balance due on their respective 2014 Note including interest in the
aggregate of approximately $19,000, In addition, as an inducement
to exercise the 2014 Warrant an additional 2,500 Inducement Shares
was issued to one of the investors. The Company recorded in the
aggregate approximately $161,000 related to the noncash portion of
the warrant exercises. The 2014 Warrant was classified as a
liability.
In
August 2019, one investor from the Company’s 2014 private
placement acquired 48,913 shares of the Company’s common
stock upon exercise of their 2014 Warrant. In connection with the
exercise, the Company received approximately $225,000 and issued as
an inducement to exercise the 2014 Warrant issued an additional
5,750 Inducement Shares. The 2014 Warrant was classified as a
liability. The Company also agreed to amend a warrant issued to the
placement agent for the 2014 private placement to purchase 44,107
shares of common stock at $7.00 per share, and a warrant issued to
purchase 60,407 shares of common stock at $4.60 per share of common
stock, both of which were to expire on September 10, 2019
(collectively, the “placement agent warrants”), to
extend the expiration date of the placement agent warrants to
December 15, 2020 for assistance in connection with the above
transaction with Mr. Grover. The placement agent warrants were
classified as equity.
In
August 2019, one investor from the Company’s Series C
offering acquired 63,156 shares of common stock of the Company,
upon the exercise at $4.75 per share of a preferred warrant to
purchase 63,156 shares of common stock held by them. In connection
with such exercise, the Company received approximately $300,000
from the investor, issued to the investor 6,000 Inducement Shares.
The preferred warrant was classified as equity.
The
Company considered the guidance of ASC 470-20-40, Debt with Conversion and Other
Options, ASC 505-50, Equity-Based Payments to Non-Employees and ASC
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/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 was recognized
immediately, as a non-operating expense, since the warrants were
not subject to vesting conditions.
The
fair value of the placement agent warrants was estimated in July
2019 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 warrant was calculated as the number of
shares issued times the per share price of the Company’s
common stock on the exercise date in August 2019. The recorded a
loss on modification of warrants of approximately $876,000 related to the
above warrant modifications.
The Company concluded that the 2014 Warrant held by Mr. Grover
would continue to be treated as a liability
Stock-based Compensation
The Company’s 2012 Stock Option Plan, as amended (the
“2012 Stock Plan”), authorizes the granting of awards
for up to 9,000,000 shares of common stock. In February 2019, the
Company’s board of
directors received consent of the Company’s majority
stockholders to further amend the 2012 Stock Plan to increase the
number of shares of the Company’s common stock that may be
delivered pursuant to awards granted during the life of the 2012
Stock Plan from 4,000,000 to 9,000,000 shares
authorized.
The purpose of the 2012 Stock Plan is to promote the long-term
growth and profitability of the Company by (i) providing key people
and consultants with incentives to improve stockholder value and to
contribute to the growth and financial success of the Company and
(ii) enabling the Company to attract, retain and reward the best
available persons for positions of substantial responsibility. The
2012 Stock Plan allows for the grant of: (a) incentive stock
options; (b) nonqualified stock options; (c) stock appreciation
rights; (d) restricted stock; and (e) other stock-based and
cash-based awards to eligible individuals qualifying under Section
422 of the IRC, in any combination. At December 31, 2019, the
Company had 3,753,656 shares of common stock remaining available
for future issuance under the 2012 Stock Plan.
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):
|
|
|
|
|
|
|
|
Cost
of revenues
|
$95
|
$20
|
|
Sales
and marketing
|
594
|
117
|
|
General
and administrative
|
12,008
|
1,316
|
|
Total
stock-based compensation
|
$12,697
|
$1,453
|
Stock Options
During the year-ended December 31, 2019, the Company issued
2,340,000 10-year incentive stock options to certain employees and
executive officers. The options vest immediately with an exercise
price between $5.56 and $7.47.
During the year-ended December 31, 2019, the Company issued 387,586
10-year non-qualified stock options to its nonemployee board
members other nonemployee service providers. The options vest
immediately with an exercise price between $3.60 and
$5.60.
During the year-ended December 31, 2018, the Company issued 537,500
10-year incentive stock options to certain employees and executive
officers. The options vest monthly over 36 months with an exercise
price of $3.92.
During the year-ended December 31, 2018, the Company issued 356,795
10-year non-qualified stock options to its nonemployee board
members other nonemployee service providers. The options vest
immediately with an exercise price between $3.92 and
$4.80.
A summary of stock option activity is presented in the following
table:
|
|
|
Weighted
Average
Exercise Price
|
Weighted
Average
Remaining Contract Life (years)
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
Outstanding
December 31, 2017
|
1,584,523
|
$4.76
|
6.2
|
$126
|
|
Issued
|
894,295
|
4.02
|
|
|
|
Canceled/expired
|
(73,303)
|
5.81
|
|
|
|
Exercised
|
(11,136)
|
3.80
|
|
33
|
|
Outstanding
December 31, 2018
|
2,394,379
|
4.45
|
6.9
|
3,049
|
|
Issued
|
2,727,586
|
6.51
|
|
|
|
Canceled
/ expired
|
(373,945)
|
5.00
|
|
|
|
Exercised
|
(110,378)
|
4.23
|
|
252
|
|
Outstanding
December 31, 2019
|
4,637,642
|
$5.63
|
7.8
|
–
|
|
Exercisable
December 31, 2019
|
4,145,382
|
$5.75
|
|
–
|
The weighted-average fair value per share of the granted options
for the years ended December 31, 2019 and 2018 was approximately
$4.18 and $2.39, respectively.
At December 31, 2019, there was approximately $1,294,000 of total
unrecognized compensation expense related to unvested stock options
granted under the 2012 Stock Plan. The expense is expected to be
recognized over a weighted-average period of 1.9
years.
The Company uses the Black-Scholes to estimate the fair value of
stock options. The use of a valuation model requires the Company to
make certain assumptions with respect to selected model inputs.
Expected volatility is 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 expected life assumed at
the date of the grant.
The following assumptions were used in the Black-Scholes model to
calculate the compensation cost of stock options:
|
|
|
|
|
|
|
|
Dividend
yield
|
–
|
–
|
|
Stock
price volatility
|
77% - 101%
|
67% - 75%
|
|
Risk-free
interest rate
|
1.47% - 2.6%
|
2.73% - 2.85%
|
|
Expected
life of options (in years)
|
1.5 - 6.5
|
3.0 - 6.0
|
Restricted Stock Units
In August 2019, the Company issued 50,000 restricted stock units to one of its
consultants. Vesting occurs monthly over a three-year period with
the first vesting period commencing one month from the grant date.
The fair value of the restricted stock units issued to the
consultant was based on the grant date closing stock price of $4.55
and is recognized as stock-based compensation expense over the
vesting term of the award. As
of December 31, 2019, 5,556 restricted stock units vested from the
August 2019 issuance.
In August 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 units. Full vesting occurs on the
sixth-year anniversary of the grant date, with 10% vesting on the
third-year, 15% on the fourth-year, 50% on the fifth-year and 25%
on the sixth-year anniversary of the vesting commencement date. The
fair value of each restricted 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. As of
December 31, 2019 and 2018, there were no restricted stock units
vested from the August 2017 issuance.
The Company adopted ASU 2018-07 on January 1, 2019 and the
stock-based compensation expense for non-employee grants was 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.
A summary of restricted stock unit activity is presented in the
following table:
|
|
|
|
Balance
at December 31, 2017
|
500,000
|
|
Issued
|
–
|
|
Canceled
|
(25,000)
|
|
Balance
at December 31, 2018
|
475,000
|
|
Issued
|
50,000
|
|
Canceled
|
(67,500)
|
|
Vested
|
(5,556)
|
|
Balance
at December 31, 2019
|
451,944
|
During the year ended December 31, 2019, the Company recognized
approximately $289,000 stock-based compensation expense. At
December 31, 2019, total unrecognized stock-based compensation
expense related to restricted stock units to employees and
consultants was approximately $1,340,000, which will be recognized
over a weighted average period of 3.6 years. As of December 31,
2019 and 2018, there were no restricted stock units
vested.
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 December 31, 2019, the
Company believes that existing litigation has no merit and it is
not likely that the Company would incur any losses with respect to
litigation.
Vendor Concentration
For the year ended December 31, 2019, the Company’s direct
selling segment made purchases from two vendors, Global Health
Labs, Inc. and Michael Schaeffer, LLC, that individually comprised
more than 10% of total segment purchases and in aggregate
approximated 41% of total segment purchases. For the year ended
December 31, 2018, the Company’s direct selling segment made
purchases from two vendors, Global Health Labs, Inc. and Purity
Supplements, that individually comprised more than 10% of total
segment purchases and in aggregate approximated 41% of total
segment purchases.
For the year ended December 31, 2019, the commercial coffee segment
primarily made purchases of processed green coffee beans from four
vendors, INTL FC Stone Merchant Services, Rothfos Corporation,
Sixto Packaging and the Serengeti Trading Co., that individually
comprised more than 10% of total segment purchases and in aggregate
approximated 73% of our total segment purchases. For the year ended
December 31, 2018, the commercial coffee segment made purchases of
processed green coffee beans from two vendors, H&H and Rothfos
Corporation, which individually comprised more than 10% of total
segment purchases and in aggregate approximated 83% of total
segment purchases.
For the year ended December 31, 2019, the Company’s
commercial hemp segment made purchases from two vendors,
BioProcessing Corp. Ltd. and Xtraction Services, Inc., that
individually comprised more than 10% of total segment purchases and
in aggregate approximated 47% of total segment
purchases.
Customer Concentration
For the
year ended December 31, 2019, the Company’s commercial coffee
segment had three customers,
H&H Export, Carnival Cruise
Lines, Inc. and Topco Associates,
LLC, that individually comprised more than 10% of segment
revenue and in aggregate approximated 54% of total segment revenue. For the year
ended December 31, 2018, the Company’s commercial coffee
segment had two customers, H&H Export and Rothfos Corporation,
that individually comprised more than 10% of segment revenue and in
aggregate approximated 52% of total segment revenue.
At
December 31, 2019 and 2018, CLR's accounts receivable balance for
customer related revenue by H&H Export were approximately
$8,707,000 and $673,000, respectively, of which the full amount was
past due at December 31, 2019. As a result, the Company has
reserved $7,871,000 as bad debt related to this accounts receivable
which is 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
$4,219,000 at December 31, 2019, which are to be delivered in
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
year ended December 31, 2019, the Company’s commercial hemp
segment had three customers, Air Spec, Inc., BioProcessing Corp. Ltd., and Vash Holding,
LLC that individually comprised more than 10% of revenue and
in aggregate approximated 72% of total revenue generated by the
commercial hemp segment.
Note 12. Income Taxes
The income tax provision contains the following components (in
thousands):
|
|
|
|
|
|
|
|
Current:
|
|
|
|
Federal
|
$(66)
|
$(146)
|
|
State
|
(59)
|
292
|
|
Foreign
|
59
|
132
|
|
Total
current
|
(66)
|
278
|
|
Deferred:
|
|
|
|
Federal
|
75
|
239
|
|
State
|
–
|
(112)
|
|
Foreign
|
–
|
11
|
|
Total
deferred
|
75
|
138
|
|
Income
tax provision
|
$9
|
$416
|
During the years ended December 31, 2019 and 2018, the loss before
income taxes related to international operations was $699,000 and
$258,000, respectively.
The reconciliation of income tax computed at the Federal statutory
tax rate to the provision for income taxes is as follows (in
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
Federal
tax provision at statutory rates
|
21.00%
|
21.00%
|
|
State
taxes, net of federal benefit
|
4.11%
|
(2.52)%
|
|
Warrant
modification and debt discount
|
1.97%
|
(6.05)%
|
|
Effect
of permanent differences and other adjustments
|
(0.22)%
|
(0.60)%
|
|
Stock
compensation
|
(4.53)%
|
(0.37)%
|
|
Decrease
in valuation allowance
|
(22.15)%
|
(7.32)%
|
|
Tax
rate change
|
0.03%
|
(0.87)%
|
|
Loss
on debt modification
|
(0.35)%
|
(6.12)%
|
|
|
0.13%
|
0.73%
|
Provision
for income taxes
|
(0.01)%
|
(2.12)%
|
The material items increasing or decreasing the effective tax rate
include the removal of the change in the fair value of the warrant
liability, accounting for state income taxes, the disallowance of
the stock compensation expense associated with Income Stock
Options, and the change in the valuation allowance associated with
the increase in deferred tax assets that are not "more likely than
not" to be realized in future years.
The provision for income taxes differs from the amount of income
tax determined by applying the applicable U.S. statutory federal
income tax rate to pretax income (loss) as a result of the
following differences (in thousands):
|
|
|
|
|
|
|
|
Income
tax benefit at federal statutory rate
|
$(10,916)
|
$(4,171)
|
|
Adjustments
for tax effects of:
|
|
|
|
Foreign
rate differential
|
–
|
74
|
|
State
taxes, net
|
(2,134)
|
540
|
|
Warrant
modification and debt discount
|
(1,025)
|
-
|
|
Stock-based
compensation
|
2,356
|
122
|
|
Other
nondeductible items
|
53
|
40
|
|
Deferred
tax asset adjustment
|
-
|
1,202
|
|
Change
in valuation allowance
|
11,513
|
1,411
|
|
Loss
on debt modification
|
184
|
1,216
|
|
AMT
tax refund
|
(66)
|
(146)
|
|
Tax
rate change
|
(17)
|
173
|
|
Other
|
61
|
(45)
|
|
Income tax provision
|
$9
|
$416
|
Significant components of the Company's deferred tax assets and
liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
Net
operating loss carry-forward
|
$8,203
|
$6,150
|
|
Amortizable
assets
|
4,229
|
548
|
|
Inventory
|
1,337
|
884
|
|
Accruals
and reserves
|
2,249
|
34
|
|
Stock-based
compensation
|
595
|
312
|
|
Credit
carry-forward
|
73
|
148
|
|
Disallowed interest
expense
|
1,886
|
–
|
|
Operating lease
liability
|
2,092
|
–
|
|
Charitable
contributions
|
132
|
104
|
|
Warrants
|
772
|
–
|
|
Total
deferred tax asset
|
21,568
|
8,180
|
|
Deferred
tax liabilities:
|
|
|
|
Prepaids
|
(428)
|
(540)
|
|
Depreciable
assets
|
(95)
|
(148)
|
|
Right-of-use
|
(2,091)
|
-
|
|
Debt
discount - Warrants
|
(22)
|
-
|
|
Total
deferred tax liability
|
(2,636)
|
(688)
|
|
Deferred
tax
|
18,932
|
7,492
|
|
Less
valuation allowance
|
(18,857)
|
(7,344)
|
|
Net
deferred tax asset
|
$75
|
$148
|
The Company has determined through consideration of all positive
and negative evidence that the U.S. deferred tax assets are not
more likely than not to be realized. The Company records a
valuation allowance in the U.S. Federal tax jurisdiction for the
year ended December 31, 2019 to all deferred tax assets and
liabilities. The TCJA enacted
in December 2017 repealed the corporate AMT for tax years beginning
on or after January 1, 2018 and provides for existing AMT tax
credit carryovers to be refunded beginning in 2018. The Company has
approximately $75,000 in refundable credits, and it expects that a
substantial portion will be refunded between 2020 and 2021. As
such, the Company does not have a valuation allowance relating to
the refundable AMT credit carryforward. A valuation allowance
remains on the U.S. state and foreign tax attributes that are
likely to expire before realization. The change in valuation
allowance increased $11,513,000 and $1,411,000 for the years ended
December 31, 2019 and 2018, respectively.
At December 31, 2019, the Company had approximately $13,727,000 in
federal net operating loss carryforwards, which does not expire and
is limited to 80% of federal taxable income when utilized,
$12,636,000 in federal net operating loss carryforwards which begin
to expire in 2029, and $45,222,000 in net operating loss
carryforwards from various states. The Company had $2,965,000 in
net operating losses in foreign jurisdictions.
Pursuant to IRC Section 382, use of net operating loss and credit
carryforwards may be limited if the Company experiences a
cumulative change in ownership of greater than 50% in a moving
three-year period. Ownership changes could impact the
Company's ability to utilize the net operating loss and credit
carryforwards remaining at an ownership change date. The
Company has not completed a Section 382 study.
As a general rule, the Company’s tax returns for fiscal years
after 2016 currently remain subject to examinations by appropriate
tax authorities. None of the Company's tax returns are under
examination at this time.
There was no uncertain tax position related to federal, state and
foreign reporting at December 31, 2019 or 2018.
Note 13. Segment and Geographical
Information
The
Company operates in three
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 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 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 (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 selected financial information for
each segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
Direct
selling
|
$127,011
|
$138,855
|
|
Commercial
coffee
|
19,544
|
23,590
|
|
Commercial
hemp
|
887
|
-
|
|
Total
revenues
|
$147,442
|
$162,445
|
|
Gross profit (loss)
|
|
|
|
Direct
selling
|
$86,160
|
$94,910
|
|
Commercial
coffee
|
8,208
|
122
|
|
Commercial
hemp
|
(408)
|
-
|
|
Total
gross profit
|
$93,960
|
$95,032
|
|
Operating loss
|
|
|
|
Direct
selling
|
$(19,830)
|
$1,733
|
|
Commercial
coffee
|
(13,934)
|
(4,370)
|
|
Commercial
hemp
|
(20,023)
|
-
|
|
Total
operating loss
|
$(53,787)
|
$(2,637)
|
|
Net loss
|
|
|
|
Direct
selling
|
$(20,665)
|
$(3,328)
|
|
Commercial
coffee
|
(11,238)
|
(16,742)
|
|
Commercial
hemp
|
(20,085)
|
-
|
|
Total
net loss
|
$(51,988)
|
$(20,070)
|
|
Capital expenditures
|
|
|
|
Direct
selling
|
$983
|
$356
|
|
Commercial
coffee
|
3,683
|
2,866
|
|
Commercial
hemp
|
5,739
|
-
|
|
Total
capital expenditures
|
$10,405
|
$3,222
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
|
Direct
selling
|
$43,221
|
$38,947
|
|
Commercial
coffee
|
34,348
|
37,026
|
|
Commercial
hemp
|
12,122
|
-
|
|
Total
assets
|
$89,691
|
$75,973
|
Total net property and equipment assets located outside the U.S.
were approximately $7,787,000 and $6,217,000 at December 31, 2019
and 2018, respectively.
The Company conducts its operations primarily in the U.S. For the
years ended December 31, 2019 and 2018 approximately 14%, of the
Company’s revenue were derived from sales outside the
U.S.
The following table displays revenues attributable to customers
located in the U.S. and internationally (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
United
States
|
$125,725
|
$139,985
|
|
International
|
21,717
|
22,460
|
|
Total
revenues
|
$147,442
|
$162,445
|
Note 14. Subsequent Events
Series D Preferred Stock
In January 2020, the
Company issued an additional 11,375 shares of Series D preferred
stock upon the partial exercise by the underwriters in the
Company’s public offering of Series D preferred stock of the
overallotment option granted to such underwriters. The
overallotment shares were sold at a price to the public of $22.75
per share, generating additional gross proceeds of approximately
$259,000. (See Note 10)
Series B Preferred Conversion
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 of the Series B preferred
stock, pursuant to the automatic conversion feature of the Series B
preferred stock. A total of 129,332 shares of Series B preferred
stock outstanding automatically converted into 258,664 shares of
common stock.
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. IGC is 100% owned by Daniel
J. Mangless.
March 2020 Private Placement
In March 2020, the Company closed the initial tranche of its March
2020 private placement debt offering of up to an aggregate
principal amount of $5,000,000 together with up to 250,000 shares
of common stock. Pursuant to the terms of the securities purchase
agreement the Company entered into, the Company received proceeds
of $1,000,000 from one investor, Daniel J. Mangless and issued to
Mr. Mangless, (i) a Senior Secured Promissory Note (the
“Mangless Note”) in the principal amount of $1,000,000,
due December 31, 2020, bearing interest at 18.00% per annum,
receiving proceeds of $1,000,000, and (ii) 50,000 shares of the
Company’s common stock in connection with his
investment.
The Mangless Note provided the Company with an option to prepay the
Mangless Note, 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, dated March 6, 2020 by and between H&H, H&H
Export and CLR to receive certain payments (the
“Mangless Pledge and Security
Agreement”).
On
December 31, 2020, CLR defaulted on the settlement of the Mangless
Note. On April 13, 2021, the Company entered into a Settlement
Agreement (the “Settlement Agreement”), effective as of
April 2, 2021, by and among the Company, CLR, and Mr. Mangless to
settle all claims related to a lawsuit filed by Mr. Mangless
against the Company and CLR, on February 10, 2021, for the alleged
breach by the Company and CLR of their obligations under the
Mangless Note and the Mangless Pledge and Security Agreement (See
Mangless v. Youngevity
International, Inc. and CLR Roasters LLC, Case No. 2021-CA-996-O
(Fla. Cir. Ct.)) (the “Lawsuit”). Pursuant to
the Settlement Agreement, Mr. Mangless has agreed to dismiss the
Lawsuit, with prejudice within five days of the Company making all
of the payments required under the Settlement Agreement. The
Settlement Agreement provides that the Company shall make a
$195,000 payment to Mr. Mangless no later than April 10, 2021 and
make a $101,668 payment to Mr. Mangless beginning on May 1, 2021,
and on the first day of every month thereafter through and
including January 1, 2022, inclusive. In addition, pursuant to the
Settlement Agreement, the Company has agreed to issue Mr. Mangless
1,000,000 shares of its common stock (the “Settlement
Shares”) and that following the date the Company has
completed the audit of its financial statements for the years ended
December 31, 2019 and 2020, if it is then necessary to register the
Settlement Shares with the Securities and Exchange Commission (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. As
of the date of this filing, the Company is compliant under the
terms of the Settlement Agreement, whereby all required cash
payments have been made timely and the Company has issued Mr.
Mangless the Settlement Shares.
Small Business Administration – Paycheck Protection Program
Loan
In April 2020, the Company’s three segments participated in
the recent “The Coronavirus Aid, Relief, and Economic
Security Act (the “CARES Act”)”, and the Paycheck
Protection Program (the “PPP”) due to losses caused by
the COVID-19 pandemic. The Company received cash in the aggregate
of $3,763,295 from qualified Small Business Administration
(“SBA”) lenders. In addition, under the SBA loans, the
Company’s Direct Selling segment qualified for mortgage
assistance, whereby the Company’s corporate office’s
mortgage has been paid directly from the SBA lenders. The Company
qualified for the mortgage payment program for a period of six
months, as such the SBA has paid approximately $50,000 directly to
the Company’s mortgage holder.
On April 21, 2021, CLR received a second PPP loan in the amount of
$632,895, payable within 60 months if relief for the loan is not
granted. As of the date of this filing, the Company received relief
of $622,500 related to KII.
The Company is currently in communication with the SBA lenders
regarding the potential liability the Company will incur (if any)
in respect for repayment of all the Company’s remaining
unforgiven loans and consideration of any portion of loans
forgiveness of the debt.
Joint Venture Agreement in Nicaragua for Hemp Processing Center
between the CLR and KII and Nicaraguan partner
On April 20 and July 29, 2020, CLR and KII (the “U.S.
Partners”) entered into agreements (“Hemp Joint Venture
Agreement”) with H&H Export and Fitracomex, Inc. (“Fitracomex”)
(collectively “The Nicaraguan Partners”) and
established the hemp joint venture (the “Nicaraguan Hemp Grow
and Extractions Group” or the “Hemp Joint
Venture”).
The
agreement calls for H&H Export to 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.
The
agreement calls for Nicaraguan Partners to 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.
Additionally,
the U.S. Partners’ parent company Youngevity International
Inc., subject to the approval of Nasdaq agreed to issue 1,500,000
shares of its restricted common stock, par value per share, to
Fitracomex. In accordance with the Hemp Joint Venture Agreement, in
July 2020 the Parent Company issued to Fitracomex the agreed upon
shares of restricted common stock. The U.S. Partners agreed to
issue warrants to Fitracomex for the purchase 5,000,000 shares of
the Parent Company common stock at an exercise price of US $1.50,
exercisable for a term of five (5) years after completion
of the construction and upon the
approval by the Parent Company’s stockholders of the proposed
issuance. In addition, the U.S. Partners agreed to use
its best efforts to register the resale of the shares of the Parent
Company’s common stock to Fitracomex under the U.S.
Securities Act of 1933, as amended (the "Securities Act"), and make
any necessary applications with Nasdaq to list the
shares.
The
U.S. Partners and H&H Export will serve as the managing
partners with 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 among the partners as follows:
twenty five percent (25%) to the Nicaraguan Partners and seventy
five percent (75%) to the U.S. Partners.
Restricted Stock Units
In
August 2020, the Company issued 39,750 shares of common stock due
to partial vesting of restricted stock units, issued to certain
employees and consultants of the Company. (See Note 10,
“Restricted Stock Units”)
Resignation of Certain Board Members
On February 11, 2020, in order to maintain compliance with the
corporate governance requirements of The Nasdaq Capital Market, and
specifically Listing Rule 5605(b) which provides that a listed
company’s board of directors shall be comprised of a majority
of independent directors, Michelle Wallach and Richard Renton, two
non-independent members of the Board of Directors of the Company,
resigned as members of the Board of Directors of the Company. The
notices of resignation provided by each director specifically
stated that the resignations were not the result of any
disagreement with the Company on any matter related to the
Company’s operations, policies or practices.
Appointment of Certain Officers and Board Members
On
October 25, 2020, William G. Thompson resigned from the Board of
Directors of the Company and as a member and chairman of the Audit
Committee to accept the position of Chief Financial Officer of the
Company effective October 26, 2020. In connection with Mr.
Thompson’s appointment, David S. Briskie was appointed Chief
Investment Officer of the Company and resigned as the
Company’s Chief Financial Officer. Mr. Briskie also retains
his title as the Company’s President.
On October 27, 2020, Daniel Dorsey was appointed to the Board of
Directors of the Company to fill the vacancy created by Mr.
Thompson’s resignation. Mr. Dorsey serves on the Audit
Committee and his term as a director continues until such time as
his successor is duly elected and qualified, or until his earlier
resignation or removal.
Credit Note
On
December 12, 2020, that certain 8% Credit Note, in the principal
amount of $5,000,000 (the “Credit Note”), issued by
CLR, under that certain Credit Agreement, dated as of December 13,
2018, by and between CLR, Siles Family Plantation Group and Carl
Grover became due and matured in accordance with its terms. CLR did
not make the payment due upon the maturity date of the Credit Note
and is in negotiations with the estate of Mr. Grover regarding a
forbearance. Pursuant to a Security Agreement, dated December 13,
2018, entered into by CLR with Mr. Grover, the Credit Note is
secured by a first priority lien granted by CLR in its green
coffee inventory. In addition, CLR’s subsidiary, Siles Family
Plantation Group S.A. executed a separate Guaranty Agreement,
dated December 13, 2018, and Stephan Wallach and Michelle
Wallach, pledged 1,500,000 shares of the Company’s Common
Stock held by them to secure the Credit Note. As of the date of
this filing, the Company is in default
of the terms of settlement of the Credit Note. (See Note
6)
2019 Private Placement Notes – Convertible Notes
On February 18, 2021, the Company entered into note amendments (the
“6% Note Amendments”) with certain holders of an
aggregate of $1,000,000 in principal amount of those 6% secured
convertible notes (the “6% Notes”), issued by the
Company to such investors (the “Investors”) on February
15, 2019. The 6% Notes had been in default and the 6% Note
Amendments extend the maturity date of the 6% Notes held by the
Investors by one year, to February 15, 2022, as applicable, and
increase the interest rate to 16%. In connection with the
foregoing, as an inducement to enter into the 6% Note Amendments,
the Company issued to certain holders of the 6% Notes an aggregate
of 150,000 shares of its restricted common stock, par value $0.001
per share. As of the date of this filing, the Company is in default
of the terms of settlement set forth in the 6% Note
Amendments. (See Note
7)
On March 16, 2021, the Company entered into note amendments (the
“6% Note Amendments”) with certain note holders of an
aggregate of $1,190,000 in principal amount of those 6% secured
convertible notes (the “6% Notes”), issued by the
Company to such investors (the “Investors”) on February
15, 2019 and March 13, 2019. The 6% Notes had been in default and
the 6% Note Amendments extend the maturity date of the 6% Notes
held by the Investors by one year, to February 15, 2022 and March
15, 2022, as applicable, and increase the interest rate to 12%. In
connection with the foregoing, as an inducement to enter into the
6% Note Amendments, the Company issued to the holders of the 6%
Notes an aggregate of 178,500 shares of its restricted common
stock, par value $0.001 per share. As of the date of this
filing, the Company is in default of the terms of settlement set
forth in the 6% Note
Amendments. (See Note
7)
March 2019 Promissory Note
On February 18, 2021, the Company entered into note amendments (the
“8% Note Amendments”) with the holders of an aggregate
of $2,000,000 in principal amount of those certain 8% secured
promissory notes (the “8% Notes”), issued by the
Company to such investors (the “Investors”) on March
18, 2019. The 8% Notes were not in default at the time of the
amendment. The 8% Note Amendments extend the maturity date of the
8% Notes held by the Investors by one year, to March 18, 2022, as
applicable, and increase the interest rate to 16%. In connection
with the foregoing, as an inducement to enter into the 8% Note
Amendments, the Company issued to certain holders of the 8% Notes
an aggregate of 400,000 shares of its restricted common stock, par
value $0.001 per share. In addition, we issued one of the note
holders a two-year warrant to purchase 150,000 shares of our common
stock at a price per share of $1.00. As of the date of this
filing, the Company is in default of the terms of settlement set
forth in the 8% Note
Amendments. (See Note
7)
Dividends
Declaration of Monthly Dividends for Series "D" Cumulative
Redeemable Perpetual Preferred Stock
During
the year ended December 31, 2020, the
Company announced the declaration of its regular monthly dividend
of $0.203125 per share of its 9.75% Series D Cumulative
Redeemable Perpetual Preferred Stock for each calendar quarter
to holders of record as of the last day of the month in 2020,
payable on the fifteenth day of each calendar month. The
Company paid cash dividends of approximately $1,434,000 during
2020.
Declaration of Monthly Dividend for the 1st Quarter of 2021 for Series "D"
Cumulative Redeemable Perpetual Preferred Stock
On January 1, 2021, the Company announced the declaration of its
regular monthly dividend of $0.203125 per share of its
9.75% Series D Cumulative Redeemable Perpetual Preferred Stock
(OTCM:YGYIP) for each of January, February and March 2021.
The dividend will be payable on February 15, 2021, March
15, 2021 and April 15, 2021 to holders of record as of January
31, February 28 and March 31, 2021. The Company paid cash dividends
of approximately $360,000 for the three months declared
above.
Declaration of Monthly Dividend for the 2nd Quarter of 2021 for Series "D"
Cumulative Redeemable Perpetual Preferred Stock
On April 12, 2021, the Company announced the declaration of its
regular monthly dividend of $0.203125 per share of its
9.75% Series D Cumulative Redeemable Perpetual Preferred Stock
(OTCM:YGYIP) for each of April, May and June 2021. The
dividend will be payable on May 17, 2021, June 15, 2021 and
July 15, 2021 to holders of record as of April 30, May 31 and
June 30, 2021. The Company paid cash dividends of approximately
$120,000 for each month of April and May 2021 on May 17, 2021 and
June 15, 2021, respectively. The Company intends to pay in cash
approximately $120,000 for the month of June 2021 declared
above.
Auditor Appointment & Nasdaq Delisting
On October 25, 2020, the Company’s Audit Committee
approved the appointment of MaloneBailey,
LLP (“MaloneBailey”) as its new independent
registered public accounting firm responsible for auditing its
financial statements. On October 12, 2020, the Board of Directors
was notified by its then registered independent certified public
accounting firm, Mayer Hoffman McCann P.C., of San Diego, CA that
it had resigned, effective immediately. Mayer Hoffman McCann P.C.
had served as the Company’s registered independent certified
public accountants since 2011.
On November 18, 2020, the Company received notice from the Nasdaq
Hearings Panel (the “Panel”) that it had determined to
delist the Company’s securities from The Nasdaq Stock Market
LLC (“Nasdaq”) based upon the Company’s
non-compliance with the filing requirements set forth in Nasdaq
Listing Rule 5250(c)(1) for failing to file its Form 10-K for
the year ended December 31, 2019, and Forms 10-Q for the periods
ended March 31, 2020 and June 30, 2020. Effective with the
open of the markets on Friday, November 20, 2020, the
Company’s common stock and Series D preferred stock commenced
trading under its trading symbols YGYI and YGYIP on the OTC Markets
system.
Updates with H&H
On
March 6, 2020, CLR entered into a Finance, Security and ARAP
Monetization Agreement (the “Agreement”)
with H&H Export Y CIA. LTDA, and H&H Coffee Group
Export Corp (collectively, “H&H”). H&H is the
agent for the independent green coffee growers from which CLR
purchases its unprocessed coffee beans and H&H also purchases
processed coffee beans from CLR that it sells to third parties. The
owners of H&H are also employees of CLR and manage the La Pita
plantation in Nicaragua for which they receive a percentage of
profit derived from green coffee sales processed in Nicaragua.
Pursuant to the Agreement, H&H has agreed to allow a Nicaraguan
agency (the “Agency”), to advance on behalf of H&H,
approximately $22,000,000 of the $30,100,000 of accounts receivable
owed by H&H to CLR for its purchase of processed green coffee
during the 2019 season. The Agency has also entered into a
$46,500,000 credit facility with H&H to provide funding for
H&H’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 will be
paid an additional amount, at a rate of $.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 to CLR. Until such time as the entire accounts receivable
balance is paid in full, H&H 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 2019
receivable balances, management considers the H&H receivable
impaired at December 31, 2019. Subsequent to the Agreement, CLR
adopted the recognition of recording revenues at net for sales
between CLR and H&H.
On March 2, 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,
described as “H&H Coffee Liability”, that is
composed of:
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past
due accounts receivable owed to CLR from H&H for 2019 and
2020;
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the
$5,000,000 note due plus accrued interest on the note;
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CLR
lost profits in 2019 and 2020;
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the
return of working capital provided by CLR for the 2019 and 2020
green coffee program.
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The
agreement also includes an offset against amounts owed by H&H
to CLR consisting of:
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H&H’s
25% profit sharing participation for 2019 and 2020;
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and an
offset of H&H’s open payables owed by CLR to H&H in
the amount of approximately $243,000.
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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 of strictly high grown coffee
(approximately 825,000 pounds of 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 $5,340,000 related to the H&H notes
receivable during the year ended December 31, 2019 due to
H&H’s repayment history and risks associated with
redemption of the receivable in coffee.
Properties Available-for-Sale
In February 2021, the Company determined that certain properties
acquired with the February 2019 KII acquisition were redundant
after KII moved its primary operations to Orlando, FL thereby no
longer needing multiple locations.
In addition, subsequent to the acquisition closing, KII
purchased in February 2019
45-acres in Groveland, FL (“Groveland”). The Company
determined that its original plan for use is not viable at the
present time as KII shifted its focus back on its primary core
business of extraction of cannabinoids and the production of
products for sale with the cannabinoids. Currently KII has listed
for sale its Clermont, FL property which was used as a testing
laboratory facility. On May 26,
2021, the Groveland property was sold for $800,000. KII’s
remaining production property in Mascotte, FL is expected to be
listed for sale by the end of 2021.
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