Notes to Unaudited Condensed
Consolidated Financial Statements
Note 1. Basis of Presentation and Description of
Business
Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission (the “SEC”) for
interim financial information. Accordingly, certain information and
footnote disclosures, normally included in financial statements
prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to such rules
and regulations.
Youngevity
International, Inc. (the “Company”) consolidates all
wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in
consolidation.
The
statements presented as of March 31, 2019 and for the three months
ended March 31, 2019 and 2018 are unaudited. In the opinion of
management, these financial statements reflect all normal recurring
and other adjustments necessary for a fair presentation, and to
make the financial statements not misleading. These condensed
consolidated financial statements should be read in conjunction
with the audited consolidated financial statements included in the
Company’s Form 10-K for the year ended December 31, 2018,
filed with the SEC on April 15, 2019. The results for interim
periods are not necessarily indicative of the results for the
entire year.
Nature of Business
Youngevity
International, Inc. (the “Company”), founded in 1996,
develops and distributes health and nutrition related products
through its global independent direct selling network, also known
as multi-level marketing, and sells coffee products to commercial
customers. During the year ended December 31, 2018 the
Company operated in two business segments, its direct selling
segment where products are offered through a global distribution
network of preferred customers and distributors and its commercial
coffee segment where products are sold directly to businesses.
During the first quarter of 2019, the Company through the
acquisition of the assets of Khrysos Global, Inc. added a third
business segment to its operations, the commercial hemp segment.
The Company's three segments are listed below:
●
Commercial
coffee business is operated through CLR and its wholly owned
subsidiary, Siles Plantation Family Group S.A.
(“Siles”).
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Domestic direct selling network is operated
through the following (i) domestic subsidiaries: AL Global
Corporation, 2400 Boswell LLC, MK Collaborative LLC, and Youngevity
Global LLC and (ii) foreign subsidiaries: Youngevity Australia Pty.
Ltd., Youngevity NZ, Ltd., Youngevity Mexico S.A. de CV, Youngevity
Israel, Ltd., Youngevity Russia, LLC, Youngevity Colombia S.A.S,
Youngevity International Singapore Pte. Ltd., Mialisia Canada, Inc.
and Legacy for Life Limited (Hong Kong). The Company also operates
through the BellaVita Group LLC, with operations in Taiwan, Hong
Kong, Singapore, Indonesia, Malaysia and Japan. The Company
also operates subsidiary branches of
Youngevity Global LLC in the Philippines and
Taiwan.
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Commercial
hemp business is operated through the Company’s wholly owned
subsidiary, Khrysos Industries, Inc., a Delaware corporation.
Khrysos Industries, Inc. acquired the assets of Khrysos Global Inc.
a Florida corporation in February 2019 and the wholly-owned
subsidiaries of Khrysos Global Inc., INXL Laboratories, Inc., a
Florida corporation and INX Holdings, Inc., a Florida
corporation.
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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), mill
processing of green coffee, and sales of green 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.”
During
the three months ended March 31, 2019, the Company derived
approximately 81.1% of its revenue from its direct selling segment
and approximately 18.7% of its revenue from its commercial coffee
segment. Commercial hemp segment revenues during the current
quarter represented 0.2% of total revenues as it is newly acquired.
During the three months ended March 31, 2018, the Company had two
reportable segments and derived approximately 82% of its revenue
from its direct selling segment and approximately 18% of its
revenue from its commercial coffee segment.
Liquidity
and Going Concern
The
accompanying condensed consolidated financial statements have been
prepared and presented on a basis assuming the Company will
continue as a going concern. The Company has sustained significant
losses during the three months ended March 31, 2019 and 2018 of
approximately $12,260,000 and $2,308,000, respectively. Net cash
used in operating activities was approximately $4,831,000 and
$1,427,000 for the three months ended March 31, 2019 and 2018,
respectively. The Company does not currently believe that its
existing cash resources are sufficient to meet the Company’s
anticipated needs over the next twelve months from the date hereof.
Based on its current cash levels and its current rate of cash
requirements, the Company will need to raise additional capital
and/or will need to further reduce its expenses from current
levels. These factors raise substantial doubt about the
Company’s ability to continue as a going
concern.
The
Company anticipates that revenues will grow, and it intends to make
necessary cost reductions related to international operations that
are not performing well and reduce non-essential
expenses.
The
Company is also considering multiple other fund-raising
alternatives.
On March 18, 2019,
the Company entered into a two-year Secured Promissory Note (the
“Note” or “Notes”) with two (2) accredited
investors that had a substantial pre-existing relationship with the
Company pursuant to which the Company raised cash proceeds of
$2,000,000. In consideration of the Notes, the Company issued
20,000 shares of the Company’s common stock par value $0.001
for each $1,000,000 invested as well as for each $1,000,000
invested five-year warrants to purchase 20,000 shares of the
Company’s common stock at a price per share of
$6.00. The Notes pay interest at
a rate of eight percent (8%) per annum and interest is paid
quarterly in arrears with all principal and unpaid interest due at
maturity on March 18, 2021.
On
February 15, 2019 and on March 10, 2019, the Company closed its
first and second tranches of its 2019 January Private
Placement debt offering, respectively, pursuant to which the
Company offered for sale notes in the principal amount of a minimum
of $100,000 and a maximum of notes in the principal amount
$10,000,000 (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 thirteen (13)
accredited investors that had a substantial pre-existing
relationship with the Company pursuant to which the Company
received aggregate gross proceeds of $2,440,000 and issued the 2019
PIPE Notes in the aggregate principal amount of $2,440,000 and an
aggregate of 48,800 shares of common stock. The placement agent
received 12,200 shares of common stock in aggregate for the first
and second tranches. The placement agent will receive up to 50,000
shares of common stock in the offering. Each 2019 PIPE Note matures
24 months after issuance, bears interest at a rate of six percent
(6%) per annum, and the outstanding principal is convertible into
shares of common stock at any time after the 180th day anniversary
of the issuance of the 2019 PIPE Note, at a conversion price of $10
per share (subject to adjustment for stock splits, stock dividends
and reclassification of the common stock).
On
February 6, 2019, the Company entered into a Securities Purchase
Agreement (the “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 the Company’s common stock, par value
$0.001 per share, 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 proceeds to the Company were
$1,750,000. Consulting fees for arranging the Purchase Agreement
include the issuance of 5,000 shares of restricted shares of the
Company’s common stock, par value $0.001 per share, and
100,000 3-year warrants priced at $10.00. No cash commissions were
paid.
On January
7, 2019, the Company entered into an At-the-Market Offering
Agreement (the “ATM Agreement”) with The Benchmark
Company, LLC (“Benchmark”), as sales agent, pursuant to
which the Company may sell from time to time, at its option, shares
of its common stock, par value $0.001 per share, through Benchmark,
as sales agent (the “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 issue any shares pursuant to the ATM Agreement. The
Company will pay the Sales Agent 3.0% commission of the gross sales
proceeds. During the three months ended March 31, 2019, the Company
sold a total of 1,000 shares of common stock under the ATM
Agreement.
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.
Failure
to raise additional funds from the issuance of equity securities
and failure to implement cost reductions could adversely affect the
Company’s ability to operate as a going concern. The
financial statements do not include any adjustments that might be
necessary from the outcome of this uncertainty.
Use of Estimates
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States
(“GAAP”) requires the Company to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expense for each reporting period. Estimates are
used in accounting for, among other things, allowances for doubtful
accounts, deferred taxes and related valuation allowances,
fair value of derivative liabilities, uncertain tax positions, loss
contingencies, fair value of options granted under the
Company’s stock-based compensation plan, fair value of assets
and liabilities acquired in business combinations, finance leases,
asset impairments, estimates of future cash flows used to evaluate
impairments, useful lives of property, equipment and intangible
assets, value of contingent acquisition debt, inventory
obsolescence, and sales returns.
Actual
results may differ from previously estimated amounts and such
differences may be material to the consolidated financial
statements. Estimates and assumptions are reviewed
periodically, and the effects of revisions are reflected
prospectively in the period they occur.
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.
Related Party Transactions
Richard Renton
Richard
Renton is a member of the Board of
Directors and owns and operates WVNP, Inc., a supplier of
certain inventory items sold by the Company. The Company made
purchases of approximately $8,000 and $54,000 from WVNP Inc., for
the three months ended March 31, 2019 and 2018,
respectively.
Carl Grover
Mr.
Grover is the sole beneficial owner of in excess of five percent
(5%) of the Company’s outstanding common shares. On December
13, 2018, CLR, entered into a Credit Agreement with Mr. Grover (the
“Credit Agreement”) pursuant to which CLR borrowed
$5,000,000 from Mr. Grover and in exchange issued to him a
$5,000,000 credit note (“Credit Note”) secured by its
green coffee inventory under a Security Agreement, dated December
13, 2018 (the “Security Agreement”), with Mr. Grover
and CLR’s subsidiary, Siles Family Plantation Group S.A.
(“Siles”), as guarantor, and Siles executed a separate
Guaranty Agreement (“Guaranty”). The Company issued to
Mr. Grover a four-year warrant to purchase 250,000 shares of our
common stock, exercisable at $6.82 per share, and a four-year
warrant to purchase 250,000 shares of the Company’s common
stock, exercisable at $7.82 per share, pursuant to a Warrant
Purchase Agreement, dated December 13, 2018, with Mr. Grover. (See
Note 7 below.)
Paul Sallwasser
Mr.
Paul Sallwasser is a member of the board directors and prior
to joining the Company’s Board of Directors he acquired a
note (the “2014 Note”) issued in the Company’s
private placement consummated in 2014 (the “2014 Private
Placement”) in the principal amount of $75,000 convertible
into 10,714 shares of common stock and a warrant (the “2014
Warrant”) issued, in the 2014 Private Placement, exercisable
for 14,673 shares of common stock. Prior to joining the
Company’s Board of Directors, Mr. Sallwasser acquired in the
2017 Private Placement a 2017 Note in the principal amount of
approximately $38,000 convertible into 8,177 shares of common stock
and a warrant (the “2017 Warrant”) issued, in the 2017
Private Placement, exercisable for 5,719 shares of common stock.
Mr. Sallwasser also acquired in the 2017 Private Placement in
exchange for the “2015 Note” that he acquired in the
Company’s private placement consummated in 2015 (the
“2015 Private Placement”), a 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. On March
30, 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.
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 March 31, 2019 was 7.75%. The
lender will adjust the interest rate on the first calendar day of
each change period or calendar quarter. The Company and its Chief
Executive Officer are both co-guarantors of the mortgage. As of
March 31, 2019, the balance on the long-term mortgage is
approximately $3,198,000 and the balance on the promissory note is
zero.
Other Relationship Transactions
Hernandez, Hernandez, Export Y Company and H&H Coffee Group
Export Corp.
The
Company’s commercial coffee segment, 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. Substantially all the green coffee
processed through the Siles mill was coffee assigned to CLR for
processing. In addition, during 2018, CLR sold green coffee beans
to H&H Coffee Group Export Corp., (“H&H
Export”), a Florida based company which is affiliated with
H&H. In consideration for H&H's sourcing of green coffee
for processing within CLR’s mill, CLR and H&H share in
the green coffee profit from milling operations.
CLR made purchases from H&H of approximately $2,576,000 of
green coffee for the three months ended March 31, 2019, for use in
the Company’s Miami roasting facilities. There were no
purchases of green coffee from H&H to be sold to other third
parties during the three months ended March 31, 2019.
CLR
made purchases from H&H of approximately $3,734,000 of green
coffee for the three months ended March 31, 2018, for use in the
Company’s Miami roasting facilities and for use in selling
processed green coffee to third parties.
During
the three months ended March 31, 2019, CLR recorded net revenues
from processing services of approximately $4,826,000. There was no
processing service revenue during the three months ended March 31,
2018.
During
the three months ended March 31, 2018, CLR recorded the sale of
processed green coffee beans, to H&H Export as gross revenue of
$2,443,000. There were no processed green coffee bean sales, to
H&H Export during the three months ended March 31,
2019.
In
May 2017, the Company entered a settlement agreement with Alain
Piedra Hernandez, one of the owners of H&H and the operating
manager of Siles, who was issued a non-qualified stock option for
the purchase of 75,000 shares of the Company’s common stock
at a price of $2.00 with an expiration date of three years, in lieu
of an obligation due from the Company to H&H as relates to a
Sourcing and Supply Agreement with H&H. During the period ended
September 30, 2017 the Company replaced the non-qualified stock
option and issued a warrant agreement with the same terms. There
was no financial impact related to the cancellation of the option
and the issuance of the warrant. As of March 31, 2019, the warrant
remains outstanding.
In
December 2018, CLR advanced $5,000,000 to H&H Export to provide
services in support of a 5-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. On March 31, 2019, this advance was
converted to a $5,000,000 loan agreement and bears interest at 9%
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. The loan is secured by H&H Export’s
hedging account with INTL FC Stone, trade receivables, green coffee
inventory in the possession of H&H Export and all green coffee
contracts.
Mill Construction Agreement
On
January 15, 2019, CLR entered into the CLR Siles Mill Construction
Agreement (the “Mill Construction Agreement”) with
H&H and H&H Export, Alain Piedra Hernandez
(“Hernandez”) and Marisol Del Carmen Siles Orozco
(“Orozco”), together with H&H, H&H Export,
Hernandez and Orozco, 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
“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.
In addition, the Nicaraguan Partner and CLR agreed to contribute
$4,700,000 each toward the construction of a processing plant,
office, and storage facilities (“Mill”) on the property
for processing coffee in Nicaragua. As of March 31, 2019, the
Company paid $1,350,000 towards construction of a mill, which is
included in construction in process within property and equipment,
net on the Company's condensed consolidated balance
sheet.
Amendment to Operating and Profit-Sharing Agreement
On
January 15, 2019, CLR entered into an amendment to the March 2014
operating and profit-sharing agreement with the owners of H&H. CLR previously engaged
Hernandez and Orozco, the owners of H&H as employees to manage
Siles. In addition, CLR and H&H, Hernandez and Orozco have
agreed to restructure their profit-sharing agreement in regard to
profits from green coffee sales and processing that increases the
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 processing from La Pita, a leased mill, or
the new mill, now will provide for a split of profits of 75% to CLR
and 25% to the Nicaraguan Partner, after certain conditions are
met. The Company issued 295,910 shares of the Company’s
common stock to H&H Export to pay for certain working capital,
construction and other payables. In addition, H&H Export has
sold to CLR its espresso brand Café Cachita in consideration
of the issuance of 100,000 shares of the Company’s common
stock. Hernandez and Orozco are employees of CLR. The shares of
common stock issued were valued at $7.50 per
share.
Revenue Recognition
The
Company recognizes revenue from product sales under 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, below).
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 the Company’s
distributor website and a genealogy position with no down line
distributors.
The
Company has determined that most contracts will be completed in
less than one year. For those transactions where all performance
obligations will be satisfied within one year or less, the Company
is applying the practical expedient outlined in ASC 606-10-32-18.
This practical expedient allows the Company not to adjust promised
consideration for the effects of a significant financing component
if the Company expects at contract inception the period between
when the Company transfers the promised good or service to a
customer and when the customer pays for that good or service will
be one year or less. For those transactions that are expected to be
completed after one year, the Company has assessed that there are
no significant financing components because any difference between
the promised consideration and the cash selling price of the good
or service is for reasons other than the provision of
financing.
Deferred Revenues and Costs
As
of March 31, 2019 and December 31, 2018, the balance in deferred
revenues was approximately $2,268,000 and $2,312,000, respectively.
Deferred revenue related to the Company’s direct selling
segment is attributable to the Heritage Makers product line and
also for future Company convention and distributor
events.
Deferred
revenues related to Heritage Makers were approximately $2,095,000
and $2,153,000, as of March 31, 2019, and December 31, 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. As of March 31, 2019 and 2018, the balance in deferred
costs was approximately $338,000 and $364,000, respectively, and is
included in prepaid expenses and current assets.
Deferred
revenues related to pre-enrollment in upcoming conventions and
distributor events of approximately $173,000 and $159,000 as
of March 31, 2019 and December 31, 2018, respectively, relate
primarily to the Company’s 2019 and 2018 events. The Company
does not recognize this revenue until the conventions or
distributor events occur.
Plantation Costs
The
Company’s commercial coffee segment includes the results of
Siles, which is a 500-acre coffee plantation and a dry-processing
facility located on 26 acres located in Matagalpa, Nicaragua. Siles
is a wholly-owned subsidiary of CLR, and the results of
CLR include the depreciation and amortization of capitalized
costs, development and maintenance and harvesting costs of
Siles. In accordance with GAAP, plantation maintenance and
harvesting costs for commercially producing coffee farms are
charged against earnings when sold. Deferred harvest costs
accumulate and are capitalized throughout the year and are expensed
over the remainder of the year as the coffee is sold. The
difference between actual harvest costs incurred and the amount of
harvest costs recognized as expense is recorded as either an
increase or decrease in deferred harvest costs, which is reported
as an asset and included with prepaid expenses and other current
assets in the condensed consolidated balance sheets. Once the
harvest is complete, the harvest costs are then recognized as the
inventory value. Deferred costs associated with the harvest as of
March 31, 2019 and December 31, 2018 are approximately zero and
$400,000, respectively, and are included in prepaid expenses and
other current assets on the Company’s balance
sheets.
Stock-based Compensation
The Company accounts for stock-based compensation
in accordance with ASC Topic 718, “Compensation – Stock
Compensation,” which
establishes accounting for equity instruments exchanged for
employee services. 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, under the
straight-line method, over the vesting period of the equity
grant.
The
Company accounts for equity instruments issued to non-employees in
accordance with authoritative guidance for equity-based payments to
non-employees. Stock options issued to non-employees are accounted
for at their estimated fair value, determined using the
Black-Scholes option-pricing model. The fair value of options
granted to non-employees is re-measured as they vest, and the
resulting increase in value, if any, is recognized as expense
during the period the related services are rendered.
Income Taxes
The Company accounts for income taxes in
accordance with ASC Topic 740, "Income
Taxes," under the asset
and liability method which includes the recognition of deferred tax
assets and liabilities for the expected future tax consequences of
events that have been included in the consolidated financial
statements. Under this approach, deferred taxes are recorded for
the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The
provision for income taxes represents income taxes paid or payable
for the current year plus the change in deferred taxes during the
year. Deferred taxes result from differences between the financial
statement and tax basis of assets and liabilities and are adjusted
for changes in tax rates and tax laws when changes are enacted. The
effects of future changes in income tax laws or rates are not
anticipated.
Income
taxes for the interim periods are computed using the effective tax
rates estimated to be applicable for the full fiscal year, as
adjusted for any discrete taxable events that occur during the
period.
The
Company files income tax returns in the United States
(“U.S.”) on a federal basis and in many U.S. state and
foreign jurisdictions. Certain tax years remain open to examination
by the major taxing jurisdictions to which the Company is
subject.
Commitments and Contingencies
The
Company is from time to time, the subject of claims and suits
arising out of matters related to the Company’s business. The
Company is party to litigation at the present time and may become
party to litigation in the future. In general, litigation claims
can be expensive, and time consuming to bring or defend against and
could result in settlements or damages that could significantly
affect financial results. It is not possible to predict the final
resolution of the current litigation to which the Company is party
to, and the impact of certain of these matters on the
Company’s business, results of operations, and financial
condition could be material. Regardless of the outcome, litigation
has adversely impacted the Company’s business because of
defense costs, diversion of management resources and other
factors
Recently Issued Accounting Pronouncements
In
August 2018, the
Financial Accounting Standards Board
(FASB) issued Accounting
Standards Update (ASU) No. 2018-15, Intangibles
— Goodwill and Other — Internal-Use Software
(Subtopic 350-40): Customer’s Accounting for
Implementation Costs Incurred in a Cloud Computing Arrangement That
Is a Service Contract. Subtopic 350-40
clarifies the accounting for implementation costs of a hosting
arrangement that is a service contract and aligns that accounting,
regardless of whether the arrangement conveys a license to the
hosted software. The amendments in this update are effective for
reporting periods beginning after December 15, 2019, with
early adoption permitted. The Company does not expect
this new guidance to have a material impact on its condensed
consolidated financial statements.
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. The Company expects
to adopt the provisions of this guidance on January 1, 2020 and is
currently evaluating the impact that Topic 820 will have on its
related disclosures.
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 does not expect
this new guidance to have a material impact on its condensed
consolidated financial statements.
Recently Adopted Accounting Pronouncements
In
February 2018, the FASB issued Accounting Standards Update 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 Tax Cuts and Jobs Act (H.R.1) (the Act). Consequently, the
amendments eliminate the stranded tax effects resulting from the
Act 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
Act, 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 condensed
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 accounted 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 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 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 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.
Following
the expiration of the Company’s Emerging Growth Company
filing status (“EGC”) on December 31, 2018 the Company
adopted the following accounting pronouncements effective January
1, 2018.
In May
2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic
606), to supersede nearly all existing revenue recognition
guidance under GAAP. Topic 606 also requires new qualitative and
quantitative disclosures, including disaggregation of revenues and
descriptions of performance obligations. The Company adopted the
provision of this guidance using the modified retrospective
approach. The Company has performed an assessment of its revenue
contracts as well as worked with industry participants on matters
of interpretation and application and has not identified any
material changes to the timing or amount of its revenue recognition
under Topic 606. The Company’s accounting policies did not
change materially as a result of applying the principles of revenue
recognition from Topic 606 and are largely consistent with existing
guidance and current practices applied by the Company. (See Note 4,
below.)
Note 2. Restatement of previously reported unaudited
condensed consolidated financial statements
Background and Effects of the Restatement
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, H&H Coffee Group Export Corp. (“H&H
Export”). These sales were originally recorded at gross,
along with the respective cost of
revenue.
As
part of the review, the Company assessed whether the 2019 green
coffee sales to H&H Export depicted the transfer of promised
goods or services to H&H Export in an amount that reflects the
consideration to which the Company expects to be entitled in
exchange for those goods or services. The following five steps were
applied to review if the core revenue recognition principles were
met as such the Company concluded it had not met all the
criteria when applying these steps:
●
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 Export (the
provider of the “wet” green coffee and the buyer of the
processed coffee). The Company’s assessment indicated that
according to the underlying terms and conditions of the contracts
that CLR entered into with H&H Export, that CLR had been
assigned the green coffee beans as coffee was 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 was
responsible for insuring all reasonable and necessary actions to
ensure the coffee beans are safeguarded during processing at the
Company’s coffee mill. CLR, however, does not take ownership
and does not incur financial risk associated with the coffee as it
is delivered to its mill for the purpose of processing. Based on
the above assessment, management has determined that when CLR
provides the processed green coffee to H&H export, the goods or
services provided to H&H Export 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 Export, that
the Company is therefore an agent in sales transactions of green
coffee beans to H&H Export.
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 quarter ended March 31, 2019,
the Company is restating its revenue for coffee sold to H&H
Export at net.
On
February 15, 2019, the Company and Khrysos Industries,
Inc., closed its acquisition of Khrysos Global, Inc.,
detailed further in Note 5 to the unaudited condensed consolidated
financial statements below. 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 including; i) $1,127,000 related to the certain
fixed assets, and ii) $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 if
$15,894,000.
The
tables below summarize the effects of the restatement on our (i)
unaudited condensed consolidated balance sheet at March 31, 2019;
(ii) unaudited condensed consolidated statement of operations for
the three months ended March 31, 2019; and (iii) unaudited
condensed consolidated statement of cash flows for the three months
ended March 31, 2019. A summary of the effect of the
restatement on the unaudited condensed consolidated statement of
changes to stockholders’ equity for the three months ended
March 31, 2019 are not presented because the impact to additional
paid-in-capital are reflected below in the unaudited condensed
consolidated balance sheet summaries.
Summary of Restatement – Unaudited Condensed
Consolidated Balance Sheet
The
effects of the restatement on the Company’s unaudited
condensed consolidated balance sheet are as follows:
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
Current Assets
|
|
|
|
|
Cash
and cash equivalents
|
$2,540
|
$-
|
$2,540
|
|
Accounts
receivable, trade
|
21,629
|
(13,923)
|
7,706
|
|
Income
tax receivable
|
75
|
-
|
75
|
|
Inventory
|
46,805
|
(22,641)
|
24,164
|
|
Notes receivable
|
5,000
|
-
|
5,000
|
|
Prepaid
expenses and Other current assets
|
4,891
|
-
|
4,891
|
|
Total
current assets
|
80,940
|
(36,564)
|
44,376
|
|
|
|
|
|
|
Property
and equipment, net
|
20,856
|
(1,127)
|
19,729
|
|
Operating
lease right-of-use assets
|
5,509
|
-
|
5,509
|
|
Deferred
tax assets
|
148
|
-
|
148
|
|
Intangible
assets, net
|
23,919
|
-
|
23,919
|
|
Goodwill
|
10,676
|
2,478
|
13,154
|
|
Other
assets – notes receivable
|
949
|
-
|
949
|
|
Total
assets
|
$142,997
|
$ (35,213)
|
$ 107,784
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
Accounts
payable
|
$22,784
|
$ (13,923)
|
$ 8,861
|
|
Accrued
distributor compensation
|
4,143
|
-
|
4,143
|
|
Accrued
expenses
|
29,103
|
(22,641)
|
6,462
|
|
Deferred
revenues
|
2,268
|
-
|
2,268
|
|
Line
of credit
|
2,432
|
-
|
2,432
|
|
Other
current liabilities
|
535
|
-
|
535
|
|
Operating
lease liabilities, current portion
|
745
|
-
|
745
|
|
Finance
lease liabilities, current portion
|
978
|
-
|
978
|
|
Notes
payable, current portion
|
158
|
-
|
158
|
|
Convertible
notes payable, current portion
|
681
|
-
|
681
|
|
Warrant
derivative liability
|
5,369
|
-
|
5,369
|
|
Contingent
acquisition debt, current portion
|
792
|
-
|
792
|
|
Total
current liabilities
|
69,988
|
(36,564)
|
33,424
|
|
|
|
|
|
|
Operating
lease liabilities, net of current portion
|
4,764
|
-
|
4,764
|
|
Finance
lease liabilities, net of current portion
|
927
|
-
|
927
|
|
Notes
payable, net of current portion
|
10,378
|
-
|
10,378
|
|
Convertible
notes payable, net of current portion
|
1,981
|
-
|
1,981
|
|
Contingent
acquisition debt, net of current portion
|
7,341
|
-
|
7,341
|
|
Total
liabilities
|
95,379
|
(36,564)
|
58,815
|
|
|
|
|
|
|
Commitments
and contingencies (Note 1)
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
Preferred
Stock, $0.001 par value: 5,000,000 shares authorized
|
-
|
-
|
-
|
|
Convertible
Preferred Stock, Series A - 161,135 shares issued and outstanding
at March 31, 2019 and December 31, 2018
|
-
|
-
|
-
|
|
Convertible
Preferred Stock, Series B – 129,437 shares issued and
outstanding at March 31, 2019 and December 31, 2018
|
-
|
-
|
-
|
|
Common
Stock, $0.001 par value: 50,000,000 shares authorized; 28,890,671
and 25,760,708 shares issued and outstanding at March 31, 2019 and
December 31, 2018, respectively
|
29
|
-
|
29
|
|
Additional
paid-in capital
|
243,555
|
1,351
|
244,906
|
|
Accumulated
deficit
|
(196,023)
|
-
|
(196,023)
|
|
Accumulated
other comprehensive loss
|
57
|
-
|
57
|
|
Total
stockholders’ equity
|
47,618
|
1,351
|
48,969
|
|
Total Liabilities and
Stockholders’ Equity
|
$142,997
|
$ (35,213)
|
$ 107,784
|
Summary of Restatement – Unaudited Condensed
Consolidated Statement of Operations
The effects of the
restatement on our unaudited condensed consolidated statement of
operations are as follows:
|
|
Three Months Ended March 31, 2019
|
|
|
|
|
|
|
Revenues
|
$56,300
|
$(15,108)
|
$41,192
|
|
Cost
of revenues
|
29,451
|
(15,108)
|
14,343
|
|
Gross
profit
|
26,849
|
-
|
26,849
|
|
Operating
expenses
|
|
|
|
|
Distributor
compensation
|
14,890
|
-
|
14,890
|
|
Sales
and marketing
|
4,019
|
-
|
4,019
|
|
General
and administrative
|
19,881
|
-
|
19,881
|
|
Total
operating expenses
|
38,790
|
-
|
38,790
|
|
Loss
from Operations
|
(11,941)
|
-
|
(11,941)
|
|
Interest
expense, net
|
(1,507)
|
-
|
(1,507)
|
|
Change
in fair value of warrant derivative liability
|
1,486
|
-
|
1,486
|
|
Total
other expense, net
|
(21)
|
-
|
(21)
|
|
Net
loss before income taxes
|
(11,962)
|
-
|
(11,962)
|
|
Income
tax provision
|
298
|
-
|
298
|
|
Net
loss
|
(12,260)
|
-
|
(12,260)
|
|
Preferred
stock dividends
|
(14)
|
-
|
(14)
|
|
Net
Loss Available to Common Stockholders
|
$(12,274)
|
$-
|
$(12,274)
|
|
|
|
|
|
|
Net
loss per share, basic
|
$(0.45)
|
$-
|
$(0.45)
|
|
Net
loss per share, diluted
|
$(0.49)
|
$-
|
$(0.49)
|
|
|
|
|
|
|
Weighted
average shares outstanding, basic
|
27,577,576
|
-
|
27,577,576
|
|
Weighted
average shares outstanding, diluted
|
28,025,172
|
-
|
28,025,172
|
Summary of Restatement – Unaudited Condensed
Consolidated Statement of Cash Flows
The
effect of the restatement on our unaudited condensed consolidated
statement of cash flows are as follows:
|
|
Three Months Ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
Net
loss
|
$(12,260)
|
$-
|
$(12,260)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
Depreciation
and amortization
|
1,145
|
-
|
1,145
|
|
Stock-based
compensation expense
|
11,344
|
-
|
11,344
|
|
Amortization
of debt discounts and issuance costs
|
199
|
-
|
199
|
|
Change
in fair value of warrant derivative liability
|
(1,486)
|
-
|
(1,486)
|
|
Change
in inventory reserve
|
159
|
-
|
159
|
|
Equity
issuance for services
|
1,859
|
-
|
1,859
|
|
Stock
issuance for true-up shares
|
281
|
-
|
281
|
|
Changes
in operating assets and liabilities, net of effect from business
combinations:
|
|
|
|
|
Accounts
receivable
|
(17,292)
|
13,923
|
(3,369)
|
|
Inventory
|
(23,924)
|
22,641
|
(1,283)
|
|
Prepaid
expenses and other current assets
|
(111)
|
-
|
(111)
|
|
Accounts
payable
|
13,977
|
(13,923)
|
54
|
|
Accrued
distributor compensation
|
854
|
-
|
854
|
|
Deferred
revenues
|
(44)
|
-
|
(44)
|
|
Accrued
expenses and other liabilities
|
20,468
|
(22,641)
|
(2,173)
|
|
Net Cash Used in Operating Activities
|
(4,831)
|
-
|
(4,831)
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
Acquisitions,
net of cash acquired
|
(425)
|
-
|
(425)
|
|
Purchases
of property and equipment
|
(2,291)
|
-
|
(2,291)
|
|
Net Cash Used in Investing Activities
|
(2,716)
|
-
|
(2,716)
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
Proceeds
from issuance of promissory notes, net of offering
costs
|
3,750
|
-
|
3,750
|
|
Proceeds
from private placement of common stock, net of offering
costs
|
2,267
|
-
|
2,267
|
|
Proceeds
from at-the-market-offering and exercise of stock options and
warrants, net
|
1,455
|
-
|
1,455
|
|
Proceeds
net of repayment on line of credit
|
176
|
-
|
176
|
|
Payments
of notes payable
|
(35)
|
-
|
(35)
|
|
Payments
of contingent acquisition debt
|
(128)
|
-
|
(128)
|
|
Payments
of finance leases
|
(368)
|
-
|
(368)
|
|
Payments
of dividends
|
(11)
|
-
|
(11)
|
|
Net Cash Provided by Financing Activities
|
7,106
|
-
|
7,106
|
|
Foreign Currency Effect on Cash
|
102
|
-
|
102
|
|
Net
decrease in cash and cash equivalents
|
(339)
|
-
|
(339)
|
|
Cash and Cash Equivalents, Beginning of Period
|
2,879
|
-
|
2,879
|
|
Cash and Cash Equivalents, End of Period
|
$2,540
|
$-
|
$2,540
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
Interest
|
$1,034
|
$-
|
$1,034
|
|
Income
taxes
|
$-
|
$-
|
$-
|
|
|
|
|
|
|
Supplemental Disclosures of Noncash Investing and Financing
Activities
|
|
|
|
|
Purchases
of property and equipment funded by finance leases
|
$-
|
$-
|
$-
|
|
Purchases
of property and equipment funded by mortgage
agreements
|
$450
|
$-
|
$450
|
|
Fair
value of stock issued for services (Note 11)
|
$417
|
$-
|
$417
|
|
Fair
value of stock issued for property and equipment
(land)
|
$1,200
|
$-
|
$1,200
|
|
Fair
value of stock issued for purchase of intangibles
(tradename)
|
$750
|
$-
|
$750
|
|
Fair
value of stock issued for note receivable, net of debt
settlement
|
$2,309
|
$-
|
$2,309
|
|
Fair
value of stock issued in connection with the acquisition of Khrysos
Global, Inc. (Note 5) (1)
|
$12,649
|
$1,351
|
$14,000
|
|
Dividends
declared but not paid at the end of period (Note 11)
|
$14
|
$-
|
$14
|
|
Acquisitions
of net assets in exchange for contingent debt, net of purchase
price adjustments
|
$-
|
$-
|
$-
|
|
Fair
value of warrants issued in connection with the Series B Preferred
Stock Offering
|
$-
|
$-
|
$-
|
|
Conversion
of 2017 Notes to Common Stock
|
$-
|
$-
|
$-
|
(1)
The
Fair value of stock issued in
connection with the acquisition of Khrysos Global, Inc., was
previously reported in Note 4 to the original filing of the
Quarterly Report on Form 10-Q for the quarter ended March 31, 2019
as filed with the SEC on May 20, 2019.
Note 3. 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 three
months ended March 31, 2019
were 12,882,194. Potentially dilutive securities were 7,321,334 for
the three months ended March 31, 2018.
The
calculation of diluted loss per share requires that, to the extent
the average market price of the underlying shares for the reporting
period exceeds the exercise price of the warrants and the presumed
exercise of such securities are dilutive to loss per share for the
period, an adjustment to net loss used in the calculation is
required to remove the change in fair value of the warrants, net of
tax from the numerator for the period. Likewise, an adjustment to
the denominator is required to reflect the related dilutive shares,
if any, under the treasury stock method. During the three
months ended March 31, 2019 and 2018, the Company recorded net of
tax gain of $1,409,000 and $254,000, on the valuation of the
Warrant Derivative Liability which has a dilutive impact on loss
per share, respectively.
|
|
Three months ended
March 31,
(unaudited)
|
|
|
|
|
|
Loss per Share – Basic
|
|
|
|
Numerator
for basic loss per share
|
$(12,274,000)
|
$(2,311,000)
|
|
Denominator
for basic loss per share
|
27,577,576
|
19,744,144
|
|
Loss
per common share – basic
|
$(0.45)
|
$(0.12)
|
|
|
|
|
|
Loss per Share – Diluted
|
|
|
|
Numerator
for basic loss per share
|
$(12,274,000)
|
$(2,311,000)
|
|
Adjust:
Fair value of dilutive warrants outstanding
|
(1,409,000)
|
(254,000)
|
|
Numerator
for dilutive loss per share
|
$(13,683,000)
|
$(2,565,000)
|
|
|
|
|
|
Denominator
for basic loss per share
|
27,577,576
|
19,744,144
|
|
Plus:
Incremental shares underlying “in the money” warrants
outstanding
|
447,595
|
14,258
|
|
Denominator
for diluted loss per share
|
28,025,172
|
19,758,402
|
|
Loss
per common share – diluted
|
$(0.49)
|
$(0.13)
|
Note 4. Balance Sheet Account Details
Inventory and Cost of Revenues
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.
Inventories
consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Finished
goods
|
$14,948
|
$11,300
|
|
Raw
materials
|
11,643
|
12,744
|
|
Total
inventory
|
26,591
|
24,044
|
|
Reserve
for excess and obsolete
|
(2,427)
|
(2,268)
|
|
Inventory,
net
|
$24,164
|
$21,776
|
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.
* Net
inventory at March 31, 2019 has been restated. See Note 2.
Leases
Generally,
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 condensed
consolidated balance sheets, and the Company does not separate
nonlease components from lease components. The
Company’s lease assets and liabilities recognized within its
condensed consolidated balance sheets were as follows (in
thousands):
|
|
|
Balance Sheet Location
|
|
ASSETS:
|
|
|
|
Operating
lease right-of-use assets
|
$5,509
|
Operating
lease right-of-use assets
|
|
Finance
lease right-of-use assets
|
1,330
|
Property,
plant, and equipment, net at cost, net of accumulated amortization
(1)
|
|
Total
lease assets
|
$6,839
|
|
|
LIABILITIES:
|
|
|
|
Current:
|
|
|
|
Operating
lease liabilities
|
$745
|
Other
current liabilities
|
|
Finance
lease liabilities
|
978
|
Current
portion of long-term debt
|
|
Non-current:
|
|
|
|
Operating
lease liabilities
|
4,764
|
Non-current
operating lease liabilities
|
|
Finance
lease liabilities
|
927
|
Long-term
debt, net of current portion
|
|
Total
lease liabilities
|
$7,714
|
|
(1)
Finance
lease assets are recorded net of accumulated amortization of
approximately $522,000 as of March 31, 2019.
Lease
cost is recognized on a straight-line basis over the lease term (in
thousands):
|
|
|
|
Operating
lease costs
|
$271
|
|
Finance
lease cost
|
-
|
|
Amortization
of right-of-use assets
|
96
|
|
Interest
on lease liabilities
|
37
|
|
Net
lease costs
|
$404
|
As
of March 31, 2019, annual scheduled lease payments were as follows
(in thousands):
|
|
|
|
|
2019
|
$788
|
$1,086
|
|
2020
|
753
|
742
|
|
2021
|
688
|
204
|
|
2022
|
648
|
9
|
|
2023
|
889
|
3
|
|
Thereafter
|
3,139
|
-
|
|
Total
lease payments
|
6,905
|
2,044
|
|
Less
imputed interest
|
1,396
|
139
|
|
Present
value of lease liabilities
|
$5,509
|
$1,905
|
Finance
lease right-of-use assets are amortized over their estimated useful
life, 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. The weighted-average remaining lease term and
weighted-average discount rate used to calculate the present value
of lease liabilities are as follows:
|
|
|
|
Weighted-average
remaining lease terms:
|
|
|
Operating
leases
|
5.8
|
|
Finance
leases
|
2.1
|
|
Weighted-average
remaining discount rate:
|
|
|
Operating
leases
|
5.5%
|
|
Finance
leases
|
9.1%
|
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 - Coffee Roaster
The
Company engages in the commercial sale of roasted coffee through
its subsidiary 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 and
Javalution brands 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 and providing
milling serves to H&H.
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 derived from the sales of green coffee
beans by the Company that it has milled, and it has determined it
is the agent with regard to such green coffee beans is recorded at
net of costs to purchase inventory or recorded to reflect only the
revenue derived from 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
The
commercial hemp segment provides end to end extraction and
processing via the Company’s proprietary systems that allow
for the conversion of hemp feed stock into hemp oil and hemp
extracts. The primary focus of the segment will be to
generate revenue through sales of extraction services and end to
end processing services for the conversion of Hemp and Hemp oil
into sellable ingredients. Additionally, the company offers
various rental, sales, and service programs of the Company’s
extraction and processing systems.
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.
The
Company operates in three primary segments: the direct selling
segment where products are offered through a global distribution
network of preferred customers and distributors, the commercial
coffee segment where products are sold directly to businesses and
the Hemp segment.
The
following table summarizes revenue disaggregated by segment (in
thousands):
|
|
For the three months ended
March 31,
|
|
|
|
|
|
|
|
|
|
Direct
selling
|
$33,420
|
$35,311
|
|
Commercial coffee:
|
|
|
|
Processed
green coffee
|
100
|
4,985
|
|
Milling
and processing services
|
4,826
|
-
|
|
Roasted
coffee and other
|
2,779
|
2,698
|
|
Total commercial coffee
|
7,705
|
7,683
|
|
Commercial
hemp
|
67
|
-
|
|
Total
|
$41,192
|
$42,994
|
*
Revenue for the three months ended March 31, 2019 has been
restated. See Note
2.
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 condensed 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 12 months.
As
of March 31, 2019 and December 31, 2018, the balance in deferred
revenues was approximately $2,268,000 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.
Deferred
revenue related to the commercial coffee segment represents
deposits on customer orders that have not yet been completed and
shipped. Revenue is recognized when the title and risk of loss is
passed to the customer under the terms of the shipping arrangement
FOB shipping point. (See Note 1, above.)
Of the
deferred revenue from the year ended December 31, 2018, the Company
recognized revenue of approximately $2,095,000 from the Heritage
Makers product line during the three months ended March 31.
2019.
There
were no deferred revenues associated with the commercial coffees
segment and the commercial hemp as of March 31, 2019.
Note 5. Acquisitions and 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 as of 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 as of the acquisition date)
of total net tangible and identified intangible assets acquired. A
liability for contingent consideration, if applicable, is recorded
at fair value as of 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.
During
the three months ended March 31, 2019, the Company entered into one
acquisition, which is detailed below. The acquisition was conducted
in an effort to expand the Company’s operations into the
field of commercial hemp business.
2019 Acquisitions
Khrysos Global, Inc.
On February 12, 2019, the Company and Khrysos
Industries, Inc., a Delaware corporation and wholly owned
subsidiary of the Company (“KII”) entered into an Asset
and Equity Purchase Agreement (the “AEPA”) with,
Khrysos Global, Inc., a Florida corporation (“Seller”),
Leigh Dundore (“LD”), and Dwayne Dundore (the
“Representing Party”) for KII to acquire substantially
all the assets (the “Assets”) of KGI and all the
outstanding equity of INXL Laboratories, Inc., a Florida
corporation (“INXL”) and INX Holdings, Inc., a Florida
corporation (“INXH”). Seller, INXL and
INXH provides end to end extraction and processing via
the company’s proprietary systems that allow for
the conversion of hemp feed stock into hemp oil and hemp
extracts. Additionally, KII offers various rental, sales, and
service programs of KII’s extraction and processing
systems.
The
consideration payable for the assets and the equity of KGI, INXL
and INXH is an aggregate of $16,000,000, to be paid as set forth
under the terms of the AEPA and allocated between the Sellers and
LD in such manner as they determine at their
discretion.
At
the closing on February 15, 2019, the Seller, LD and the
Representing Party received an aggregate of 1,794,972 shares of the
Company’s common stock which have a value of $14,000,000 for
the purposes of the AEPA or $12,649,000 fair value for the
acquisition valuation and $500,000 in cash. Thereafter, Seller, LD
and the Representing Party are to receive an aggregate of: $500,000
in cash thirty (30) days following the date of closing; $250,000 in
cash ninety (90) days following the date of closing; $250,000 in
cash one hundred and eighty (180) days following the Date of
closing; $250,000 in cash two hundred and seventy (270) days
following the date of closing; and $250,000 in cash one (1) year
following the date of closing.
In
addition, the Company agreed to issue to Representing Party,
subject to the approval of the holders of at least a majority of
the issued and outstanding shares of the Company’s common
stock and the approval of The Nasdaq Stock Market (collectively,
the “Contingent Consideration Warrants”) consisting of
six (6) six-year warrants, to purchase 500,000 shares of common
stock each, for an aggregate of 3,000,000 shares of common stock at
an exercise price of $10 per share exercisable upon reaching
certain levels of cumulative revenue or cumulative net income
before taxes by the business during the any of the years ending
December 31, 2019, 2020, 2021, 2022, 2023 or 2024.
The
AEPA contains customary representations, warranties and covenants
of the Company, KII, the Seller, LD and the Representing Party.
Subject to certain customary limitations, the Seller, LD and the
Representing Party have agreed to indemnify the Company and KII
against certain losses related to, among other things, breaches of
the Seller’s, LD’s and the Representing Party’s
representations and warranties, certain specified liabilities and
the failure to perform covenants or obligations under the
AEPA.
On
February 28, 2019, KII purchased a 45-acre tract of land in
Groveland, Florida, in central Florida, which KII intends to build
a R&D facility, greenhouse and allocate a portion for
farming.
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 15, 2019 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 if $15,894,000. As such, the Company here restates its
Quarterly Report on Form 10-Q for the quarter ended March 31,
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 preliminary 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
preliminary estimated 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-related
intangible and non-compete agreement. The trademarks and trade
name, customer-related intangible and non-compete are being
amortized over their estimated useful life of 8 years, 7 years and
6 years, respectively. The straight-line method is being used and
is believed to approximate the time-line within which
the economic benefit of the underlying intangible asset will be
realized.
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. Goodwill is estimated to represent the synergistic
values expected to be realized from the combination of the two
businesses. The goodwill is expected to be deductible for tax
purposes.
The
Contingent Consideration Warrants discussed above are subject to
vesting based upon the achievement of various sales milestones and
only if the sellers do not terminate their services. As such,
the warrants were considered equity-based compensation for future
services and not considered contingent consideration in the
calculation of the purchase price.
The costs related to the acquisition are included in legal and
accounting fees.
Revenues included in the consolidated statement of operations for
the three months ended March 31, 2019 were approximately
$67,000.
Note 6. Intangible Assets and Goodwill
Intangible Assets
Intangible
assets are comprised of distributor organizations, trademarks and
tradenames, customer relationships and internally developed
software. 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.
Intangible
assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributor
organizations
|
$14,559
|
$9,796
|
$4,763
|
$14,559
|
$9,575
|
$4,984
|
|
Trademarks
and trade names
|
9,963
|
2,033
|
7,930
|
7,337
|
1,781
|
5,556
|
|
Customer
relationships
|
16,028
|
5,895
|
10,133
|
10,398
|
5,723
|
4,675
|
|
Internally
developed software
|
720
|
583
|
137
|
720
|
558
|
162
|
|
Non-compete
agreement
|
956
|
-
|
956
|
-
|
-
|
-
|
|
Intangible
assets
|
$42,226
|
$18,307
|
$23,919
|
$33,014
|
$17,637
|
$15,377
|
Amortization
expense related to intangible assets was approximately $670,000 and
$827,000 for the three months ended March 31, 2019 and 2018,
respectively.
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. As of March 31, 2019 and December
31, 2018, approximately $1,649,000 in trademarks from business
combinations have been identified as having indefinite
lives.
Goodwill
Goodwill is recorded as the excess, if any, of the
aggregate fair value of consideration exchanged for an acquired
business over the fair value (measured as of the acquisition date)
of total net tangible and identified intangible assets acquired. In
accordance with Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification
(“ASC”) Topic 350, “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. 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, then the Company conducts the two-step impairment
testing process. The first step compares the Company’s fair
value to its net book value. If the fair value is less than the net
book value, the second step of the test compares the implied fair
value of the Company’s goodwill to its carrying amount. If
the carrying amount of goodwill exceeds its implied fair value, the
Company would recognize an impairment loss equal to that excess
amount. 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. As
such, the Company analyzes its goodwill balances separately for the
commercial coffee reporting unit, the direct selling reporting unit
and the commercial hemp reporting unit. The goodwill balance as of
March 31, 2019 and December 31, 2018 is approximately $13,154,000
and $6,323,000, respectively, which includes an adjustment to the
KII acquisition goodwill during the three months ended March 31,
2019, discussed above in Note 5, which increased the goodwill for
KII in the amount of $2,478,000. There were no triggering events
indicating impairment of goodwill or intangible assets during the
three months ended March 31, 2019 and 2018.
Goodwill
consists of the following (in thousands):
|
|
|
|
|
Goodwill,
commercial coffee
|
$3,314
|
$3,314
|
|
Goodwill,
direct selling
|
3,009
|
3,009
|
|
Goodwill,
commercial hemp
|
6,831
|
-
|
|
Total
goodwill
|
$13,154
|
$6,323
|
Note 7. Notes Payable and Other Debt
Short-term Debt
On July 18, 2018, the Company entered into lending
agreements (the “Lending Agreements”) with three (3)
separate entities and received loans in the total amount of
$1,907,000, net of loan fees to be paid back over an eight-month
period on a monthly basis. Payments are 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 as of December 31, 2018 and
was included in other current liabilities on the Company’s
balance sheet as of December 31, 2018. During the quarter ended
March 31, 2019 the loans were paid in their entirety and the
outstanding loan balance was zero.
Notes Payable
Promissory Notes
On
March 18, 2019, the Company entered into a two-year Secured
Promissory Note (the “Note” or “Notes”)
with two (2) accredited investors that had a substantial
pre-existing relationship with the Company pursuant to which the
Company raised cash proceeds of $2,000,000.
In consideration of
the Notes, the Company issued 20,000 shares of the Company’s
common stock par value $0.001 for each $1,000,000 invested as well
as for each $1,000,000 invested five-year warrants to purchase
20,000 shares of the Company’s common stock at a price per
share of $6.00. The Notes pay interest
at a rate of eight percent (8%) per annum and interest is paid
quarterly in arrears with all principal and unpaid interest due at
maturity on March 18, 2021.
The
Company recorded debt discounts of approximately $139,000 related
to the fair value of warrants issued in the transaction and
$212,000 of transaction issuance costs to be amortized to interest
expense over the life of the Notes. As of March 31, 2019, the
remaining balance of the debt discounts is approximately $345,000.
The Company recorded approximately $5,000 amortization of the debt
discounts during the three months ended March 31, 2019 and is
recorded as interest expense.
Credit Note
On December 13,
2018, the Company’s wholly owned subsidiary, CLR, entered
into a Credit Agreement with Mr. Carl Grover pursuant to which CLR
borrowed $5,000,000 from Mr. Grover and in exchange issued to him a
$5,000,000 Credit Note (the “Credit Note”) secured by
its green coffee inventory under a Security Agreement, dated
December 13, 2018, with Mr. Grover and CLR’s subsidiary,
Siles. 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”), pursuant to a Warrant Purchase Agreement, dated December
13, 2018, with Mr. Grover. The Company also entered into an
Advisory Agreement with Ascendant Alternative Strategies, LLC
(“Ascendant”), a third party not affiliated with Mr.
Grover, in connection with the Credit Agreement, pursuant to which
it agreed to pay to Ascendant a 3% fee on the transaction with Mr.
Grover and issued to Ascendant (or it’s designees) a
four-year warrant to purchase 50,000 shares of its common stock,
exercisable at $6.33 per share.
Upon
the occurrence of an event of default, the unpaid balance of the
principal amount of this Credit Note together with all accrued but
unpaid interest, may become, or may be declared to be, due and
payable in the manner, upon the conditions and with the effect
provided in the Credit Agreement. The Company determined that the
contingent call (put) option meets the definition of a derivative
(i.e., has an underlying, a notional amount, requires no initial
investment, and can be net settled). Therefore, it must be
separately measured at fair value with changes in fair value
impacting current earnings.
Management has assessed the probability of a trigger event (i.e.,
the occurrence of an event of default, such amounts are declared
due and payable or made automatically due and payable, in each
case, in accordance with the terms of this Note) to be de minimis
during the term of the Credit Note. As such, the fair value of the
contingent put feature would have a de minimis value (i.e., there
is no need to separately measure the contingent put feature, as
assigning a probability of zero percent or near zero percent to the
occurrence of an event of default would result in de minimis fair
value for the feature). Management will reassess the probability of
a trigger event at each reporting period during the term of the
Credit Note.
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 to be amortized to interest
expense over the life of the Credit Agreement. As of March 31,
2019, the remaining balance of the debt discounts is approximately
$1,460,000. The Company recorded approximately $154,000
amortization of the debt discounts during the three months ended
March 31, 2019 and is recorded as interest expense.
2400 Boswell Mortgage
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 our
Chief Executive Officer and consisted of approximately $248,000 in
cash, $334,000 of debt forgiveness and accrued interest, and a
promissory note of approximately $393,000, payable in equal
payments over 5 years with interest at
5.0%. Additionally, the Company assumed a long-term
mortgage of $3,625,000, payable over 25 years with an initial
interest rate of 5.75%. The interest rate is the prime rate plus
2.5%. As of March 31, 2019, the interest rate was 7.75%. 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 March 31, 2019, the balance on
the long-term mortgage is approximately $3,198,000 and– the
balance on the promissory note is zero.
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% of the sales related to the acquired
assets until the entire note balance is paid. As of March
31,2019 and December 31, 2018, the carrying value of the liability
was approximately $1,061,000 and $1,071,000, respectively. The
interest associated with the note for the three months ended March
31, 2019 and 2018 was minimal.
Khrysos Mortgage Notes
In conjunction with the Company’s acquisition of Khrysos, the
Company assumed one interest only mortgage in the amounts of
$350,000 (due in September 2021) that bears an interest rate of 8%
and a second mortgage of approximately $177,000 (due in June 2023)
that bears an interest rate of 7% per annum. Both properties are
located in Florida. As of March 31, 2019, the remaining mortgage
balances are approximately $527,000.
In February 2019, Khrysos purchased a 45-acre tract of land in
Groveland, Florida, in central Florida for $750,000, which Khrysos
intends to build a R&D facility, greenhouse and allocate a
portion for farming. Khrysos paid approximately $303,000 down and
assumed a mortgage of $450,000. The entire balance is due in
February 2024 and bears interest at 6% per annum. As of March 31,
2019, the remaining mortgage balance is
$450,000.
Other
Notes
The
Company’s other notes relate to loans for commercial vans at
CLR in the amount of $90,000 as of March 31, 2019 which expire at
various dates through 2023.
Line of Credit - Loan and Security Agreement
CLR
had a factoring agreement (“Factoring Agreement”) with
Crestmark Bank (“Crestmark”) related to accounts
receivable resulting from sales of certain CLR products. On
November 16, 2017, CLR entered into a new Loan and Security
Agreement (“Agreement”) with Crestmark which amended
and restated the original Factoring Agreement dated February 12,
2010 with Crestmark and subsequent agreement amendments thereto.
CLR is provided with 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. Effective December 29, 2017, CLR entered into a
First Amendment to the Agreement, to include an increase in the
maximum overall borrowing to $6,250,000. The loan amount 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 (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.
The
outstanding principal balance of the Agreement will bear interest
based upon a year of 360 days with interest being charged for each
day the principal amount is outstanding including the date of
actual payment. The interest rate is a rate equal to the prime rate
plus 2.50% with a floor of 6.75%. As of March 31, 2019, the
interest rate was 8.0%. 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 is effective until
November 16, 2020.
The
Company and the Company’s CEO, Stephan Wallach, have 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, the Company’s President and Chief Financial
Officer, David Briskie, personally entered into a Guaranty of
Validity representing the Company’s financial statements so
long as the indebtedness is owing to Crestmark, maintaining certain
covenants and guarantees.
The
Company’s outstanding line of credit liability related to the
Agreement was approximately $2,432,000 as of March 31, 2019 and
$2,256,000 as of December 31, 2018.
Contingent Acquisition Debt
The
Company has contingent acquisition debt associated with its
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 as of the acquisition date. A
liability for contingent consideration, if applicable, is recorded
at fair value as of the acquisition date and evaluated each period
for changes in the fair value and adjusted as appropriate. (See
Note 10 below.)
The
Company’s contingent acquisition debt as of March 31, 2019
and December 31, 2018 is $8,133,000 and $8,261,000, respectively,
and is attributable to debt associated with the Company’s
direct selling segment.
Note 8. Convertible Notes Payable
Total
convertible notes payable as of March 31, 2019 and December 31,
2018, net of debt discount outstanding consisted of the amount set
forth in the following table (in thousands):
|
|
March 31,
2019
(unaudited)
|
|
|
8%
Convertible Notes due July and August 2019 (2014 Notes),
principal
|
$750
|
$750
|
|
Debt
discounts
|
(69)
|
(103)
|
|
Carrying
value of 2014 Notes
|
681
|
647
|
|
6%
Convertible Notes due February and March 2021 (2019 PIPE Notes),
principal
|
2,400
|
-
|
|
Debt
discounts
|
(459)
|
-
|
|
Carrying
value of 2019 PIPE Notes
|
1,941
|
-
|
|
Total
carrying value of convertible notes payable
|
$2,622
|
$647
|
July 2014 Private Placement
Between
July 31, 2014 and September 10, 2014 the Company entered into Note
Purchase Agreements (the “Note” or “Notes”)
related to its private placement offering (“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 (5) year senior secured convertible Notes
in the aggregate principal amount of $4,750,000 that are
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 Notes bear interest at a rate of eight percent (8%) per
annum and interest is paid quarterly in arrears with all principal
and unpaid interest due between July and September
2019.
The Company has the right to prepay the Notes at
any time after the one-year anniversary date of the issuance of the
Notes at a rate equal to 110% of the then outstanding principal
balance and any unpaid accrued interest. The Notes are secured by
Company pledged assets and rank senior to all debt of the Company
other than certain senior debt that has been previously identified
as senior to the convertible notes. Additionally, Stephan Wallach, the Company’s
Chief Executive Officer, has also personally guaranteed the
repayment of the Notes, subject to the terms of a Guaranty
Agreement executed by him with the investors. In
addition, Mr. Wallach has agreed not to sell, transfer or pledge
1.5 million shares of the common stock that he owns so long as his
personal guaranty is in effect.
On October 23, 2018, the Company entered into an
agreement with Carl Grover to exchange (the “Debt
Exchange”), subject to stockholder approval which was
received on December 6, 2018, all amounts owed under the 2014 Note
held by him in the principal amount of $4,000,000 which matures on
July 30, 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. Upon the closing
the Company issued
Ascendant Alternative Strategies, LLC, a FINRA broker dealer (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 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 October 23, 2018
as interest expense, and the fair value of the warrants and
additional shares issued as discussed above were recorded as a loss
on the Debt Exchange 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 Notes. The unamortized debt discounts recognized
with the Debt Exchange was approximately $679,000. As of March 31,
2019 and December 31, 2018 the remaining balance of the debt
discounts is approximately $63,000 and $94,000, respectively. The
Company recorded approximately $31,000 and $238,000 amortization of
the debt discounts during the three months ended March 31, 2019 and
2018 and is recorded as interest expense.
With
respect to the 2014 Private Placement, the Company paid
approximately $490,000 in expenses including placement
agent fees. The issuance costs are amortized to interest
expense over the term of the Notes. The unamortized issuance costs
recognized with the Debt Exchange was approximately $63,000. As of
March 31, 2019 and December 31, 2018 the remaining balance of the
issuance costs is approximately $6,000 and $10,000, respectively.
The Company recorded approximately $3,000 and $25,000 of the debt
discounts amortization during the three months ended March 31, 2019
and 2018, respectively, and is recorded as interest
expense.
As
of March 31, 2019 and December 31, 2018 the principal amount of
$750,000 remains outstanding.
Unamortized
debt discounts and issuance costs are included with convertible
notes payable, net of debt discount on the condensed consolidated
balance sheets.
January 2019 Private Placement
On
February 15, 2019 and on March 10, 2019, the Company closed its
first and second tranches of its 2019 January Private
Placement debt offering, respectively, pursuant to which the
Company offered for sale a minimum of notes in the principal amount
of a minimum of $100,000 and a maximum of notes in the principal
amount $10,000,000 (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
thirteen (13) accredited investors that had a substantial
pre-existing relationship with the Company pursuant to which the
Company received aggregate gross proceeds of $2,440,000 and issued
2019 PIPE Notes in the aggregate principal amount of $2,440,000 and
an aggregate of 48,800 shares of common stock. The placement
agent will receive up to 50,000 shares of common stock in the
offering. Each 2019 PIPE Note matures 24 months after issuance,
bears interest at a rate of six percent (6%) per annum, and the
outstanding principal is convertible into shares of common stock at
any time after the 180th day anniversary of the issuance of the
2019 PIPE Note, at a conversion price of $10 per share (subject to
adjustment for stock splits, stock dividends and reclassification
of the common stock).
Upon issuance of the 2019 PIPE Notes, the Company
recognized debt discounts of approximately $467,000, resulting from
the allocated portion of offering proceeds to the separable common
stock issuance. The debt discount is being amortized to interest
expense over the term of the 2019 PIPE Notes. During
the three months ended March 31, 2019 the Company recorded
approximately $7,000 of amortization related to the debt
discounts.
Note 9. Derivative Liability
The Company recognizes and measures the
warrants issued in conjunction with the Company’s August
2018, July 2017, November 2015 and July 2014 Private Placements 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 (see Note
10, below) 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.
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.
Warrants
Effective January 1, 2019, the Company adopted ASU
No. 2017-11 (see above, Recently Adopted Accounting
Pronouncements). 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 as
of the date of change in classification, in the amount of
$1,494,000 was reclassified from warrant derivative liability to
additional paid in capital as a result of the change in
classification of the warrants.
Increases or decreases in the fair value of the
derivative liability are included as a component of total other
expense in the accompanying condensed consolidated statements of
operations for the respective period. The changes to the derivative
liability for warrants resulted in a decrease of
$1,486,000 and a decrease of
$712,000 for the three months ended March 31, 2019 and 2018,
respectively.
The
estimated fair value of the outstanding warrant liabilities is
$5,369,000 and $9,216,000 as of March 31, 2019 and December 31,
2018, respectively.
The
estimated fair value of the warrants was computed as of March 31,
2019 and December 31, 2018 using the Monte Carlo option pricing
model with the following assumptions:
|
|
March 31,
2019
(unaudited)
|
December 31,
2018
|
|
Stock price volatility
|
97.2% - 111.5%
|
83.78% - 136.76%
|
|
Risk-free interest rates
|
2.33% - 2.42%
|
2.465% - 2.577%
|
|
Annual dividend yield
|
0%
|
0%
|
|
Expected life
|
0.33 - 1.54 years
|
0.58 - 2.76 years
|
In
addition, management assessed the probabilities of future
financing assumptions in the valuation models.
Note 10. Fair Value of Financial
Instruments
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, capital 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
estimated fair value of the contingent consideration related to the
Company's business combinations is recorded using significant
unobservable measures and other fair value inputs and is therefore
classified as a Level 3 financial instrument.
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 March 31, 2019
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Contingent
acquisition debt, current portion
|
$792
|
$-
|
$-
|
$792
|
|
Contingent
acquisition debt, less current portion
|
7,341
|
-
|
-
|
7,341
|
|
Warrant
derivative liability
|
5,369
|
-
|
-
|
5,369
|
|
Total
liabilities
|
$13,502
|
$-
|
$-
|
$13,502
|
|
|
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
liabilities
|
$17,477
|
$-
|
$-
|
$17,477
|
The
following table reflects the activity for the Company’s
warrant derivative liability associated with the Company’s
2019, 2018, 2017, 2015 and 2014 Private Placements measured at fair
value using Level 3 inputs (in thousands):
|
|
Warrant Derivative Liability
|
|
Balance
at December 31, 2018
|
$9,216
|
|
Issuance
|
-
|
|
Adjustments
to estimated fair value
|
(1,486)
|
|
Adjustments
related to warrant exercises
|
(867)
|
|
Adjustments
related to the reclassification of warrants to equity
|
(1,494)
|
|
Balance
at March 31, 2019
|
$5,369
|
The
following table reflects the activity for the Company’s
contingent acquisition liabilities measured at fair value using
Level 3 inputs (in thousands):
|
|
|
|
Balance
at December 31, 2018
|
$8,261
|
|
Liabilities
acquired
|
-
|
|
Liabilities
settled
|
(128)
|
|
Adjustments
to liabilities included in earnings
|
-
|
|
Adjustment
to purchase price
|
-
|
|
Balance
at March 31, 2019
|
$8,133
|
The
fair value of the contingent acquisition liabilities 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. Increases (decreases)
in any of those inputs in isolation may result in a significantly
lower (higher) fair value measurement. During the three months
ended March 31, 2018, the net adjustment to the fair value of the
contingent acquisition debt was a decrease $213,000 and is included
in the Company’s statements of operations in general and
administrative expense. The Company did not have any
adjustments to the fair value of the contingent acquisition debt
during the three months ended March 31, 2019.
Note 11. 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”.
The
total number of shares of stock which the Company has authority to
issue is 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 161,135 shares have been designated as Series A
convertible preferred stock, par value $0.001 per share
(“Series A Convertible Preferred”), 1,052,631 has been
designated as Series B convertible preferred stock (“Series B
Convertible Preferred”), and 700,000 has been designated
as Series C convertible preferred stock (“Series C
Convertible Preferred”).
Common Stock
As of March 31, 2019 and December 31, 2018 there
were 28,890,671 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 Offering
On
February 6, 2019, the Company entered into a Securities Purchase
Agreement (the “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, par value $0.001 per share, 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 proceeds were $1,750,000. Consulting fees for
arranging the Purchase Agreement include the issuance of 5,000
shares of restricted shares of the Company’s common stock,
par value $0.001 per share, and 100,000 3-year warrants priced at
$10.00. No cash commissions were paid.
On
February 15, 2019 and on March 10, 2019, the Company closed its
first and second tranches of its 2019 January Private
Placement debt offering, respectively, pursuant to which the
Company offered for sale a minimum of notes in the principal amount
of a minimum of $100,000 and a maximum of notes in the principal
amount $10,000,000 (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
thirteen (13) accredited investors that had a substantial
pre-existing relationship with the Company pursuant to which the
Company received aggregate gross proceeds of $2,440,000 and issued
2019 PIPE Notes in the aggregate principal amount of $2,440,000 and
an aggregate of 48,800 shares of common stock. The placement agent
will receive up to 50,000 shares of common stock in the offering.
Each 2019 PIPE Note matures 24 months after issuance, bears
interest at a rate of six percent (6%) per annum, and the
outstanding principal is convertible into shares of common stock at
any time after the 180th day anniversary of the issuance of the
2019 PIPE Note, at a conversion price of $10 per share (subject to
adjustment for stock splits, stock dividends and reclassification
of the common stock).
On
March 18, 2019, the Company entered into a two-year Secured
Promissory Note (the “Note or Notes”) 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. In
consideration of the Notes, the Company issued 20,000 shares of
common stock par value $0.001 for each $1,000,000 invested as well
as for each $1,000,000 invested and five-year warrants to purchase
20,000 shares of common stock at a price per share of
$6.00. The Notes pay
interest at a rate of eight percent (8%) 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 40,000 shares
of common stock and 40,000 warrants with the
Notes.
Issuance of additional common shares and repricing of warrants
related to 2018 Private Placement
On
March 13, 2019, the Company determined that three of the investors
of the Company’s August 2018 Private Placement became
eligible to receive additional shares of the Company’s common
stock as it was referred to in their respective Purchase Agreement
as True-up Shares. Total number of additional shares issued to
those three investors is 44,599 shares of restricted shares of the
Company’s common stock, par value $0.001. In addition, the
exercise price of the warrants issued at their respective closings
is reset pursuant to the terms of the warrants to exercise prices
ranging from $4.06 to $4.44 from the exercise price at issuance of
$4.75.
Convertible Preferred Stock
Series A Convertible Preferred Stock
The
Company has 161,135 shares of Series A Convertible Preferred Stock
outstanding as of March 31, 2019, and December 31, 2018 and accrued
dividends of approximately $140,000 and $137,000, respectively. The
holders of the Series A Convertible Preferred Stock are entitled to
receive a cumulative dividend at a rate of 8.0% per year, payable
annually either in cash or shares of the Company's common stock at
the Company's election. Each share of Series A Convertible
Preferred is convertible into common stock at a conversion rate of
0.10. The holders of Series A Convertible Preferred are entitled to
receive payments upon liquidation, dissolution or winding up of the
Company before any amount is paid to the holders of common stock.
The holders of Series A Convertible Preferred have no voting
rights, except as required by law.
Series B Convertible Preferred Stock
On
March 30, 2018, the Company completed the Series B Offering,
pursuant to which the Company sold 381,173 shares of Series B
Convertible Preferred Stock at an offering price of $9.50 per share
and received gross proceeds in aggregate of approximately
$3,621,000. The net proceeds to the Company from the Series B
Offering were approximately $3,289,000 after deducting commissions,
closing and issuance costs. Each share of Series B Convertible
Preferred Stock is 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 two (2) shares of common stock and
automatically converts into two (2) shares of common stock on its
two-year anniversary of issuance.
The
Company has 129,437 shares of Series B Convertible Preferred Stock
outstanding as of March 31, 2019 and December 31, 2018. The holders
of the Series B Convertible Preferred Stock are entitled to receive
cumulative dividends on the Series B Convertible 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. As of March 31, 2019 and December 31, 2018 accrued
dividends were approximately $11,000 and $11,000,
respectively.
The
shares of Series B Convertible 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
Notes in the principal amount of approximately $7,254,000
automatically converted into 1,577,033 shares of common stock.
The holders of Series B Convertible Preferred are 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. Holders of the Series B
Convertible Preferred Stock have no voting rights, except as
required by law.
Series C Preferred Stock
Between
August 17, 2018 and October 4, 2018, the Company closed three
tranches of its Series C Offering, pursuant to which the Company
sold 697,363 shares of Series C Convertible Preferred Stock at an
offering price of $9.50 per share and agreed to issue two-year
warrants (the “Preferred 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
voluntarily convert their shares of Series C Preferred to the
Company’s common stock within two-years from the issuance
date. Each share of Series C Convertible Preferred Stock is
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 two (2) shares of common stock and automatically
converts into two (2) shares of common stock on its two-year
anniversary of issuance.
The
Company issued the placement agent in connection with the Series C
Offering 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 as of the issuance date December
19, 2018. As of December 31, 2018, the 116,867 warrants issued to
the placement agent remain 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.
Upon
liquidation, dissolution or winding up of the Company, each holder
of Series C Preferred Stock was entitled to receive a distribution,
to be paid in an amount equal to $9.50 for each and every share of
Series C Preferred Stock held by the holders of Series C 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 or any other class or series of stock ranking
junior to the Series C Preferred Stock.
The
shares of Series C Convertible Preferred Stock issued in the Series
C Offering were sold pursuant to the Company’s Registration
Statement, which was declared effective with the SEC on December
10, 2018.
Pursuant
to the Certificate of Designation, the Company agreed to pay
cumulative dividends on the Series C Convertible Preferred Stock
from the date of original issue at a rate of 6.0% 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. In 2018 a total of approximately $51,000 of
dividends was paid to the holders of the Series C Convertible
Preferred Stock. The Series C Convertible Preferred Stock ranks
senior to the Company’s outstanding Series A Convertible
Preferred Stock, Series B Convertible Preferred Stock and the
common stock with respect to dividend rights and rights upon
liquidation, dissolution or winding up. Holders of the Series C
Convertible Preferred Stock have no voting rights.
The
contingent obligation to issue warrants is considered an
outstanding equity-linked financial instrument and was therefore
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 C Preferred
Stock of approximately $3,276,000.
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. All of the Series C
Preferred shares were converted to common stock during 2018 and the
Company has issued 1,394,726 warrants. As of March 31, 2019, no
shares of Series C Convertible Preferred Stock remain
outstanding.
Repurchase of Common Stock
On
December 11, 2012, the Company authorized a share repurchase
program to repurchase up to 750,000 of the Company's issued and
outstanding shares of common stock from time to time on the open
market or via private transactions through block
trades. A total of 196,594 shares have been repurchased
to-date as of March 31, 2019 at a weighted-average cost of $5.30
per share. There were no repurchases during the three months ended
March 31, 2019 and 2018. The remaining number of shares authorized
for repurchase under the plan as of March 31, 2019 is
553,406.
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 is recorded through equity
and prepaid advisory fees and amortized over the life of the
service agreement.
ProActive Capital Resources Group, LLC
On September 1, 2015, the Company entered into an
agreement with ProActive
Capital Resources
Group, LLC (“PCG”), pursuant to which PCG
agreed to provide investor relations services for six (6) months 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. Subsequent
to the September 1, 2015 initial agreement, the agreement was
extended through August 2018 under six-month incremental service
agreements under the same terms with the monthly cash payments of
$6,000 per month and 5,000 shares of restricted common stock for
every six (6) months of service performed.
The
stock issuance expense associated with the amortization of advisory
fees is recorded as stock issuance expense and is included in
general and administrative expense on the Company’s condensed
consolidated statements of operations for the three months ended
March 31, 2018 is approximately $13,000. The Company did not
further extend this agreement subsequent to August
2018.
Ignition Capital, LLC
On
April 1, 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 twenty-one (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 is recorded as prepaid advisory fees and is included in
prepaid expenses and other current assets on the Company’s
condensed consolidated balance sheets and is amortized on a
pro-rata basis over the term of the agreement. During the
three months ended March 31, 2019, the Company recorded
expense of approximately $30,000 in connection with
amortization of the stock issuance. The stock issuance expense
associated with the amortization of advisory fees is recorded as
stock issuance expense and is included in general and
administrative expense on the Company’s condensed
consolidated statements of operations for the three months ended
March 31, 2019.
Greentree Financial Group, Inc.
On March 27, 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 twenty-one (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 is approximately
$311,000 and is recorded as prepaid advisory fees and is included
in prepaid expenses and other current assets on the Company’s
condensed consolidated balance sheets and is amortized on a
pro-rata basis over the term of the agreement. During the
three months ended March 31, 2018, the
Company recorded expense of
approximately $44,000 in connection with amortization of the stock
issuance. The stock issuance expense associated with the
amortization of advisory fees is recorded as stock issuance expense
and is included in general and administrative expense on the
Company’s condensed consolidated statements of operations for
the three months ended March 31, 2019.
Capital Market Solutions, LLC.
On July
1, 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 in cash a base fee of $300,000, payable as follows; $50,000
paid in August 2018, and the remaining balance shall be paid
monthly in the amount of $25,000 through January 1, 2019.
Subsequent to the initial agreement, the Company extended the term
for an additional 24 months through December 31, 2021 and agreed to
issue Capital Market an additional 100,000 shares of restricted
common stock which were issued in advance of the service period and
$125,000 of additional fees. On January 9, 2019, the Company
executed the second amendment to the agreement with Capital Market,
pursuant to which, the aggregate base fee increased to $525,000,
and the Company issued an additional 75,000 of restricted common
stock. 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 on January
9, 2019 and 25% on January 9, 2020 and 25% on January 9, 2021. The
fair value of the vested portion of the warrant is approximately
$1,656,000 and is recorded as equity on the Company’s balance
sheet as of March 31, 2019 and equity issuance expense on the
Company’s condensed
consolidated statement of operations for the three months ended
March 31, 2019.
The fair value of the common stock shares issued
is recorded as prepaid advisory fees and is included in prepaid
expenses and other current assets on the Company’s condensed
consolidated balance sheets and is amortized on a pro-rata basis
over the term of the agreement. During the three months ended
March 31, 2019 and 2018, the Company recorded expense of
approximately $129,000, in
connection with amortization of the stock issuance expense. During
the three months ended March 31, 2019, the
Company recorded expense of
approximately $50,000, in
connection with the base fee. The stock issuance expense associated
with the amortization of advisory fees is recorded as stock
issuance expense and is included in general and administrative
expense on the Company’s condensed consolidated statements of
operations for the three months ended March 31,
2019.
Warrants
As of March 31, 2019, warrants to purchase
6,943,874 shares of the Company's common stock at prices
ranging from $2.00 to $10.00 were outstanding. As of March 31, 2019, 6,539,187
warrants are exercisable and expire at various dates
through March
2024 and have a weighted
average remaining term of approximately 2.23 years and are included in the table below as of
March 31, 2019.
The Company uses the Monte Carlo and Black-Scholes
option-pricing model to estimate the fair value of the
warrants.
Warrants – Securities Purchase Agreement
During
the three months ended March 31, 2019, the Company issued the
selling agent in connection with the Securities Purchase Agreement
100,000 warrants as compensation, exercisable at $10.00 per share
and expire in February 2022. The Company used the Black-Scholes
option-pricing model (“Black-Scholes”) to estimate the
fair value of the warrants issued to the selling agent of $324,000
as of March 30, 2019.
A
summary of the warrant activity for the three months ended March
31, 2019 is presented in the following table:
|
|
|
|
Balance
at December 31, 2018
|
5,876,980
|
|
Issued
|
1,315,000
|
|
Expired
/ cancelled
|
-
|
|
Exercised
|
(248,106)
|
|
Balance
at March 31, 2019, outstanding
|
6,943,874
|
|
Balance
at March 31, 2019, exercisable
|
6,539,187
|
Stock Options
On
May 16, 2012, the Company established the 2012 Stock Option Plan
(“Plan”) authorizing the granting of options for up to
9,000,000 shares of common stock.
The purpose of the 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 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 Internal Revenue Code, in any
combination (collectively, “Options”). At March 31,
2019, the Company had 3,587,072 shares of common stock available for issuance
under the Plan.
A
summary of the Plan stock option activity for the three months
ended March 31, 2019 is presented in the following
table:
|
|
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contract Life (years)
|
Aggregate
Intrinsic Value (in thousands)
|
|
Outstanding
December 31, 2018
|
2,394,379
|
$4.45
|
6.94
|
$3,049
|
|
Issued
|
2,540,000
|
6.66
|
|
|
|
Canceled /
expired
|
(37,275)
|
5.00
|
|
|
|
Exercised
|
(60,530)
|
4.46
|
|
-
|
|
Outstanding March
31, 2019
|
4,836,574
|
$5.61
|
8.35
|
$3,045
|
|
Exercisable March
31, 2019
|
3,723,870
|
$5.96
|
8.23
|
$1,617
|
The weighted-average fair value per share of the
granted options for the three months ended March 31, 2019 was
approximately $4.26. There were no options granted during the three
months ended March 31, 2018
Stock-based compensation expense included in the
condensed consolidated statements of operations
was $11,248,000 and
$122,000 for the three months ended March 31, 2019 and 2018,
respectively.
As of March 31, 2019, there was
approximately $2,132,000 of total unrecognized compensation expense related
to unvested stock options granted under the Plan. The expense is
expected to be recognized over a weighted-average period
of 1.75 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.
Restricted Stock Units
On
August 9, 2017, the Company issued restricted stock units for an
aggregate of 500,000 shares of common stock, to its employees and
consultants. These shares of common stock will be issued upon
vesting of the restricted stock 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. As
of March 31, 2019, none of the restricted stock units have vested.
There were no grants during the three months ended March 31,
2019.
The
fair value of each restricted stock unit issued to employees is
based on the closing stock price on the grant date of $4.53 and
restricted stock units issued to consultants are revalued as they
vest and is recognized as stock-based compensation expense over the
vesting term of the award.
|
|
|
|
Balance
at December 31, 2018
|
475,000
|
|
Issued
|
-
|
|
Canceled
|
-
|
|
Balance
at March 31, 2019
|
475,000
|
Stock-based
compensation expense included in the condensed consolidated
statements of operations was $96,000 and $115,000 for the three
months ended March 31, 2019 and 2018, respectively.
As
of March 31, 2019, total unrecognized stock-based compensation
expense related to restricted stock units to employees and
consultants was approximately $1,629,000, which will be recognized
over a weighted average period of 4.36 years.
Note 12. Segment and Geographical
Information
The
Company is a leading multi-channel lifestyle company offering a
hybrid of the direct selling business model that also offers
e-commerce and the power of social selling. Assembling a
virtual main street of products and services under one corporate
entity, Youngevity offers products from top selling retail
categories: health/nutrition, home/family, food/beverage (including
coffee), spa/beauty, apparel/jewelry, as well as innovative
services. The Company operates in 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 commercial hemp segment provides
end to end extraction and processing via the Company's
proprietary systems that allow for the conversion of hemp feed
stock into hemp oil and hemp extracts. The primary focus of
the segment will be to generate revenue through sales of extraction
services and end to end processing services for the conversion of
Hemp and Hemp oil into sellable ingredients. Additionally,
the Company offers various rental, sales, and service
programs of the company's extraction and processing
systems.
The
Company’s segments reflect the manner in which the business
is managed and how the Company allocates resources and assesses
performance. The Company’s chief operating decision maker is
the Chief Executive Officer. The Company’s chief operating
decision maker evaluates segment performance primarily based on
revenue and segment operating income. 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 certain financial
information for each segment (in thousands):
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
Revenues
|
|
|
|
Direct selling
|
$33,420
|
$35,311
|
|
Commercial coffee
|
7,705
|
7,683
|
|
Commercial hemp
|
67
|
-
|
|
Total revenues
|
$41,192
|
$42,994
|
|
Gross
profit
|
|
|
|
Direct selling
|
$22,755
|
$24,735
|
|
Commercial coffee
|
4,067
|
277
|
|
Commercial hemp
|
27
|
-
|
|
Total gross profit
|
$26,849
|
$25,012
|
|
Operating
income (loss)
|
|
-
|
|
Direct selling
|
$(12,309)
|
$781
|
|
Commercial coffee
|
884
|
(757)
|
|
Commercial hemp
|
(516)
|
-
|
|
Total operating income (loss)
|
$(11,941)
|
$24
|
|
Net
income (loss)
|
|
|
|
Direct selling
|
$(13,377)
|
$(591)
|
|
Commercial coffee
|
1,633
|
(1,717)
|
|
Commercial hemp
|
(516)
|
-
|
|
Total net loss
|
$(12,260)
|
$(2,308)
|
|
Capital
expenditures
|
|
|
|
Direct selling
|
$17
|
$87
|
|
Commercial coffee
|
2,572
|
679
|
|
Commercial hemp
|
1,384
|
-
|
Total capital expenditures
|
$3,973
|
$766
|
|
Capital
expenditures acquired through acquisition
|
|
|
|
Direct selling
|
$-
|
$-
|
|
Commercial coffee
|
-
|
-
|
|
Commercial hemp
|
1,133
|
-
|
|
Total capital expenditures acquired through
acquisition
|
$1,133
|
$-
|
|
|
|
|
|
March 31,
2019
(unaudited)
|
|
|
Total
assets
|
|
|
|
Direct selling
|
$45,011
|
$38,947
|
|
Commercial coffee
|
41,584
|
37,026
|
|
Commercial hemp
|
21,189
|
-
|
|
Total assets
|
$ 107,784
|
$75,973
|
*
Segment results and total assets as of and for the
three months ended March 31, 2019 have been restated.
See Note 2.
Total
tangible assets, net located outside the United States were
approximately $7.3 million and $6.2 million as of March 31, 2019
and December 31, 2018, respectively.
The
Company conducts its operations primarily in the United States. For
both the three months ended March 31, 2019 and 2018 approximately
13% of the Company’s sales were derived from sales outside
the United States.
The
following table displays revenues attributable to the geographic
location of the customer (in thousands):
|
|
Three Months
Ended March 31,
|
|
|
|
|
|
Revenues
|
|
|
|
United States
|
$35,782
|
$37,393
|
|
International
|
5,410
|
5,601
|
|
Total revenues
|
$41,192
|
$42,994
|
*
Revenue for the three months ended March 31, 2019 has been
restated. See Note 2.
Note 13. Subsequent Events
None.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Restatement of previously reported unaudited condensed consolidated
financial statements
This “Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations” has been
amended and restated to give effect to the restatement of our
unaudited condensed consolidated financial statements as more fully
described in “Note 2. Restatement of previously reported
unaudited condensed consolidated financial statements” in
“Item 1. Financial
Statements.”
FORWARD LOOKING STATEMENTS
This
quarterly report on Form 10-Q/A contains forward-looking
statements. The words “expects,”
“anticipates,” “believes,”
“intends,” “plans” and similar expressions
identify forward-looking statements. In addition, any statements
which refer to expectations, projections or other characterizations
of future events or circumstances are forward-looking statements.
We undertake no obligation to publicly disclose any revisions to
these forward-looking statements to reflect events or circumstances
occurring subsequent to filing this Form 10-Q/A with the Securities
and Exchange Commission. These forward-looking statements are
subject to risks and uncertainties, including, without limitation,
those risks and uncertainties discussed in Part I, Item 1A,
“Risk Factors” and in Part II, Item 7,
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in our annual report on
Form 10-K filed with the Securities and Exchange Commission on
April 15, 2019 and herein as reported under Part II Other
Information, Item 1A. Risk Factors. In addition, new risks emerge
from time to time and it is not possible for management to predict
all such risk factors or to assess the impact of such risk factors
on our business. Accordingly, our future results may differ
materially from historical results or from those discussed or
implied by these forward-looking statements. Given these risks and
uncertainties, the reader should not place undue reliance on these
forward-looking statements.
In
the following text, the terms “we,” “our,”
and “us” may refer, as the context requires, to
Youngevity International, Inc. or collectively to Youngevity
International, Inc. and its subsidiaries.
Overview
We
operate in three segments: (i) the direct selling segment, where
products are offered through a global distribution network of
preferred customers and distributors, (ii) the commercial coffee
segment, where products are sold directly to businesses, processed
green coffee beans are processed and milling services
are provided for unprocessed green coffee beans, and
(iii) the commercial hemp segment, where we manufacture 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.
In
the direct selling segment, we sell health and wellness products on
a global basis and offer a wide range of products through an
international direct selling network of independent distributors.
Our multiple independent selling forces sell a variety of products
through friend-to-friend marketing and social
networking.
We
also engage in the commercial sale of coffee. We own a traditional
coffee roasting business, CLR, that sells roasted and unroasted
coffee and produces coffee under its own Café La Rica brand,
Josie’s Java House brand and Javalution brands. CLR produces
coffee under a variety of private labels through major national
sales outlets and major customers including cruise lines and office
coffee service operators. During fiscal 2014 CLR acquired the Siles
Plantation Family Group, a coffee plantation and dry-processing
facility located in Matagalpa, Nicaragua, an ideal coffee growing
region that is historically known for high quality coffee
production. The dry-processing facility is approximately 26 acres
and the plantation is approximately 500 acres and produces 100
percent Arabica coffee beans that are shade grown, Rainforest
Alliance Certified™ and Fair Trade Certified™. CLR is
also in the process of expanding its capabilities in Nicaragua by
constructing a large processing mill. The plantation, the
dry-processing facilities and existing U.S. based coffee roaster
facilities allows CLR to control the coffee production process from
field to cup.
In
the commercial hemp segment, we are engaged in the CBD hemp
extraction technology and equipment business. We develop,
manufacture and sell equipment and related services to clients
which enable them to extract CBD oils from hemp stock.
We
conduct our operations primarily in the United States. For both the
three months ended March 31, 2019 and 2018, approximately 87% of
our revenues were derived from sales within the United
States.
Recent Events
New Acquisitions During the three months ended March 31,
2019
New Acquisitions - Khrysos Global, Inc.
(See Note 2 and Note 5, to the condensed consolidated financial
statements)
On February 12, 2019, we and Khrysos Industries,
Inc., a Delaware corporation our wholly owned subsidiary of
(“KII”) entered into an Asset and Equity Purchase
Agreement (the “AEPA”) with, Khrysos Global, Inc., a
Florida corporation (“Seller”), Leigh Dundore
(“LD”), and Dwayne Dundore (the “Representing
Party”) for KII to acquire substantially all the assets (the
“Assets”) of KGI and all the outstanding equity of INXL
Laboratories, Inc., a Florida corporation (“INXL”) and
INX Holdings, Inc., a Florida corporation (“INXH”).
Seller, INXL and INXH provides end to end extraction
and processing via the company's proprietary systems
that allow for the conversion of hemp feed stock into hemp oil and
hemp extracts. Additionally, the company offers
various rental, sales, and service programs of the
company’s extraction and processing
systems.
The
consideration payable for the assets and the equity of KGI, INXL
and INXH is an aggregate of $16,000,000, to be paid as set forth
under the terms of the AEPA and allocated between the Sellers and
LD in such manner as they determine at their
discretion.
At
closing, Seller, LD and the Representing Party received an
aggregate of 1,794,972 shares of our common stock which have a
value of $14,000,000 for the purposes of the AEPA or
$12,649,000 fair value for the acquisition valuation
and $500,000 in cash. Thereafter, Seller, LD and the Representing
Party are to receive an aggregate of: $500,000 in cash thirty (30)
days following the date of closing; $250,000 in cash ninety (90)
days following the date of closing; $250,000 in cash one hundred
and eighty (180) days following the Date of closing; $250,000 in
cash two hundred and seventy (270) days following the date of
closing; and $250,000 in cash one (1) year following the date
of closing.
In
addition, we agreed to issue to Representing Party, subject to the
approval of the holders of at least a majority of the issued and
outstanding shares of our common stock and the approval of The
Nasdaq Stock Market (collectively, the “Contingent
Consideration Warrants”) consisting of six (6) six-year
warrants, to purchase 500,000 shares of common stock each, for an
aggregate of 3,000,000 shares of common stock at an exercise price
of $10 per share exercisable upon reaching certain levels of
cumulative revenue or cumulative net income before taxes by the
business during the any of the years ending December 31, 2019,
2020, 2021, 2022, 2023 or 2024.
The
AEPA contains customary representations, warranties and covenants
of Youngevity, KII, the Seller, LD and the Representing Party.
Subject to certain customary limitations, the Seller, LD and the
Representing Party have agreed to indemnify us and KII against
certain losses related to, among other things, breaches of the
Seller’s, LD’s and the Representing Party’s
representations and warranties, certain specified liabilities and
the failure to perform covenants or obligations under the
AEPA.
On February
28, 2019, KII purchased a 45-acre tract of land in Groveland,
Florida, in central Florida, which KII intends to build R&D
facility, greenhouse and allocate a portion for
farming.
Overview of Significant Events
At-the-Market Equity Offering Program
On January
7, 2019, we entered into an At-the-Market Offering Agreement (the
“ATM Agreement”) with The Benchmark Company, LLC
(“Benchmark”), as sales agent, pursuant to which we may
sell from time to time, at its option, shares of our common stock,
par value $0.001 per share, through Benchmark, as sales agent (the
“Sales Agent”), for the sale of up to $60,000,000 of
shares of our common stock. We are not obligated to make any sales
of common stock under the ATM Agreement and we cannot provide any
assurances that it will issue any shares pursuant to the ATM
Agreement. We will pay the Sales Agent 3.0% commission of the gross
sales proceeds. During the three months ended March 31, 2019, the
Company sold a total of 1,000 shares of common stock under the ATM
Agreement for an aggregate purchase price of $6.6118 pursuant
to the ATM Agreement.
Cross-Marketing Agreement
On
January 10, 2019, we entered into an exclusive cross-marketing
agreement with Icelandic Glacial™ an Iceland based spring
water drinking water company and is now available for customers to
purchase.
Mill Construction Agreement
On January
15, 2019, CLR entered into the CLR Siles Mill Construction
Agreement (the “Mill Construction Agreement”) with
H&H and H&H Export, Alain Piedra Hernandez
(“Hernandez”) and Marisol Del Carmen Siles Orozco
(“Orozco”), together with H&H, H&H Export,
Hernandez and Orozco, 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
“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.
In addition, the Nicaraguan Partner and CLR agreed to contribute
$4,700,000 each toward construction of a processing plant, office,
and storage facilities (“Mill”) on the property for
processing coffee in Nicaragua. As of March 31, 2019, the Company
has made deposits of $2,250,000 towards the Mill, which is included
in construction in process in property and equipment, net on the
Company’s consolidated balance sheet.
Amendment to Operating and Profit-Sharing Agreement
On
January 15, 2019, CLR entered into an amendment to the March 2014
operating and profit-sharing agreement with the owners of H&H. CLR engaged Hernandez and
Orozco, the owners of H&H as employees to manage Siles. In
addition, CLR and H&H, Hernandez and Orozco have agreed to
restructure their profit-sharing agreement in regard to profits
from green coffee sales and processing that increases the
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 processing from La Pita, a leased mill, or
the new mill, now will provide for a split of profits of 75% to CLR
and 25% to the Nicaraguan Partner, after certain conditions are
met. We issued 295,910 shares of our common stock to H&H Export
to pay for certain working capital, construction and other
payables. In addition, H&H Export has sold to CLR its espresso
brand Café Cachita in consideration of the issuance of 100,000
shares of our common stock. Hernandez and Orozco are employees of
CLR. The shares of common stock issued were valued at $7.50 per
share.
Stock Offering
On
February 6, 2019, we entered into a Securities Purchase Agreement
(the “Purchase Agreement”) with one accredited investor
that had a substantial pre-existing relationship with us pursuant
to which we sold 250,000 shares of our common stock, par value
$0.001 per share, at an offering price of $7.00 per share. Pursuant
to the Purchase Agreement, we also issued to the investor a
three-year warrant to purchase 250,000 shares of common stock at an
exercise price of $7.00. The proceeds to us were $1,750,000.
Consulting fees for arranging the Purchase Agreement include the
issuance of 5,000 shares of restricted shares of our common stock,
par value $0.001 per share, and 100,000 3-year warrants priced at
$10.00. No cash commissions were paid.
Convertible Notes
On
February 15, 2019 and on March 10, 2019, the Company closed its
first and second tranches of its 2019 January Private
Placement debt offering, respectively, pursuant to which the
Company offered for sale a minimum of notes in the principal amount
of a minimum of $100,000 and a maximum of notes in the principal
amount $10,000,000 (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
thirteen (13) accredited investors that had a substantial
pre-existing relationship with the Company pursuant to which the
Company received aggregate gross proceeds of $2,440,000 and issued
2019 PIPE Notes in the aggregate principal amount of $2,440,000 and
an aggregate of 48,800 shares of common stock. The placement agent
will receive up to 50,000 shares of common stock in the offering.
Each 2019 PIPE Note matures 24 months after issuance, bears
interest at a rate of six percent (6%) per annum, and the
outstanding principal is convertible into shares of common stock at
any time after the 180th day anniversary of the issuance of the
2019 PIPE Note, at a conversion price of $10 per share (subject to
adjustment for stock splits, stock dividends and reclassification
of the common stock).
Promissory Notes
On
March 18, 2019, we entered into a two-year Secured Promissory Note
(the “Note or Notes”) with two accredited investors
that we had a substantial pre-existing relationship with and from
whom we raised cash proceeds in the aggregate of $2,000,000. In
consideration of the Notes, we issued 20,000 shares of our common
stock par value $0.001 for each $1,000,000 invested as well
as for each $1,000,000 invested and five-year warrants
to purchase 20,000 shares of our common stock at a price per share
of $6.00. The Notes pay interest at a rate of eight percent
(8%) per annum and interest is paid quarterly in arrears with all
principal and unpaid interest due at maturity on March 18,
2021.
Results of Operations
Three months ended March 31, 2019 compared to three months ended
March 31, 2018
Revenues
For the
three months ended March 31, 2019, our revenues decreased 4.2% to
$41,192,000 as compared to $42,994,000 for the three months ended
March 31, 2018. During the three months ended March 31, 2019,
we derived approximately 81.1% of our revenue from our direct
selling segment, 18.7% of our revenue from our commercial coffee
segment and 0.2% of our revenue from our commercial hemp
segment.
For the
three months ended March 31, 2019, direct selling segment
revenues decreased by $1,891,000 or 5.4% to $33,420,000 as compared
to $35,311,000 for the three months ended March 31, 2018. This
decrease was primarily attributed to revenues from new acquisitions
of $421,000, offset by a decrease of $2,333,000 in revenues from
existing business. The decrease in direct selling revenues was also
attributable to a general decline in net sales, primarily in North
America and in Taiwan.
For the
three months ended March 31, 2019, commercial coffee segment
revenues increased by $22,000 or 0.3% to $7,705,000 as compared to
$7,683,000 for the three months ended March 31, 2018. This increase
was primarily attributed to increased revenues of $81,000 from our
roasted coffee business, offset by a decrease in revenues from
sales of green coffee of $4,885,000, attributable to the change in recognition of
H&H Export revenue in 2019 to milling and processing services
related to the green coffee business. The decrease in sales from
green coffee was offset by revenues from milling
and processing services of approximately $4,826,000 to H&H
Export.
Our new
commercial hemp segment recorded $67,000 in revenues related to the
acquisition of Khrysos which closed on February 15,
2019.
The
following table summarizes our revenue in thousands by
segment:
|
|
Three
Months Ended March
31,
|
|
|
|
|
|
|
|
|
|
|
|
Direct
selling
|
$33,420
|
$35,311
|
(5.4)%
|
|
As a % of Revenue
|
81.1%
|
82.1%
|
(1.0)%
|
|
Commercial coffee:
|
|
|
|
|
Processed
green coffee
|
100
|
4,985
|
(98.0)%
|
|
As a % of Segment Revenue
|
1.3%
|
64.9%
|
(63.6)%
|
|
Milling
and processing services
|
4,826
|
-
|
N/A
|
|
As a % of Segment Revenue
|
62.6%
|
-%
|
N/A
|
|
Roasted
coffee and other
|
2,779
|
2,698
|
3.0%
|
|
As a % of Segment Revenue
|
36.1%
|
35.1%
|
1.0%
|
|
Total commercial coffee
|
7,705
|
7,683
|
0.3%
|
|
As a % of Revenue
|
18.7%
|
17.9%
|
0.8%
|
|
Commercial
hemp
|
67
|
-
|
N/A
|
|
|
0.2%
|
-%
|
N/A
|
|
Total
Revenues
|
$41,192
|
$42,994
|
(4.2)%
|
*
See
Note 2 to the unaudited condensed consolidated financial
statements.
(1)
Percentages
denoted as N/A do not contain prior period
comparatives
Cost of Revenues
For
the three months ended March 31, 2019, overall cost of revenues
decreased approximately 20.2% to $14,343,000 as compared to
$17,982,000 for the three months ended March 31, 2018.
The
direct selling segment cost of revenues increased 0.8% to
$10,665,000 when compared to $10,576,000 for the same period last
year, primarily due to product sales mix and an increase in stock
and equity-based compensation expense of $74,000.
The commercial coffee segment cost of revenues
decreased 50.9% to approximately $3,638,000 when compared to
$7,406,000 for the same period last year. This was primarily
attributable to the shift in revenue from
processed green coffee sales to milling and processing services
year on year. As revenue for milling services does not contain a
cost of goods sold component, related to processed green coffee,
this shift in revenues to milling and processing services lowers
our cost of revenue. Cost of revenues from the sale of processed
green coffee was $607,000 or 7.9% of commercial coffee segment
revenues for the three months ended March 31, 2019. During the
three months ended March 31, 2018, cost of revenues on processed
green coffee sales were $4,809,000 or 96.5% of commercial coffee
segment revenues. Cost of revenue for roasted coffee increased
16.7% to $3,031,000 for the three months ended March 31,
2019.
The
commercial hemp segment cost of revenues was $40,000.
Cost
of revenues includes the cost of inventory including green coffee,
shipping and handling costs incurred in connection with shipments
to customers, direct labor and benefits costs, royalties associated
with certain products, transaction merchant fees and depreciation
on certain assets.
Gross Profit
For
the three months ended March 31, 2019, gross profit increased
approximately 7.3% to $26,849,000 as compared to $25,012,000 for
the three months ended March 31, 2018. Overall gross profit as a
percentage of revenues increased to 65.2%, compared to 58.2% in the
same period last year, primarily due to the increased revenues in
the commercial coffee segment.
Gross
profit in the direct selling segment decreased by 8.0% to
$22,755,000 from $24,735,000 in the prior period primarily as a
result of the decrease in revenues and the higher cost of sales
discussed above. Gross profit as a percentage of revenues in the
direct selling segment decreased by approximately 1.9% to 68.1% for
the three months ended March 31, 2019, compared to 70.0% in the
same period last year.
Gross profit in the commercial coffee segment
increased to approximately $4,067,000 compared to $277,000 in the
prior period. Gross profit as a percentage of revenues in the
commercial coffee segment increased to 52.8% for the three months
ended March 31, 2019, compared to 3.6% in the same period last
year. The increase in gross profit in the commercial coffee segment
was primarily due to the overall increase in the processing and milling of
unprocessed green coffee at our mill that in turn drove higher
gross profits from the combination of processed green coffee sales
and revenues on milling and processing services during the three
months ended March 31, 2019. Gross profit from the sales of
processed green coffee was a negative $507,000 or 6.6% of
commercial
coffee segment revenues and
gross profits from milling and processing services was
$4,826,000.
Gross profit in the commercial hemp segment was
$27,000 related to the acquisition of Khrysos which
closed on February 15, 2019.
Below
is a table of gross profit (loss) by segment (in thousands) and
gross profit as a percentage of segment revenues:
|
|
Three
Months Ended March
31,
|
|
|
|
|
|
|
|
|
|
|
|
Direct
selling
|
$22,755
|
$24,735
|
(8.0)%
|
|
Gross Profit % of Segment
Revenues
|
68.1%
|
70.0%
|
(1.9)%
|
|
Commercial
Coffee:
|
|
|
|
|
Processed
green coffee
|
(507)
|
176
|
(388.1)%
|
|
Gross Profit % of Segment Revenues
|
(6.6)%
|
2.3%
|
(8.9)%
|
|
Milling
and processing services
|
4,826
|
-
|
N/A
|
|
Gross Profit % of Segment Revenues
|
62.6%
|
-%
|
N/A
|
|
Roasted
coffee and other
|
(252)
|
101
|
(349.5)%
|
|
Gross Loss % of Segment Revenues
|
(3.3)%
|
1.3%
|
(4.6)%
|
|
Total commercial coffee
|
4,067
|
277
|
1,368.2%
|
|
Gross Profit % of Segment
Revenues
|
52.8%
|
3.6%
|
49.2%
|
|
Commercial
hemp
|
27
|
-
|
N/A
|
|
Gross Profit % of Segment
Revenues
|
40.3%
|
-%
|
N/A
|
|
Total
|
$26,849
|
$25,012
|
7.3%
|
Gross Profit % of Revenues
|
65.2%
|
58.2%
|
7.0%
|
* See Note 2 to the unaudited condensed consolidated financial
statements.
(1)
Percentages denoted
as N/A do not contain prior period comparatives
Operating Expenses
For
the three months ended March 31, 2019, our operating expenses
increased 55.2% to $38,790,000 as compared to $24,988,000 for the
three months ended March 31, 2018. The increase included
$12,892,000 in stock and equity-based compensation expense
(see Note 11, to the condensed
consolidated financial statements).
For
the three months ended March 31, 2019, the distributor compensation
paid to our independent distributors in the direct selling segment
decreased 4.4% to $14,890,000 from $15,578,000 for the three months
ended March 31, 2018. This decrease was primarily attributable to
the decrease in revenues. Distributor compensation as a percentage
of direct selling revenues increased to 44.6% for the three months
ended March 31, 2019 as compared to 44.1% for the three months
ended March 31, 2018.
For
the three months ended March 31, 2019, total sales and marketing
expense increased 14.9% to $4,019,000 from $3,499,000 for the three
months ended March 31, 2018. This increase included an increase of
$471,000 in equity-based compensation expense. Excluding the
increase in equity-based compensation expense, the increase in
sales and marketing expense would have been
1.4%.
In the direct selling segment, sales and marketing expense
increased by 12.8% to $3,715,000 in the current quarter from
$3,292,000 for the same period last year. This increase included an
increase of $471,000 in equity-based compensation expense.
Excluding the increase in equity-based compensation expense, sales
and marketing expense would have decreased by 1.5%. In the
commercial coffee segment, sales and marketing costs increased by
$84,000 to $291,000 in the current quarter compared to the same
period last year, primarily due to increased advertising costs and
compensation expense. Sales and marketing expense was $13,000 in
the commercial hemp segment.
For
the three months ended March 31, 2019,
total general and
administrative expense increased 236.3% to $19,881,000 from
$5,911,000 for the three months ended March 31, 2018. This
increase included an increase of $12,421,000 in equity-based
compensation expense. Excluding the increase in equity-based
compensation expense, the increase in general and administration
expense would have been 27.2%.
In the direct selling segment, general and administrative expense
increased by 223.7% to $16,459,000 in the current quarter from
$5,084,000 for the same period last year. This increase included an
increase of $10,995,000 in equity-based compensation expense.
Excluding the increase in equity-based compensation expense,
general and administrative expense would have increased by 7.7%.
This increase was primarily due to an increase in accounting and
legal fees. In addition, there was no contingent liability
revaluation adjustment in the current quarter compared to a
reduction in expense of $213,000 for the same period last year. In
the commercial coffee segment, general and administrative costs
increased by $2,065,000 or 249.7% to $2,892,000 in the current
quarter compared to $827,000 in the same period last year. This
increase included an increase of $1,425,000 in equity-based
compensation expense. Excluding the increase in stock based
compensation expense, general and administration expense in the
commercial coffee segment would have increased by 77.4%. This was
primarily due to an increase in wages, incentives, warehouse
storage costs, workers’ compensation costs and profit-sharing
expense of $243,000, compared to a profit-sharing benefit of
$223,000 in the same period last year. General and administrative
expense was $530,000 in the commercial hemp segment, mostly related
to wages, supplies and general office
costs.
Operating Income (Loss)
For the three months ended March 31, 2019, the
Company reported an operating loss of $11,941,000 as compared to an
operating income of $24,000 for the three months ended March 31,
2018. This was primarily due to the increase of $12,966,000 in
non-cash and equity-based compensation expense
discussed above. Excluding the increase in
equity-based compensation expense, the Company would have
reported an operating income of $1,025,000 in the current
quarter.
Total Other Expense
For
the three months ended March 31, 2019, total other expense
decreased by $2,061,000 to $21,000 as compared to other expense of
$2,082,000 for the three months ended March 31, 2018. Total other
expense includes net interest expense, the change in the fair value
of derivative liabilities and extinguishment loss on
debt.
Net
interest expense decreased by $205,000 for the three months ended
March 31, 2019 to $1,507,000, compared to $1,712,000 for the three
months ended March 31, 2018.
Change
in fair value of derivative liabilities increased by $774,000 for
the three months ended March 31, 2019 to $1,486,000 in other income
compared to $712,000 for the three months ended March 31,
2018. Various factors are considered in the pricing models we
use to value the warrants including our current stock price, the
remaining life of the warrants, the volatility of our stock price,
and the risk-free interest rate. Future changes in these factors
may have a significant impact on the computed fair value of the
Company’s derivative liabilities. As such, we expect future
changes in the fair value of the warrants and may vary
significantly from period to period (see Notes 8 &
9, to the condensed consolidated financial
statements).
For
the three months ended March 31, 2018, we recorded a non-cash
extinguishment loss on debt of $1,082,000 as a result of the
triggering of the automatic conversion of the 2017 Notes associated
with our July 2017 Private Placement to common stock. This loss
represented the difference between the carrying value of the 2017
Notes and embedded conversion feature and the fair value of the
shares that were issued. The fair value of the shares issued were
based on the stock price on the date of the conversion. There was
no loss on debt extinguishment in the current quarter. (See Note 8,
to the condensed consolidated financial statements).
Income Taxes
Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carry-forwards. Deferred tax assets
and liabilities are measured using statutory tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities from a change in tax rates is
recognized in income in the period that includes the effective date
of the change. We have determined through consideration of all
positive and negative evidences that the deferred tax assets are
not more likely than not to be realized. A valuation allowance
remains on the U.S., state and foreign tax attributes that are
likely to expire before realization. We have approximately $146,000
in AMT refundable credits, and we expect that $73,000 will be
refunded in 2019. As such, we do not have a valuation allowance
relating to the refundable AMT credit carryforward. We have
recognized an income tax expense of
$298,000 which is our
estimated federal, state and foreign income tax expense for the
three months ended March 31, 2019. The difference between the
effective tax rate and the federal statutory rate of 21% is due to
the permanent differences, change in
valuation allowance, state
taxes (net of federal benefit), and foreign tax rate
differential.
Net Loss
For
the three months ended March 31, 2019, the Company reported a net
loss of $12,260,000 as compared to net loss of $2,308,000 for the
three months ended March 31, 2018. The primary reason for the
increase in net loss when compared to the prior period was due to
the increase in operating loss of $11,965,000, and
increase in income taxes of $48,000, offset by the increase
in other income of $2,061,000. The primary reason for the increase
in operating loss was the increase of $12,966,000 in
non-cash equity-based compensation
expense.
Adjusted EBITDA
EBITDA
(earnings before interest, income taxes, depreciation and
amortization) as adjusted to remove the effect of equity-based
compensation expense and the non-cash loss on extinguishment of
debt and the change in the fair value of the derivatives or
"Adjusted EBITDA," increased 58.4% to $2,407,000 for the three
months ended March 31, 2019 compared to $1,520,000 in the same
period for the prior year.
Management
believes that Adjusted EBITDA, when viewed with our results under
GAAP and the accompanying reconciliations, provides useful
information about our period-over-period growth. Adjusted EBITDA is
presented because management believes it provides additional
information with respect to the performance of our fundamental
business activities and is also frequently used by securities
analysts, investors and other interested parties in the evaluation
of comparable companies. We also rely on Adjusted EBITDA as a
primary measure to review and assess the operating performance of
our company and our management team.
Adjusted
EBITDA is a non-GAAP financial measure. We calculate adjusted
EBITDA by taking net income, and adding back the expenses related
to interest, income taxes, depreciation, amortization,
equity-based compensation expense and the change in the fair
value of the warrant derivative, as each of those elements are
calculated in accordance with GAAP. Adjusted EBITDA
should not be construed as a substitute for net income (loss) (as
determined in accordance with GAAP) for the purpose of analyzing
our operating performance or financial position, as Adjusted EBITDA
is not defined by GAAP.
A
reconciliation of our adjusted EBITDA to net loss for the
three months ended March 31, 2019 and 2018 is included in the table
below (in thousands):
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
Net
loss
|
$(12,260)
|
$(2,308)
|
|
Add/Subtract:
|
|
|
|
Interest,
net
|
1,507
|
1,712
|
|
Income
tax provision
|
298
|
250
|
|
Depreciation
|
475
|
432
|
|
Amortization
|
670
|
827
|
|
EBITDA
|
(9,310)
|
913
|
|
Add/Subtract:
|
|
|
|
Equity-based compensation
|
13,203
|
237
|
|
Change
in the fair value of derivatives
|
(1,486)
|
(712)
|
|
Extinguishment
loss on debt
|
-
|
1,082
|
|
Adjusted
EBITDA
|
$2,407
|
$1,520
|
Liquidity and Capital Resources
Sources of Liquidity
At
March 31, 2019 we had cash and cash equivalents of approximately
$2,540,000 as compared to cash and cash equivalents of $2,879,000
as of December 31, 2018.
Cash Flows
Cash used
in operating activities.
Net cash used in operating activities for the three months ended
March 31, 2019 was $4,831,000 as compared to net cash used in
operating activities of $1,427,000 for the three months ended March
31, 2018. Net cash used in operating activities consisted of a net
loss of $12,260,000 and $6,072,000 in changes in operating
assets and liabilities, partially offset by net non-cash operating
expenses of $13,501,000.
Net
non-cash operating expenses included $1,145,000 in depreciation and
amortization, $11,344,000 in stock-based compensation expense,
$1,859,000 in equity issuance for services, $199,000
in amortization of debt discounts, $281,000 in stock issuance cost
related to true-up shares and $159,000 in increase in inventory
reserves, offset by $1,486,000 related to the change in fair value
of warrant derivative liability.
Changes in operating assets and liabilities were attributable to
decreases in working capital, primarily related to changes in
accounts receivable of $3,369,000, inventory of $1,283,000, prepaid
expenses and other current assets of $111,000, deferred revenues of
$44,000 and accrued expenses and other liabilities of $2,713,000.
Increases in working capital primarily related to changes in
accounts payable of $54,000 and accrued distributor compensation of
$854,000.
Cash used in
investing activities. Net cash used in investing activities for
the three months ended March 31, 2019 was $2,716,000 as compared to
net cash used in investing activities of $156,000 for the three
months ended March 31, 2018. Net cash used in investing activities
consisted of $1,350,000 in payments made towards the construction
of a large mill in Nicaragua, $500,000 in cash paid related to the
acquisition of Khrysos, offset by cash acquired of $75,000 and
other purchases of property and equipment.
Cash provided
by financing activities.
Net cash provided by financing activities was $7,106,000 for the
three months ended March 31, 2019 as compared to net cash provided
by financing activities of $3,762,000 for the three months ended
March 31, 2018.
Net
cash provided by financing activities consisted of net proceeds of
$6,023,000 from issuance of equity and convertible notes,
$1,451,000 from the issuance of common stock from the at-the-market
offering including exercise of stock options and warrants, net. Net
proceeds from line of credit of $176,000, offset by
$35,000 in payments to reduce notes payable, $128,000 in payments
related to contingent acquisition debt, $368,000 in payments
related to capital lease financing obligations and $11,000 in
dividends paid.
Future Liquidity Needs
The
accompanying condensed consolidated financial statements have been
prepared and presented on a basis assuming we will continue as a
going concern. We have sustained significant losses during the
three months ended March 31, 2019 of $12,260,000 and $2,308,000 for
the three months ended March 31, 2018. Net cash used in operating
activities was $4,831,000 for the three months ended March 31, 2019
compared to net cash used in operating activities of $1,427,000 for
the three months ended March 31, 2018. We do not currently believe
that our existing cash resources are sufficient to meet our
anticipated needs over the next twelve months from the date hereof.
Based on our current cash levels and our current rate of cash
requirements, we will need to raise additional capital and will
need to further reduce our expenses from current levels. These
factors raise substantial doubt about our ability to continue as a
going concern.
During
the quarter ended March 31, 2019, our operations did not generate
sufficient cash to meet our operating needs and we supplemented the
revenue generated from operations with cash proceeds of debt and
equity offerings. We raised additional capital through equity and
convertible notes offerings during the current quarter and
we entered into an At-the-Market
Offering Agreement (the “ATM Agreement”) with The
Benchmark Company, LLC (“Benchmark”), as sales agent,
pursuant to which the Company may sell from time to time, at its
option, shares of its common stock, par value $0.001 per share,
through Benchmark, as sales agent (the “Sales Agent”),
for the sale of up to $60,000,000 of shares of the Company’s
common stock.
However, despite such actions, we do not
believe that our existing cash
resources are sufficient to meet our anticipated needs over the
next twelve months from the date hereof. We are also
considering additional alternatives, including, but not limited to
equity financings and debt financings. Depending on market
conditions, we cannot be sure that additional capital will be
available when needed or that, if available, it will be obtained on
terms favorable to us or to our stockholders.
We
anticipate revenues to continue to grow and we intend to make
necessary cost reductions and reduce non-essential
expenses.
Failure
to raise additional funds from the issuance of equity securities
and failure to implement cost reductions could adversely affect our
ability to operate as a going concern. There can be no assurance
that any cost reductions, implemented will correct our going
concern issue. The financial statements do not include
any adjustments that might be necessary from the outcome of this
uncertainty.
Off-Balance Sheet Arrangements
There
were no off-balance sheet arrangements as of March 31,
2019.
Contractual Obligations
There
were no material changes from those disclosed in our most recent
annual report.
Critical Accounting Policies
The
unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America, which require us to make
estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the unaudited condensed
consolidated financial statements and revenues and expenses during
the periods reported. Actual results could differ from those
estimates. Information with respect to our critical accounting
policies which we believe could have the most significant effect on
our reported results and require subjective or complex judgments by
management is contained in Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of Operations, of
our Annual Report on Form 10-K for the year ended December 31,
2018.
Recent Accounting Pronouncements
Recent
accounting pronouncements are disclosed in Note 1 to the
accompanying condensed consolidated financial statements of this
Quarterly Report on Form 10-Q/A.
