F-41
Upon liquidation, dissolution or winding up of the Company, each
holder of Series C Preferred Stock shall be entitled to receive a
distribution, to be paid in an amount equal to $9.50 for each and
every share of Series 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 has 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. As of December 31,
2018, all of the Series C Preferred shares were converted to common
stock and the Company has issued 1,394,726 warrants. As of December
31, 2018, no shares of Series C Convertible Preferred Stock remain
outstanding.
Amendments to Certificate of Incorporation or Bylaws
On
August 16, 2018, the Company filed a Certificate of Designation of
Powers, Preferences and Rights of Series C Convertible Preferred
Stock with the Secretary of State of the State of Delaware. On
September 28, 2018 the Company filed a Certificate of Designation
of Powers, Preferences and Rights of Series C Convertible Preferred
Stock with the Secretary of State of the State of Delaware
increasing the number of authorized shares of Series C Convertible
Preferred Stock from the original authorized issuance of 315,790 to
700,000.
On
March 2, 2018, the Company filed a Certificate of Designation of
Powers, Preferences and Rights of Series B Convertible Preferred
Stock with the Secretary of State of the State of Delaware (the
“Certificate of Designation”). On March 14, 2018, the
Company filed a Certificate of Correction to the Certificate of
Designation to correct two typographical errors in the Certificate
of Designation (the “Certificate of
Correction”).
2015 Convertible Note
On
October 19, 2018, Mr. Carl Grover, an investor in the
Company’s 2014 and 2015 Private Placements, exercised his
right to convert all amounts owed under the note issued to him in
the 2015 Private Placement in the principal amount of $3,000,000
which matured on October 12, 2018, into 428,571 shares of common
stock (at a conversion rate of $7.00 per share), in accordance with
its stated terms. (See Note 6,
above.)
2014 Convertible Note – Debt Exchange
On October 23, 2018, the Company entered into an agreement with Mr.
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.
(See Note 6, above.)
A FINRA
broker dealer, acted as the Company’s advisor in connection
with the Debt Exchange. Upon the closing of the Debt Exchange, the
Company issued to the broker dealer 30,000 shares of common stock,
a four-year warrant to purchase 80,000 shares of common stock at an
exercise price of $5.35 per share and a four-year warrant to
purchase 70,000 shares of common stock at an exercise price of
$4.75 per share. By a written consent dated October 29, 2018, the
holders of a majority of the Company’s issued and outstanding
common stock, Stephan Wallach and Michelle Wallach,
approved the issuance of the foregoing securities. The Company
received shareholder approval on December 6, 2018. (See Note 6, above.)
Private Placement – Securities Purchase
Agreement
Between
August 31, 2018 and October 5, 2018, the Company completed its
August 2018 Private Placement and entered into Securities Purchase
Agreements (the “Purchase Agreements”) with nine (9)
investors with whom the Company had a substantial pre-existing
relationship (the “Investors”) pursuant to which the
Company sold an aggregate of 630,526 shares of common stock at an
offering price of $4.75 per share. In addition, the Company issued
the Investors an aggregate of 150,000 additional shares of common
stock as an advisory fee and issued the investors three-year
warrants (the “Investor Warrants”) to purchase an
aggregate of 630,526 shares of common stock (at an exercise price
of $4.75 per share). The Investor
Warrants are ineligible for equity classification due to
anti-dilution provisions contained therein and as a result, the
Company determined that the warrants should be classified as
derivative liabilities and used the Monte-Carlo option-pricing
model to estimate the fair value of the warrants issued to the
investors of approximately $1,689,000 as of the issuance dates.
(See Note 6 above.) The warrants remain outstanding as of December
31, 2018.
The
Purchase Agreement requires the Company to issue the Investor
additional shares of the Company’s common stock in the event
that the average of the 15 lowest closing prices for the
Company’s common stock during the period beginning on August
31, 2018 and ending on the date 90 days from the effective date of
the Registration Statement (the “Subsequent Pricing
Period”) is less than $4.75 per share. The additional common
shares to be issued are calculated as the difference between the
common stock that would have been issued using the average price of
such lowest 15 closing prices during the Subsequent Pricing Period
less shares of common stock already issued pursuant to the August
2018 Private Placement. Notwithstanding the foregoing, in no event
may the aggregate number of shares issued by the Company, including
shares of common stock issued, shares of common stock underlying
the warrants, the shares of common stock issued as advisory shares
and True-up Shares exceed 2.9% of the Company’s issued and
outstanding common stock as of August 31, 2018 for each $1,000,000
invested in the Company.
The
True-up Share feature is considered to be embedded in the specific
common shares purchased by each Investor, by way of the Purchase
Agreement. As the economic characteristics and risks of the True-up
Share feature are clearly and closely related to the common stock
host contract, the True-up Share feature was not separately
recognized in the private placement transaction.
The
aggregate gross proceeds of approximately $2,995,000 from the aggregate
closings of the August 2018 Private Placement were first allocated
to the Investor Warrants, with an aggregate initial fair value of
approximately $1,689,000, with the residual amount allocated to the
common stock issued in the offering, including the common stock
issued to each Investor as an advisory fee. The net cash proceeds to the Company from the
August 2018 Private Placement were approximately $2,962,000 after deducting
advisory fees, closing and issuance costs.
Note Payable
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 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 designee’s) a four-year warrant to purchase 50,000
shares of its common stock, exercisable at $6.33 per share.
(See Note 5,
above.)
Warrants
As of December 31, 2018, warrants to purchase 5,876,980 shares
of the Company's common stock at prices ranging from
$2.00 to $9.00 were outstanding. All warrants are exercisable as of
December 31, 2018 and expire at various dates through December 2022
and have a weighted average remaining term of approximately 2.21
years and are included in the table below as of December 31,
2018.
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 of 2017, the Company cancelled the non-qualified stock
option and issued a warrant agreement with the same terms. The fair
value of the warrant was $232,000 and was recorded in general and
administrative expense in the consolidated statements of
operations. There was no
financial impact to the change in the valuation related to the
cancellation of the option and the issuance of the warrant. As of
December 31, 2018, the warrant remains
outstanding.
In May 2017, the Company issued a warrant as compensation to an
associated Youngevity distributor to purchase 37,500 shares of the
Company’s common stock at a price of $2.00 with an expiration
date of three years. During the year ended December 31, 2017, the
warrant was exercised on a cashless basis based on the
Company’s closing stock price of $4.66 and 21,875 shares of
common stock were issued. The fair value of the warrant was
$109,000 and was recorded in distributor compensation in the
consolidated statements of operations.
The Company uses the Black-Scholes option-pricing model
(“Black-Scholes model”) to estimate the fair value of
the warrants.
Warrant Modification Agreements
In January 2018, the Company approved an amendment (the
“Warrant Amendment”) to its warrant agreements issued
to the placement agent, pursuant to which warrants were issued to
purchase 179,131 shares of the Company’s common stock as
compensation associated with the Company’s July 2017 Private
Placement. (See Note 6 above.) The Warrant Amendment amended the
transfer provisions of the warrants and removed the down-round
price protection provision. As a result of this change in terms,
the Company considered the guidance of ASC 815-40-35-8 in regard to
the appropriate treatment related to the modification of these
warrants that were initially classified as derivative liabilities.
In accordance with the guidance, the warrants should now be
classified as equity instruments. (See Note 7 above)
Warrants Activity
A summary of the warrant activity for the years ended December 31,
2018 and 2017 is presented in the following table:
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 withIncome Taxes
The Company accounts for income taxes in accordance with ASC
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 withTopic 740, "Income Taxes,"
under the asset and liability method
which includes the monthly cash paymentsrecognition of $6,000 per month and 5,000 shares of restricted common stock for
every six (6) months of service performed.
As of December 31, 2018, the Company has issued in the aggregate
30,000 shares of restricted common stock in connection with this
agreement. During the years ended December 31, 2018 and 2017 the
Company issued 15,000 and 10,000 shares of common stock with a fair
value of approximately $70,000 and $50,000, respectively. During
the year ended December 31, 2018 and 2017, the
Company recorded stock issuance expense of approximately
$31,000 and $56,000, respectively, 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 consolidated statements of operations for the
years ended December 31, 2018 and 2017. 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 approximately
$208,000 and is recorded as prepaid advisory fees and is included
in prepaid expenses and other current assets on the Company’s
consolidated balance sheets and is amortized on a pro-rata basis
over the term of the agreement. During the year ended December
31, 2018, the Company recorded expense of approximately
$89,000 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
consolidated statements of operations for the year ended December
31, 2018.
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
consolidated balance sheets and is amortized on a pro-rata basis
over the term of the agreement. During the year ended December
31, 2018, the Company recorded expense of approximately
$133,000 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
consolidated statements of operations for the year ended December
31, 2018.
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.
The fair value of the shares issued is approximately $1,226,000 and
is recorded as prepaid advisory fees and is included in prepaid
expenses and other current assets on the Company’s
consolidated balance sheets and is amortized on a pro-rata basis
over the term of the agreement. During the year ended December
31, 2018, the Company recorded expense of approximately
$102,000, in connection with amortization of the stock issuance
expense. During the year ended December 31, 2018, the
Company recorded expense of approximately $425,000, 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 consolidated statements of
operations for the year ended December 31, 2018.
Stock Options
On May 16, 2012, the Company established the 2012 Stock Option Plan
(“Plan”) authorizing the granting of options for up to
2,000,000 shares of common stock. On February 23, 2017, the
Company’s Board of Directors received consent of the
Company’s majority stockholders, to amend the Plan to
increase the number of shares of common stock available for grant
and to expand the types of awards available for grant under the
Plan. The amendment of the Plan increased the number of authorized
shares of the Company’s common stock that may be delivered
pursuant to awards granted during the life of the Plan from
2,000,000 to 4,000,000 shares (as adjusted for the 1-for-20 reverse
stock split, which was effective on June 7, 2017). On January 10,
2019, the Company’s Board of Directors received consent of
the Company’s majority stockholders to further amend the Plan
to increase the number of shares of the Corporation’s common
stock that may be delivered pursuant to awards granted during the
life of the Plan from 4,000,000 to 9,000,000 shares
authorized.
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 December 31, 2018, the Company had
1,077,297 shares of common stock remaining available for future
issuance under the Plan.
Stock-based compensation expense related to stock options and
restricted stock units included in the consolidated deferred tax assets and
liabilities for the expected future tax consequences of events that
have been included in the consolidated financial statements. ofUnder
operations was charged as follows (in thousands):
A summary of the Plan stock option activity for the years endedthis approach, deferred taxes are recorded for the future tax
December 31, 2018 and 2017 is presented in the following
table:
The weighted-average fair valueconsequences expected to occur when the reported amounts of assets
and liabilities are recovered or paid. The provision for income
per share of the granted optionstaxes represents income taxes paid or payable for the years ended December 31, 2018 and 2017 was approximately
$2.39 and $2.90, respectively.
As of December 31, 2018, there was approximately $2,617,000 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 2.03
years.
Valuation Inputs
The Company uses the Black-Scholes model to estimate the fair value
of equity-based options. The use of a valuation model requires the
Company to make certain assumptions with respect to selected model
inputs. Expected volatility is calculated based on the historical
volatility of the Company’s stock price over
the expected term of the option. The expected life is based on
the contractual life of the option and expected employee
exercise and post-vesting employment termination behavior. The
risk-free interest rate is based on U.S. Treasury zero-coupon
issues with a remaining term equal to the expected life assumed at
the date of the grant.
The following were the factors used in the Black-Scholes model to
calculate the compensation cost:
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 December 31, 2018, none of the restricted stock units have
vested. There were no grants during the year ended Decembercurrent year
plus the change in deferred taxes during the year. Deferred taxes
31,
2018.
Theresult from differences between the financial statement and fairtax
value of each restricted stock unit issued to employees is
based on the closing price on the grant date of $4.53 and
restricted stock units issued to consultantsbasis of assets and liabilities and are revalued as they
vestadjusted for changes in tax
rates and is recognized as stock-based compensation expense over the
vesting term of the award.
As of December 31, 2018, total unrecognized stock-based
compensation expense related to restricted stock units to employees
and consultants was approximately $1,725,000, which will be
recognized over a weighted average period of 4.61
years.
Note 10. Commitments and Contingencies
Credit Risk
The Company maintains cash balances at various financial
institutions primarily located in the United States. Accounts held
at the United States institutions are secured, up to certain
limits, by the Federal Deposit Insurance Corporation. At times,
balances may exceed federally insured limits. The Company has not
experienced any losses in such accounts. There is credit risk
related to the Company’s ability to collect on its trade
account receivables from its major customers. Management believes
that the Company is not exposed to any significant credit risk with
respect to its cash and cash equivalent balances and trade accounts
receivables.
Litigationtax laws when changes are enacted. The effects of future
changes in income tax laws or rates are not
anticipated.
The Company is partysubject to litigation at the present time and may
become party to litigationincome taxes in the future. In general, litigation
claims can be expensive, and time consuming to bring or defend
against and could result in settlements or damages that could
significantly affect financial results. However, it is not possible
to predict the final resolution of any litigation to which the
Company is, or may be party to, and the impact of certain of these
matters onUnited States
(“U.S.”) and certain foreign jurisdictions. The
calculation of the Company’s business, results of operations,tax provision involves the
application of complex tax laws and financial condition could be material. As of December 31, 2018, the
Company believes that existing litigation has no merit and it is
not likely that the Company would incur any losses with respect to
litigation.
Leases
The Company leases its domestic and certain foreign facilities and
other equipment under non-cancelable operating lease agreements,
which expire at various dates through 2028. In addition to the
minimum future lease commitments presented below, the leases
generally require that the Company pay property taxes, insurance,
maintenance and repair costs. Such expenses are not included in the
operating lease amounts.
At December 31, 2018, future minimum lease commitments are as follows
(in thousands):
Rent expense was approximately $1,475,000 and $1,413,000 for the
years ended December 31, 2018 and 2017, respectively.
Other
Vendor Concentration
The Company purchases its inventory from multiple third-party
suppliers at competitive prices. For the year ended December 31,
2018, the Company’s commercial coffee segment made purchases
from two vendors, H&H Export and Rothfos Corporation, that
individually comprised more than 10% of total purchases and in
aggregate approximated 83% of total purchases. For the year ended
December 31, 2017, the Company’s commercial coffee segment
made purchases from two vendors, H&H Export and Rothfos
Corporation, that individually comprised more than 10% of total
purchases and in aggregate approximated 87% of total
purchases.
For the year ended December 31, 2018, the Company’s direct
selling segment made purchases from two vendors, Global Health
Labs, Inc. and Purity Supplements, that individually comprised more
than 10% of total purchases and in aggregate approximated 41% of
total purchases. For the year ended December 31, 2017, the
Company’s direct selling segment made purchases from two
vendors, Global Health Labs, Inc. and Columbia Nutritional, LLC.,
that individually comprised more than 10% of total purchases and in
aggregate approximated 41% of total purchases.
Customer Concentration
For the
years ended December 31, 2018 and 2017, the Company’s
commercial coffee segment had two customers, H&H Export and
Rothfos Corporation that individually comprised more than 10% of
revenue and in aggregate approximated 52% of total revenue,
respectively. The direct selling segment did not have any customers
during years ended December 31, 2018 and 2017 that comprised more
than 10% of revenue.
The Company has purchase obligations related to minimum future
purchase commitments for green coffee to be used in the
Company’s commercial coffee segment. Each individual contract
requires the Company to purchase and take delivery of certain
quantities at agreed upon prices and delivery dates. The
contracts as of December 31, 2018, have minimum future purchase
commitments of approximately $1,849,000, which are to be
delivered in 2019. The contracts contain provisions
whereby any delays in taking delivery of the purchased product will
result in additional charges related to the extended warehousing of
the coffee product. The fees can average approximately
$0.01 per pound for every month of delay. To-date the Company has
not incurred such fees.
Note 11. Income Taxes
The income tax provision contains the following components (in
thousands):
Loss before income taxes relating to non-U.S. operations were
$258,000 in the year ended December 31, 2018 compared to $130,000
of income in the year ended December 31, 2017.
The provision for income taxes differs from the amount of income
tax determined by applying the applicable U.S. statutory federal
income tax rate to pretax income (loss) as a result of the
following differences:
Significant components of the Company's deferred tax assets and
liabilities are as follows (in thousands):
The Company has determined through consideration of allrequires significant judgment
and estimates. The Company evaluates the realizability of its
deferred tax assets for each jurisdiction in which it operates at
each reporting date and establishes a valuation allowance when it
is more likely than not that all or a portion of its deferred tax
assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable
income of the same character and in the same jurisdiction. The
Company considers all available positive and negative evidence that the U.S. deferred tax assets are not
more likely than not to be realized. The Company records a
valuation allowance in the U.S. Federal tax jurisdiction for the
year ended December 31, 2018 to all deferred tax assets and
liabilities. The Tax Cuts and Jobs Act ("TCJA") enacted in December
2017 repealed the corporate AMT for tax years beginning on or after
January 1, 2018 and provides for existing AMT tax credit carryovers
to be refunded beginning in 2018. The Company has approximately
$146,000 in refundable credits,in
making this assessment, including, but not limited to, the
scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies. In circumstances where
there is sufficient negative evidence indicating that deferred tax
assets are not more likely than not realizable, the Company will
establish a valuation allowance.
ASC 740 requires that all tax positions be evaluated using a
recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. Differences between tax
positions taken in a tax return and amounts recognized in the
financial statements are recorded as adjustments to income taxes
payable or receivable, or adjustments to deferred taxes, or both.
The Company believes that its accruals for uncertain tax positions
are adequate for all open audit years based on its assessment of
many factors including past experience and interpretation of tax
law. To the extent that new information becomes available, which
causes the Company to change its judgment about the adequacy of its
accruals for uncertain tax positions, such changes will impact
income tax expense in the period such determination is made. The
Company’s policy is to include interest and it expects that a substantial
portion will be refunded between 2019 and 2021. As such, the
Company does not have a valuation allowance relating to the
refundable AMT credit carryforward. A valuation allowance remains
on the state and foreign tax attributes that are likely to expire
before realization. The change in valuation allowance increased
approximately $1,411,000 for the year ended December 31, 2018 and
increased approximately $3,956,000 for the year ended December 31,
2017penalties related
to unrecognized income tax benefits as a component of income tax
expense.
At
December 31, 2018, the Company had approximately $7,581,000 in
federal net operating loss carryforwards, which does not expire and
is limited to 80% of federal taxable income when utilized,
approximately $12,636,000 in federal net operating loss
carryforwards which begin to expire in 2028, and approximately
$38,466,000 in net operating loss carryforwards from various
states. The Company had approximately $2,265,000 in net operating
losses in foreign jurisdictions.
Pursuant to Internal Revenue Code ("IRC") Section 382, use of net
operating loss and credit carryforwards may be limited if the
Company experiences a cumulative change in ownership of greater
than 50% in a moving three-year period. Ownership changes
could impact the Company's ability to utilize the net operating
loss and credit carryforwards remaining at an ownership change
date. The Company has not completed a Section 382
study.
There was no uncertain tax position related to federal, state and
foreign reporting as of December 31, 2018.
U.S. Tax Reform
On December 22, 2017, H.R.1, known as the Tax Cuts and Jobs Act of
2017 (In December 2017, H.R.1, known as the Tax Cuts and Jobs Act of 2017
(the "TCJA") was signed into law and included widespread changes to
the Internal Revenue Code (the “IRC”) including, among
other items, creation of new taxes on certain foreign earnings, a
deduction for certain export sales by a domestic C corporation, a
minimum tax on certain related party expenses and transactions. The
TCJA subjects certain U.S. shareholders to current tax on global
intangible low-taxed income ("GILTI") earned by certain foreign
subsidiaries. Conversely, foreign-derived intangible income
("FDII") will be taxed at a lower effective rate than the statutory
rate by allowing a tax deduction against the income. In addition to
GILTI and FDII, Congress passed the base erosion and anti-abuse tax
(“BEAT”) as part of the TCJA, which will impose a 5% effective tax rate on
corporations by disallowing certain related party expenses and
transactions and eliminating any associated foreign tax credits. TheWe
Company hashave considered these new provisions as they are effective for tax
years starting after December 31, 2017 andbut determined that none
will likely apply for fiscal year 20182019.
During the enactment of TCJA in December 2017, amongAmong other things, the TCJA reducesreduced the U.S. federal corporate tax
rate from 35% to 21% beginning in 2018, requiresrequired companies to pay a
one-time transition tax on previously unremitted earnings of
non-U.S. subsidiaries that were previously tax deferred, and
createscreated new taxes on certain foreign sourced earnings. The
SECSecurities and Exchange Commission (the “SEC”) staff
issued Staff Accounting Bulletin (“SAB”) 118, which
providesprovided guidance on accounting for enactment effects of the TCJA.
SAB 118 provides a
measurement period of up to one year from the TCJA’s
enactment date for companies to complete their accounting under ASC
740. In accordance with SAB 118, to the extent that a
company’s accounting for certain income tax effects of the
TCJA is incomplete but it is able to determine a reasonable
estimate, it must record a provisional estimate in its financial
statements. If a company cannot determine a provisional estimate to
be included in its financial statements, it should continue to
apply ASC 740 on the basis of the provisions of the tax laws that
were in effect immediately before the enactment of the
TCJA.
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 provided a measurement period of up to one year from the
TCJA’s enactment date for companies to complete their
accounting under ASC 740. In accordance with SAB 118, to the extent
that a company’s accounting for certain income tax effects of
the TCJA is incomplete but it is able to determine a reasonable
estimate, it must record a provisional estimate in its financial
statements. If a company cannot determine a provisional estimate to
be included in its financial statements, it should continue to
apply ASC 740 on the basis of the provisions of the tax laws that
were in effect immediately before the enactment of the
TCJA.
Stock-based Compensation
The Company accounts for stock-based compensation in accordance
with ASC Topic 718, “Compensation – Stock
Compensation,” which
establishes accounting for equity instruments exchanged for
services from employees and non-employees. Under such provisions,
stock-based compensation cost is measured at the grant date, based
on the calculated fair value of the award, and is recognized as an
expense net of forfeitures, under the straight-line method, over
the vesting period of the equity grant. Forfeitures are recorded as
they occur.
The Company uses the Black-Scholes to estimate the fair value of
stock options. The use of a valuation model requires the Company to
make certain assumptions with respect to selected model inputs.
Expected volatility is calculated based on the historical
volatility of the Company’s stock price over
the expected term of the option. The expected life is based on
the contractual life of the option and expected employee
exercise and post-vesting employment termination behavior. The
risk-free interest rate is based on U.S. Treasury zero-coupon
issues with a remaining term equal to the expected life assumed at
the date of the grant.
Other Income (Expense)
The Company records interest income, interest expense, and change
in derivative liabilities, as well as other non-operating
transactions, as other income (expense) on our consolidated
statements of operations.
Reclassification of Prior Year
Results
Certain prior year results reported in the consolidated statement
of operations deemed not to be material, have not been reclassified
within the 2018 prior year results and therefore will not reflect
the current year presentation. The Company has determined that the
reclassification would have no impact on the consolidated balance
sheet, the reported net loss in the consolidated statement of
operations, consolidated statements of stockholders' equity and on
the consolidated statement of cash flows.
Recently Adopted Accounting Pronouncements
In August 2018, the FASB issued ASU No.
2018-13, Fair Value Measurement (Topic
820): Disclosure Framework-Changes to the Disclosure Requirements
for Fair Value Measurement.
Topic 820 removes or modifies certain current disclosures and
adds additional disclosures. The changes are meant to provide more
relevant information regarding valuation techniques and inputs used
to arrive at measures of fair value, uncertainty in the fair value
measurements, and how changes in fair value measurements impact an
entity's performance and cash flows. Certain disclosures
in Topic 820 will need to be applied on a retrospective
basis and others on a prospective basis. Topic 820 is
effective for fiscal years, and interim periods within those years,
beginning after December 15, 2019. Early adoption is permitted upon issuance.
The Company adopted the provisions of
this guidance early on January 1, 2019 and the adoption of this
standard did not have a material impact on the Company’s
consolidated financial statements.
In June
2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation
(Topic 718): Improvements to Nonemployees Share-Based
Payment Accounting. The intention of ASU 2018-07 is to
expand the scope of Topic 718 to include share-based payment
transactions in exchange for goods and services from nonemployees.
These share-based payments will now be measured at grant-date fair
value of the equity instrument issued. Upon adoption, only
liability-classified awards that have not been settled and
equity-classified awards for which a measurement date has not been
established should be remeasured through a cumulative-effect
adjustment to retained earnings at the beginning of the fiscal year
of adoption. Topic 718 was effective for fiscal years beginning
after December 15, 2018. The Company
adopted the provisions of this guidance on January 1, 2019 and the
adoption of this standard did not have a material impact on the
Company’s consolidated financial
statements.
In
February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive
Income (Topic 220), Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income, Topic 220. The
amendments in this Update allow a reclassification from accumulated
other comprehensive income to retained earnings for stranded tax
effects resulting from the TCJA. Consequently, the amendments
eliminate the stranded tax effects resulting from the TCJA and will improve the usefulness of
information reported to financial statement users. However, because
the amendments only relate to the reclassification of the income
tax effects of the TCJA, the underlying guidance that requires that
the effect of a change in tax laws or rates be included in income
from continuing operations is not affected. The amendments in this
Update also require certain disclosures about stranded tax effects.
Topic 220 is effective for fiscal years, and interim periods within
those years, beginning after December 15, 2018. The Company adopted the provisions of this
guidance on January 1, 2019 and the adoption of this standard did
not have a material impact on the Company’s consolidated
financial statements.
In July
2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing
Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic
815): (Part I) Accounting for Certain Financial Instruments with
Down Round Features, (Part II) Replacement of the Indefinite
Deferral for Mandatorily Redeemable Financial Instruments of
Certain Nonpublic Entities and Certain Mandatorily Redeemable
Noncontrolling Interests with a Scope Exception. Topic 260
allows companies to exclude a down round feature when determining
whether a financial instrument (or embedded conversion feature) is
considered indexed to the entity’s own stock. As a result,
financial instruments (or embedded conversion features) with down
round features may no longer be required to be classified as
liabilities. A company will recognize the value of a down round
feature only when it is triggered, and the strike price has been
adjusted downward. For equity-classified freestanding financial
instruments, such as warrants, an entity will treat the value of
the effect of the down round, when triggered, as a dividend and a
reduction of income available to common shareholders in computing
basic earnings per share. For convertible instruments with embedded
conversion features containing down round provisions, entities will
recognize the value of the down round as a beneficial conversion
discount to be amortized to earnings. The guidance in Topic 260 is
effective for fiscal years beginning after December 15, 2018, and
interim periods within those fiscal years. Early adoption is
permitted, and the guidance is to be applied using a full or
modified retrospective approach. The Company adopted Topic 260, Topic 480 and Topic
815 effective January 1, 2019 using the modified retrospective
approach. The new guidance requires companies to exclude any down
round feature when determining whether a freestanding equity-linked
financial instrument (or embedded conversion option) is considered
indexed to the entity’s own stock when applying the
classification guidance in ASC 815-40. Upon adoption of the new
guidance, existing equity-linked financial instruments (or embedded
conversion options) with down round features must be reassessed as
liability classification may no longer be required. As a result,
the Company determined in regard to its 2018 warrants the
appropriate treatment of these warrants that were initially
classified as derivative liabilities should now be classified as
equity instruments. The Company determined that the liability
associated with the 2018 warrants should be remeasured and adjusted
to fair value on the date of the change in classification with the
offset to be recorded through earnings and then the fair value of
the warrants should be reclassified to equity. The Company
recorded the change in the fair value of the 2018 warrants as of
the date of change in classification to earnings. The fair value of
the 2018 warrants in the amount of $1,494,000 at the date of change
in classification was reclassified from warrant derivative
liability to additional paid in capital as a result of the change
in classification of the warrants. (See Note 8)
In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other (Topic
350): Simplifying the Test for Goodwill Impairment. This ASU
simplifies the test for goodwill impairment by removing Step 2 from
the goodwill impairment test. Companies will now perform the
goodwill impairment test by comparing the fair value of a reporting
unit with its carrying amount, recognizing an impairment charge for
the amount by which the carrying amount exceeds the reporting
unit’s fair value not to exceed the total amount of goodwill
allocated to that reporting unit. An entity still has the option to
perform the qualitative assessment for a reporting unit to
determine if the quantitative impairment test is necessary. The
amendments in this update are effective for goodwill impairment
tests in fiscal years beginning after December 15, 2019 for public companies, with early
adoption permitted for goodwill impairment tests performed after
January 1, 2017. The Company adopted
the provisions of this guidance on January 1, 2019 and the adoption
of this standard did not have a material impact on the
Company’s consolidated financial statements. (See Notes 1 and
5)
In February
2016, FASB established
Topic 842, Leases, by issuing ASU No. 2016-02, Leases (Topic
842) which required
lessees to recognize leases on-balance sheet and disclose key
information about leasing arrangements.
Topic 842 was
subsequently amended by ASU No. 2018-01, Land Easement Practical
Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to
Topic 842, Leases; ASU No. 2018-11, Targeted
Improvements; ASU No.
2018-20, Narrow-Scope Improvements for
Lessors; and ASU
2019-01, Codification
Improvements. The new standard
establishes a right-of-use model (ROU) that requires a lessee to
recognize a ROU asset and lease liability on the balance sheet for
all leases with a term longer than 12 months. Leases are classified as finance or
operating, with classification affecting the pattern and
classification of expense recognition in the income statement. The
amendments were adopted by the
Company on January 1,
2019. A modified
retrospective transition approach is required, applying the
standard to all leases existing at the date of initial application.
The Company elects to use its effective date as its date of initial
application. Consequently, financial information
will not be
updated, and the disclosures required under the new standard
will not be
provided for dates and periods before January 1, 2019. The new standard provides a number of optional
practical expedients in transition. The Company elected the
“package of practical expedients”, which permits the
Company not to reassess under the new standard prior conclusions
about lease identification, lease classification and initial
direction costs. In addition, the Company elected the practical
expedient to use hindsight when determining lease terms. The
practicable expedient pertaining to land easement is not applicable
to the Company. The Company continues to assess all of the effects
of adoption, with the most significant effect relating to the
recognition of new ROU assets and lease liabilities on the
Company’s consolidated balance sheet for real estate
operating leases. The
Company adopted the provisions of this guidance on January 1, 2019
and accordingly recognized additional operating liabilities of
approximately $5,509,000
with corresponding ROU assets of the same amount based on the
present value of the remaining minimum rental payments under
current leasing standards for existing operating
leases.
The
Company does not believe that any recently issued effective
pronouncements, or pronouncements issued but not yet effective, if
adopted, would have a material effect on the Company’s
consolidated financial statements.
Note 2. Acquisitions and Business Combinations
During 2019 and 2018, the Company entered into a total of four
acquisitions which are detailed below. The acquisitions were
conducted to allow the Company to enter into the hemp market and
expand the Company’s distributor network within the direct
selling segment, enhance and expand its product portfolio, and
diversify its product mix. As a result of the Company’s
business combinations, the Company’s distributors and
customers will have access to the acquired company’s products
and the acquired company’s distributors and customers will
gain access to products offered by the Company.
As such, the major purpose for the business combinations was to
increase revenue and profitability. The acquisitions were
structured as asset purchases which resulted in the recognition of
certain intangible assets.
During the year ended December 31, 2018, the Company adjusted the
preliminary purchase price for one of its 2017 acquisitions which
resulted in an adjustment to the related intangibles and contingent
debt in the amount of $629,000. In addition, during the year ended
December 31, 2018, the Company removed the contingent debt
associated with the Nature’s Pearl acquisition from 2016 due
to a breach of the asset purchase agreement by Nature's Pearl and
amended certain terms of the existing agreement. As a result, the
Company is no longer obligated under the related asset purchase
agreement to make payments. During the year ended December 31,
2018, the Company recorded a reduction to the acquisition debt for
Nature’s Pearl in the amount of approximately $1,246,000 with
a corresponding credit to general and administrative expense in the
statements of operations.
2019 Acquisitions
BeneYOU
On October 31, 2019, the Company entered into an asset purchase
agreement with an effective date of November 1, 2019, with BeneYOU,
LLC, a Utah limited liability company (“BeneYOU”), and
Ryan Anderson (the “BeneYOU Representing Party”), for
the Company to acquire certain assets of BeneYOU including all of
the outstanding equity of BeneYOU Holding, LLC, a Utah limited
liability company (“BeneYOU Holding”), collectively
“BeneYOU”. In accordance with the asset purchase
agreement, the Company also acquired BeneYOU’s customer and
distributor organization lists, all intellectual property, product
formulations, products, product packaging, product registrations,
licenses, marketing materials, sales tools and swag, and all
saleable inventory. BeneYOU’s flagship brand Jamberry has an
extensive line of nail products with a core competency in social
selling, and two other brands including Avisae which focuses on the
gut health and the M.Global brand of products that includes
hydration products.
The Company is obligated to make monthly payments based on a
percentage of the BeneYOU
distributor revenue derived from sales of the Company’s
products and a percentage of royalty revenue derived from sales of
BeneYOU products until the earlier of the date that is ten years
from the closing date or such time as the Company has paid to
BeneYOU aggregate cash payments of the BeneYOU distributor revenue
and royalty revenue equal to the maximum aggregate purchase price
of $3,500,000. In addition, the Company paid an acquisition
liability payment of $200,000 on the closing date, which reduced
the maximum aggregate purchase price to $3,300,000.
The contingent consideration’s estimated fair value at the
date of acquisition was approximately $2,648,000
as determined by management using a
discounted cash flow methodology. The acquisition related costs,
such as legal costs and other professional fees were minimal and
expensed as incurred.
The purchase agreement contains customary representations,
warranties and covenants of the Company, BeneYOU and the BeneYOU
Representing Party. Subject to certain customary limitations the
BeneYOU Representing Party have agreed to indemnify the Company and
BeneYOU against certain losses related to, among other things,
breaches of the BeneYOU Representing Party’s representations
and warranties, certain specified liabilities and the failure to
perform covenants or obligations under the purchase
agreement.
The Company recorded the fair value (in thousands) at the date of
acquisition of the acquired tangible and intangible assets and
liabilities as follows:
|
Contingent
consideration
|
$2,648
|
|
Aggregate purchase
price
|
$2,648
|
The
following table summarizes the fair values of the assets acquired
and liabilities assumed in November 2019 (in
thousands):
|
Current assets
(excluding inventory)
|
$408
|
|
Inventory (net of
$469 reserve)
|
441
|
|
Trademarks and
trade name
|
343
|
|
Distributor
organization
|
1,175
|
|
Customer
relationships
|
44
|
|
Non-compete
agreement
|
277
|
|
Goodwill
|
669
|
|
Current
liabilities
|
(709)
|
|
Net assets
acquired
|
$2,648
|
The estimated fair value of intangible assets acquired of
$1,839,000 was determined through the use of a third-party
valuation firm using various income and cost approach
methodologies. Specifically, the intangibles identified in the
acquisition were trademarks and trade name, distributor
organization, customer relationships and non-compete agreement and
are being amortized over their estimated useful life of 5 years, 9
years, 5 years and 4 years, respectively. The straight-line method
is being used and is believed to approximate the timeline within
which the economic benefit of the underlying intangible asset will
be realized.
Goodwill of $669,000 was recognized as the excess purchase price
over the acquisition-date fair value of net assets acquired.
Goodwill is estimated to represent the synergistic values expected
to be realized from the combination of the two businesses. The
goodwill is expected to be deductible for tax
purposes.
Revenues from BeneYOU included in the consolidated statement of
operations within the direct selling segment for the year ended
December 31, 2019 were approximately $1,989,000.
The pro-forma effect assuming the business combination with
BeneYOU discussed above had occurred
at the beginning of the year is not presented as the information
was not available.
Khrysos Global, Inc.
On February 12, 2019, the Company and KII entered into an asset and
equity purchase agreement (the “AEPA”) with Khrysos
Global, and Leigh Dundore and Dwayne Dundore (collectively, the “Khrysos
Representing Party”), for KII to acquire substantially all
the assets of Khrysos Global and all the outstanding equity of INXL
and INXH. The collective business manufactures proprietary systems
to provide end-to-end extraction and processing that allow for the
conversion of hemp feed stock into hemp oil and hemp
extracts.
The aggregate consideration payable for the assets of Khrysos
Global and the equity of INXL and INXH of $16,000,000 is to be paid
as set forth under the terms of the AEPA and allocated between
Khrysos Global and Leigh Dundore in such manner as they determine
at their discretion.
At closing, Khrysos Global and the Khrysos Representing Party
received an aggregate of 1,794,972 shares of the Company’s
common stock. In addition, the Company agreed to pay the sellers
$1,500,000 in cash towards the AEPA of which $1,000,000 was paid to
Khrysos Global and the Khrysos Representing Party during 2019, and
the remaining cash payment of $500,000 is to be paid in 2020. At
December 31, 2019, the Company’s remaining liability of
$500,000 was outstanding and recorded as accrued expenses on the
consolidated balance sheet.
In conjunction with the acquisition and organization of KII, the
Company retained Dwayne Dundore as President of KII. Previously
agreed-upon equity compensation in the form of warrants that was to
be provided as part of the closing to Dwayne Dundore by the Company
were terminated as a result of Mr. Dundore’s acceptance as an
employee with the Company. Effective September 17, 2020, Mr.
Dundore was no longer employed with KII or the
Company.
The AEPA contains customary representations, warranties and
covenants of the Company, Khrysos Global and the Khrysos
Representing Party. Subject to certain customary limitations
Khrysos Global and the Khrysos Representing Party have agreed to
indemnify the Company and KII against certain losses related to,
among other things, breaches of the Khrysos Representing
Party’s representations and warranties, certain specified
liabilities and the failure to perform covenants or obligations
under the AEPA.
Restatement Note - related to the Acquisition of Khrysos Global,
Inc.
In conjunction with the Company’s 2019 annual audit the
Company concluded that certain fixed assets acquired in the
acquisition and the share price valuation for the common stock
issued as consideration were not fairly valued as of the closing
date February 12, 2019 which resulted in a decrease to the net
assets acquired including; a) $1,127,000 related to the certain
fixed assets, and b) $1,351,000 related to a change in the fair
value of common stock issuance resulting in an increase to goodwill
of $2,478,000 acquired and an adjusted aggregate purchase price of
$15,894,000. The Company intends to restate its quarterly reports
on Form 10-Q for the three months ended March 31, 2019, three and
six months ended June 30, 2019, and for the three and nine months
ended September 30, 2019.
The Company has estimated fair value at the date of acquisition of
the acquired tangible and intangible assets and liabilities as
follows including the resulting adjustments in changes to the
aggregate purchase price (in thousands):
|
|
Consideration
as Originally Reported
|
|
Consideration as Currently Reported
|
|
Present value of
cash consideration
|
$1,894
|
$
|
$1,894
|
Estimated fair
value of common stock issued
|
12,649
|
1,351
|
14,000
|
|
Aggregate purchase
price
|
$14,543
|
$1,351
|
$15,894
|
The
following table summarizes the estimated and as adjusted fair
values of the assets acquired and liabilities assumed in February
2019 (in thousands):
|
|
Fair
Value as Originally Reported
|
|
Fair Value as Currently Reported
|
|
Current
assets
|
$636
|
$-
|
$636
|
|
Inventory
|
1,264
|
-
|
1,264
|
|
Property, plant and
equipment
|
2,260
|
(1,127)
|
1,133
|
|
Trademarks and
trade name
|
1,876
|
-
|
1,876
|
|
Customer-related
intangible
|
5,629
|
-
|
5,629
|
|
Non-compete
intangible
|
956
|
-
|
956
|
|
Goodwill
|
4,353
|
2,478
|
6,831
|
|
Current
liabilities
|
(1,904)
|
-
|
(1,904)
|
|
Notes
payable
|
(527)
|
-
|
(527)
|
|
Net assets
acquired
|
$14,543
|
$1,351
|
$15,894
|
The reported fair value of intangible assets acquired in the amount
of $8,461,000 was determined through the use of a third-party
valuation firm using various income and cost approach
methodologies. Specifically, the intangibles identified in the
acquisition were trademarks and trade name, customer
relationships and non-compete
agreement. The trademarks and trade name,
customer relationships and
non-compete agreement are being amortized over their estimated
useful life of 8 years, 4 years and 6 years, respectively. The
straight-line method is being used and is believed to approximate
the timeline within which the economic benefit of the underlying
intangible asset will be realized. In connection with the
Company’s annual impairment test in 2019, the net book value
of intangible assets of $8,461,000 was determined to be impaired.
(See Note 5)
Goodwill
acquired as currently reported of $6,831,000 is recognized as the
excess purchase price over the acquisition-date fair value of net
assets acquired. In connection with the Company’s annual
impairment test in 2019, the full amount of goodwill recognized of
$6,831,000 was determined to be impaired. (See Note
5)
The costs related to the acquisition are included in legal and
accounting fees and were expensed as incurred.
Revenues from KII included in the consolidated statement of
operations for the year ended December 31, 2019 were approximately
$887,000.
The pro-forma effect assuming the business combination with KII
discussed above had occurred at the beginning of the year is not
presented as the information was not available.
2018 Acquisitions
Doctor’s Wellness Solutions Global LP
(ViaViente)
On
March 1, 2018, the Company
acquired certain assets of Doctor’s Wellness Solutions Global
LP (“ViaViente”).
ViaViente is the distributor of The ViaViente Miracle, a highly
concentrated, energizing whole fruit puree blend that is rich in
antioxidants and naturally occurring vitamins and
minerals.
The Company is obligated to make monthly payments based on a
percentage of the ViaViente
distributor revenue derived from sales of the Company’s
products and a percentage of royalty revenue derived from sales of
ViaViente’s products until the earlier of the date that is
five years from the closing date or such time as the Company has
paid to ViaViente aggregate cash payments of the ViaViente
distributor revenue and royalty revenue equal to the maximum
aggregate purchase price of $3,000,000. In addition, the Company
entered into an inventory consignment agreement whereby the Company
agreed to pay an additional royalty fee on specific inventory items
up to $750,000. The $750,000 is in addition to the $3,000,000
aggregate purchase price and is included in the estimated fair
value of the contingent debt. The inventory consignment royalty
fees are applied to the maximum aggregate purchase
price.
The contingent consideration’s estimated fair value at the
date of acquisition was $1,375,000 as determined by management
using a discounted cash flow methodology. The acquisition related
costs, such as legal costs and other professional fees were minimal
and expensed as incurred.
The assets acquired were recorded at estimated fair values as of
the date of the acquisition. During the year ended December 31,
2018, the Company reviewed the initial valuation of $1,375,000 and
reduced it by $749,000. The contingent liability was also reduced
by $749,000.
The revenue impact from the ViaViente acquisition, included in the
consolidated statements of operations for the year ended December
31, 2018 was approximately $1,542,000.
The pro-forma effect assuming the business combination with
ViaViente discussed above had occurred
at the beginning of the year is not presented as the information
was not available.
Nature Direct
On
February 12, 2018, the Company
acquired certain assets and liabilities of Nature Direct. Nature
Direct, is a manufacturer and distributor of essential oil based
nontoxic cleaning and care products for personal, home and
professional use.
The Company is obligated to make monthly payments based on a
percentage of the Nature Direct distributor revenue derived from sales of the
Company’s products and a percentage of royalty revenue
derived from sales of the Nature Direct products until the earlier of the date that is
twelve years from the closing date or such time as the Company has
paid to Nature Direct aggregate
cash payments of the Nature Direct distributor revenue and royalty revenue equal to
the maximum aggregate purchase price of
$2,600,000.
The contingent consideration’s estimated fair value at the
date of acquisition was $1,085,000 as determined by management
using a discounted cash flow methodology. The acquisition related
costs, such as legal costs and other professional fees were minimal
and expensed as incurred. The Company received approximately
$90,000 of inventories from Nature Direct and paid for the
inventory and assumed liabilities of $50,000. This payment is
applied to the maximum aggregate purchase price.
The assets acquired were recorded at estimated fair values as of
the date of the acquisition. During the year ended December 31,
2018, the Company reviewed the initial valuation of $1,085,000 and
reduced it by $560,000. The contingent liability was also reduced
by $560,000.
The revenue impact from the Nature Direct acquisition, included in the consolidated
statements of operations for the year ended December 31, 2018 was
approximately $1,308,000.
The pro-forma effect assuming the business combination with
Nature Direct discussed above had
occurred at the beginning of the year is not presented as the
information was not available.
Contingent Acquisition Debt
The Company’s contingent acquisition debt at December 31,
2019 and 2018 was approximately $8,611,000 and $8,261,000,
respectively, and was attributable to debt associated with the
Company’s direct selling segment.
Note 3. Agreements with Variable Interest Entities and Related
Party Transactions
FDI Realty, LLC
FDI Realty, LLC (“FDI Realty”) is the owner and lessor
of the building previously partially occupied by the Company for
its sales and marketing office in Windham, NH until December 2015.
A former officer of the Company is the single member of FDI
Realty.
At December 31, 2017 the Company believed it held a variable
interest in FDI Realty, for which the Company was not deemed to be
the primary beneficiary. The Company concluded, based on its
qualitative consideration of the terminated lease agreement, and
the role of the single member of FDI Realty, that the single member
is the primary beneficiary of FDI Realty. In making these
determinations, the Company considered that the single member
conducts and manages the business of FDI Realty, is authorized to
borrow funds on behalf of FDI Realty, is the sole person authorized
and responsible for conducting the business of FDI Realty and is
obligated to fund the obligations of FDI Realty. The Company
believed it was a co-guarantor of FDI Realty’s mortgages on
the building, however, at December 31, 2017, the Company determined
that the fair value of the guarantees was not significant and
therefore did not record a related liability.
During the year ended December 31, 2018, the Company determined
that based on the current circumstances as it relates to certain
agreements existing among the Company and FDI Realty, including but
not limited to an amended and restated equity purchase agreement
which was executed in October 2011 and FDI Realty’s failure
to meet its obligations under the amended purchase agreement, the
Company no longer holds a variable interest in FDI
Realty.
Other Related Party Transactions
Hernandez, Hernandez, Export Y Company and H&H Coffee Group
Export Corp.
The Company’s wholly-owned subsidiary, CLR, is associated
with Hernandez, Hernandez, Export Y Company
(“H&H”), a Nicaragua company, through sourcing
arrangements to procure Nicaraguan grown green coffee beans. As
part of the 2014 Siles acquisition, CLR engaged the owners of
H&H, Alain Piedra Hernandez (“Mr. Hernandez”) and
Marisol Del Carmen Siles Orozco (“Ms. Orozco”), as
employees to manage Siles.
H&H is a sourcing agent that purchases raw green coffee beans
from the local producers in Nicaragua and supplies CLR’s mill
with unprocessed green coffee for processing. CLR does not have a
direct relationship with the local producers and is dependent on
H&H to negotiate agreements with local producers for the supply
and provide to CLR’s mill raw unprocessed green coffee to CLR
in a timely and efficient manner. In addition, CLR’s largest
customer for green coffee beans was H&H Export during the year
ended December 31, 2019. In consideration for H&H's sourcing of
green coffee for processing within CLR’s mill, CLR and
H&H share in the green coffee profit from milling
operations.
CLR made purchases from H&H Export of
approximately $9,891,000 of unprocessed green coffee for the year
ended December 31, 2018, that approximated 45%, of total
coffee segment purchases for use in
selling processed green coffee to other third parties and for use
in CLR’s Miami roasting facilities. CLR did not have any
purchases of unprocessed green coffee from H&H Export during
the year ended December 31, 2019.
During the year ended December 31, 2019, CLR recorded net revenues
from green coffee milling and processing services of approximately
$6,416,000 and during the year ended December 31, 2018 recorded
revenues from sales of processed green coffee beans of $3,938,000,
to H&H Export. At December 31, 2019 and 2018, CLR's accounts
receivable balance for customer related revenue from H&H Export
were $8,707,000 and $673,000, respectively, of which the full
amount was past due at December 31, 2019. As a result, the
Company has reserved $7,871,000 as bad debt related to
H&H’s accounts receivable balance, which was net of collections through
December 31, 2020. (See Note
11)
In addition, the Company has collaborated with H&H, the
Company’s green coffee supplier and H&H Export, and other
third parties in Nicaragua to develop a sourcing solution by
entering into the Finance, Security and Accounts
Receivable/Accounts Payable Monetization Agreement (the “FSRP
Agreement”.) The FSRP Agreement is designed to provide the
Company with access to a continued supply of unprocessed green
coffee beans for the 2020 growing season and a solution for funding
of the continued operations of the Company’s green coffee
distribution business. Under the FSRP Agreement, management has
assessed the collectability of accounts receivable from H&H
Export.
The Company initially expected that through this agreed upon
financing arrangement that the Company would collect the
outstanding accounts receivable balance in full during the 2020
growing season. However, given the COVID crisis’ impact on
the 2020 growing season and the continued delay in full payment of
the 2019 receivable balances, management considers the H&H
Export receivable impaired at December 31, 2019.
Advance
In
December 2018, CLR advanced $5,000,000 to H&H Export to provide
services in support of a five-year contract for the sale and
processing of 41 million pounds of green coffee beans on an annual
basis. The services include providing hedging and financing
opportunities to producers and delivering harvested coffee to the
Company’s mills. In March 2019, this advance was
converted to a $5,000,000 loan agreement as a note receivable and
bears interest at 9.00% per annum and is due and payable by H&H
Export at the end of each year’s harvest season, but no later
than October 31 for any harvest year. In October 2019, CLR and
H&H Export amended the March 2019 agreement in terms of the
maturity date such that all outstanding principal and interest is
due and payable at the end of the 2020 harvest (or when the 2020
season’s harvest was exported and collected), but never to be
later than November 30, 2020.
Management reviewed the security against the loan and the impact of
the underlying COVID crisis and determined that the full amount of
the note receivable including interest of approximately $5,340,000,
was not collected as of December 31, 2020, and therefore $5,340,000
was recognized as an allowance for collectability at the end of
December 31, 2019.
Mill Construction Agreement between CLR and H&H
In
January 2019, to accommodate CLR’s green coffee purchase
contract, CLR entered into a mill construction agreement with
H&H and H&H Export, Mr. Hernandez and Ms. Orozco, together
with H&H, collectively referred to as the Nicaraguan Partner,
pursuant to which the Nicaraguan Partner agreed to transfer a
45-acre tract of land in Matagalpa, Nicaragua (the “Matagalpa
Property”) to be owned 50% by the Nicaraguan Partner and 50%
by CLR. In consideration for the land acquisition the Company
issued to H&H Export, 153,846 shares of common stock.
The fair value of the shares issued
was $1,200,000 and was based on the stock price on the date of
issuance of the shares. In addition, the Nicaraguan Partner
and CLR agreed to contribute $4,700,000 each toward construction of
a processing plant, office, and storage facilities on the Matagalpa
Property (collectively the “Matagalpa Mill”) for
processing coffee in Nicaragua. The addition of the mill will
accommodate CLR’s green coffee contract
commitments.
For the
years ended December 31, 2019 CLR made payments of approximately $2,150,000 and $900,000
during the year ended December 31, 2018 in advance of the
agreement, towards the Matagalpa Mill project. In addition,
$391,117 was paid for operating equipment in 2019.
At
December 31, 2019, CLR contributed a total of $3,441,000 towards
the Matagalpa Mill project, which is included in construction in
process within property and equipment, net on the Company's
consolidated balance sheets. At December 31, 2019, the Nicaraguan
Partner contributed a total of $1,922,000 towards the Matagalpa
Mill project. CLR’s remaining portion of $1,650,000 was paid
during 2020, in addition $912,606 was paid for operating equipment.
At December 31, 2019, the Matagalpa Mill was in construction and
was not ready for full operations.
During 2019, the Company issued 295,910 shares of common stock to
H&H Export to pay for certain working capital, construction and
other payables. In connection with the issuance, the Company over
issued 121,649 shares of common stock, resulting in the net
issuance of common stock to settle payables of 174,261 shares.
H&H Export agreed to reimburse CLR for the over issuance of the
121,649 shares of common stock in cash. At December 31, 2019, the
value of the shares was approximately $397,000 based on the stock
price at December 31, 2019. Management reviewed the amount due in
conjunction with the impact of the underlying COVID crisis and has
determined that the receivable balance of $397,000, was more than
likely to be uncollected as of December 31, 2019, and therefore the
full amount was recognized as an allowance for collectability at
December 31, 2019.
Amended Operating and Profit-Sharing Agreement between CLR and
H&H
In
January 2019, CLR entered into an amendment to the March 2014
operating and profit-sharing agreement with the owners of
H&H. In addition, CLR and H&H,
Mr. Hernandez and Ms. Orozco restructured their profit-sharing
agreement in regard to profits from green coffee sales and
processing that increased CLR’s profit participation by an
additional 25%. Under the new terms of the agreement with respect
to profit generated from green coffee sales and processed from La
Pita, a leased mill, or the Matagalpa Mill, now will provide for a split of profits of 75% to
CLR and 25% to the Nicaraguan Partner, after certain conditions are
met. Profit-sharing
expense for the year ended December 31, 2019 was $1,060,000
compared to a profit-sharing benefit of $910,000 in the same period
last year, which is included in accrued expenses on the
Company’s balance sheets.
In addition, H&H Export sold to CLR its espresso brand
Café Cachita in consideration of the issuance of 100,000
shares of the Company’s common stock in January 2019. The
shares of common stock issued were valued at $7.50 per
share.
Joint Venture Agreement in Nicaragua for Hemp Processing Center
between the CLR and KII and Nicaraguan partner
On April 20 and July 29, 2020, CLR and KII (the U.S.
Partners) entered into agreements (“Hemp Joint Venture
Agreement”) with H&H Export and Fitracomex, Inc. (“Fitracomex”)
(collectively “The Nicaraguan Partners”) and
established the hemp joint venture (the “Nicaraguan Hemp Grow
and Extractions Group” or the “Hemp Joint
Venture”).
The
agreement calls for H&H Export to contribute the 2,200-acre
Chaguitillo Farms in Sebaco-Matagalpa, Nicaragua which will be
owned by H&H Export and the U.S. Partners on a 50/50 basis
separate from the Hemp Joint Venture.
The
agreement calls for Nicaraguan Partners to contribute the
excavation and preparation for hemp growth of the 2,200 acres,
installation of electrical service, and the construction of 45,000
square feet of buildings to be used for office, processing,
storage, drying and green house space.
The
U.S. Partners will contribute all the necessary extraction
equipment to convert hemp to crude oil and will also provide the
feminized hemp seeds for the pilot grow program, along with their expertise in the hemp
business. The U.S. Partners will also provide all necessary
working capital as required.
Additionally,
the U.S. Partners’ parent company Youngevity International
Inc., subject to the approval of The Nasdaq Stock Market
(“Nasdaq”) agreed to issue 1,500,000 shares of its
restricted common stock, par value per share, to Fitracomex. In
accordance with the Hemp Joint Venture Agreement, in July 2020 the
Parent Company issued to Fitracomex the agreed upon shares of
restricted common stock. The U.S. Partners agreed to issue warrants
to Fitracomex for the purchase 5,000,000 shares of the Parent
Company common stock at an exercise price of US $1.50, exercisable
for a term of five (5) years after completion of the construction and upon the approval by the
Parent Company’s stockholders of the proposed
issuance. In addition, the U.S. Partners agreed to use
its best efforts to register the resale of the shares of the Parent
Company’s common stock to Fitracomex under the U.S.
Securities Act of 1933, as amended (the "Securities Act"), and make
any necessary applications with Nasdaq to list the
shares.
The
U.S. Partners and H&H Export will serve as the managing
partners with all business decisions will require prior consent and
agreement of both parties. The Net Profits and Net Losses for each
fiscal period shall be allocated among the partners as follows:
twenty five percent (25%) to the Nicaraguan Partners and seventy
five percent (75%) to the U.S. Partners.
Master Relationship Agreement
In March 2021, CLR entered into a Master Relationship Agreement
(“MA Agreement”) with the owners of H&H in order to
memorialize the various agreements and modifications to those
agreements. Additionally, certain events have occurred that have
kept the parties from complying with the terms of each of the
original agreements and have caused there to be an imbalance with
the respect to the funds owed by one party to the other; therefore
this MA Agreement also sets forth a detailed accounting of the
different business relationships and reconciles the monetary
obligations between each party through the end of fiscal year
2020.
This MA Agreement memorialized the key
settlement terms and established that H&H owes CLR
approximately $10,700,000, described as “H&H Coffee
Liability”, that is composed of:
●
past due accounts
receivable owed to CLR from H&H for 2019 and 2020;
●
the $5,000,000 note
due plus accrued interest on the note;
●
CLR lost profits in
2019 and 2020;
●
the return of
working capital provided by CLR for the 2019 and 2020 green coffee
program.
The MA
Agreement also includes an offset against amounts owed by H&H
to CLR consisting of:
●
H&H’s 25%
profit sharing participation for 2019 and 2020;
●
and an offset of
H&H’s open payables owed by CLR to H&H in the amount
of approximately $243,000.
The MA
Agreement provides that approximately $10,700,000 is owed to CLR by
H&H and H&H agrees to satisfy this obligation by providing
CLR a minimum of 20 containers of strictly high grown coffee
(approximately 825,000 pounds of coffee) per month, commencing at
the end of March 2021 and continuing monthly until the aforesaid
amount is paid in full. The MA Agreement stipulates that the
parties have agreed that the coffee to be provided to CLR by
H&H for the shipments described above, that in order to satisfy
H&H’s debt to CLR, shall not be produced on any
plantation that the parties have a joint interest in. CLR has
recorded allowances of $7,871,000 related to the H&H trade
accounts receivable $5,340,000 related to the H&H notes
receivable during the year ended December 31, 2019 due to
H&H’s repayment history and risks associated with
redemption of the receivable in coffee.
Other Agreement between CLR and H&H
In May 2017, CLR entered a settlement agreement, as amended, with
Mr. Hernandez who was issued a warrant for the purchase of 75,000
shares of our common stock at a price of $2.00 with an expiration
date of three years, in lieu of an obligation due from CLR to
H&H as relates to a sourcing and supply agreement with H&H
and H&H Export. The warrants were outstanding at both December
31, 2019 and 2018.
Related Party Transactions
Richard Renton
Richard
Renton was a member of the board of directors until February 11,
2020 and owns and operates WVNP, Inc., a supplier of certain
inventory items sold by the Company. The Company made
purchases of approximately $228,000 and $151,000 from WVNP Inc.,
for the years ended December 31, 2019 and 2018, respectively.
In addition, Mr. Renton is a distributor of the Company and was
paid distributor commissions for the years ended December 31, 2019
and 2018 of approximately $366,000 and $363,000,
respectively.
Carl Grover
Carl Grover was the sole beneficial owner of in excess of 5% of the
Company’s outstanding common shares and beneficial owner of
3,293,643 shares of common stock at December 31, 2019.
In July
2019, Mr. Grover acquired 600,242 shares of the Company's common
stock upon the partial exercise at $4.60 per share of a 2014
warrant to purchase 782,608 shares of common stock held by him. In
connection with such exercise, the Company received approximately
$2,761,000 from Mr. Grover, issued to Mr. Grover 50,000 shares of
restricted common stock as an inducement fee and agreed to extend
the expiration date of the July 2014 warrant held by him to
December 15, 2020, and the exercise price of the warrant was
adjusted to $4.75 with respect to 182,366 shares of common stock
remaining for exercise thereunder.
In December 2018, CLR entered into a credit agreement with Mr.
Grover pursuant to which CLR borrowed $5,000,000 from Mr. Grover
and in exchange issued to him a $5,000,000 credit note. In
addition, Siles, as guarantor, executed a separate Guaranty
Agreement (“Guaranty”). In connection with the
credit agreement, the Company issued
to Mr. Grover a four-year warrant to purchase 250,000 shares of its
common stock, exercisable at $6.82 per share, and a four-year
warrant to purchase 250,000 shares of the Company’s common
stock, exercisable at $7.82 per share, pursuant to a warrant
purchase agreement with Mr. Grover. At December 31, 2019, the
balance of the borrowing from the credit agreement with Mr. Grover
was approximately $4,085,000, net of debt discounts. (See Note
6)
Mr. Grover held the following warrants exercisable into an
aggregate of 2,248,975 shares of common stock at December 31, 2019:
(i) a 2014 warrant exercisable for 182,366 shares of common stock, (ii) a 2015 warrant
exercisable for 200,000 shares of common stock, (iii) three 2017
warrants exercisable for an aggregate of 735,030 shares of common
stock, (iv) a 2018 warrant exercisable for 631,579 shares of common
stock, and (v) two 2018 warrants exercisable for an aggregate of
500,000 shares of common stock.
In addition, Mr. Grover owned 2,986,908 shares of common stock at
December 31, 2019 which included: (i) 1,122,233 shares issued from
the conversion of his 2017 PIPE Notes to common stock, (ii) 428,571
shares issued from the conversion of his 2015 Note to common stock,
(iii) 747,664 shares issued from the conversion of his 2014 PIPE
Notes to common stock, (iv) 650,242 shares from the partial
exercise and inducement shares issued with the exercise of the 2014
warrants, and (v) 38,198 shares of common stock. (See Note
7)
Paul Sallwasser
Mr. Paul Sallwasser is a member of the board directors and prior to
joining the Company’s board of directors he acquired in the
Company’s 2014 private placement, a note in the principal
amount of $75,000 convertible into 10,714 shares of common stock
and a warrant exercisable for 14,673 shares of common stock. Mr.
Sallwasser additionally acquired in the Company’s 2017
private placement, a note in the principal amount of $38,000
convertible into 8,177 shares of common stock and a warrant issued
to purchase 5,719 shares of common stock. Mr. Sallwasser also
acquired, as part of the 2017 private placement in exchange for the
2015 note that he acquired in the Company’s 2015 private
placement, an additional 2017 note in the principal amount of
$5,000 convertible into 1,087 shares of common stock and a 2017
warrant exercisable for 543 shares of common stock.
In March 2018, the Company completed its Series B offering and in
accordance with the terms of the 2017 notes, Mr. Sallwasser’s
2017 notes converted to 9,264 shares of the Company’s common
stock. Mr. Sallwasser’s aggregate 2017 warrants of to
purchase 6,262 shares of common stock remained outstanding at
December 31, 2019.
In
August 2019, Mr. Sallwasser acquired 14,673 shares of the Company's
common stock upon the exercise of his 2014 warrant. In connection
with the exercise, Mr. Sallwasser applied approximately $67,000 of
the proceeds of his 2014 note due to him from the Company as
consideration for the warrant exercise. The warrant exercise
proceeds to the Company would have been approximately $67,000. The
Company paid the balance owed to him under his 2014 note including
accrued interest of approximately $8,000.
At December 31, 2019, Mr. Sallwasser owned 76,924 shares of common
stock and options to purchase an aggregate of 116,655 shares of
common stock, which are immediately exercisable.
2400 Boswell LLC
In March 2013, the Company acquired 2400 Boswell for approximately
$4,600,000. 2400 Boswell is the owner and lessor of the building
occupied by the Company for its corporate office and warehouse in
Chula Vista, California. The purchase was from an immediate family
member of the Company’s Chief Executive Officer and consisted
of approximately $248,000 in cash, approximately $334,000 of debt
forgiveness and accrued interest, and a promissory note of
approximately $393,000, payable in equal payments over 5 years and
bears interest at 5.0%. Additionally, the Company assumed a
long-term mortgage of $3,625,000, payable over 25 years with an
initial interest rate of 5.75%. The interest rate is the prime rate
plus 2.5%. The current interest rate as of December 31, 2019 was
7.5%. The lender will adjust the interest rate on the first
calendar day of each change period. The Company and its Chief
Executive Officer are both co-guarantors of the mortgage. As of
December 31, 2019, the balance on the long-term mortgage is
approximately $3,143,000 and the balance on the promissory note is
zero.
JJL Equipment Holding, LLC
In connection with the acquisition of Khrysos Global, the Company
held a deposit of $233,000 on December 31, 2019 from JJL Equipment
Holding, LLC (“JJL Equipment”) for an equipment
purchase. Temple Leigh Dundore, a member of the Khrysos
Representing Party and wife of Dwayne Dundore, who was the
President of KII through September 2020, is a member and part owner
of JJL Equipment. The deposit is to be applied to future machinery
and equipment orders from JJL Equipment and is recorded in other
current liabilities in the consolidated balance sheet at December
31, 2019.
Daniel J. Mangless
Daniel J. Mangless, was a beneficial owner of in excess of 5% of
the Company’s outstanding shares of common stock due to his
beneficial ownership of 1,780,000 shares of common stock at
December 31, 2019 which included 63,000 shares of common stock
issued from the conversion of his Series C convertible preferred
stock to common stock, and 63,000 shares of common stock issued
from the exercise of his December 2018 warrant, 250,000 shares of
common stock issued from his February 2019 securities purchase
agreement, 250,000 shares of common stock issued from his June 2019
securities purchase agreement, and 904,000 shares of common stock
held by him at December 31, 2019. Mr. Mangless also owns a February
2019 warrant exercisable for 250,000 shares of common stock which
he acquired in connection with a February 2019 securities purchase
agreement. During 2021, Mr. Mangless liquated some of his
Youngevity common stock and is no longer a beneficial owner of in
excess of 5% of the outstanding shares of common
stock.
In February 2019, the Company entered into a securities purchase
agreement with Mr. Mangless pursuant to which the Company sold
250,000 shares of common stock at an offering price of $7.00 per
share. Pursuant to the purchase agreement, the Company also issued
Mr. Mangless a three-year warrant to purchase 250,000 shares of
common stock at an exercise price of $7.00. The Company received
proceeds of $1,750,000 from the stock offering. (See Note
10)
In June 2019, the Company entered into a second securities purchase
agreement with Mr. Mangless pursuant to which the Company sold
250,000 shares of common stock at an offering price of $5.50 per
share. The Company received proceeds of $1,375,000 from the stock
offering. (See Note 10)
Note 4. Revenues
Following the expiration of the Company’s EGC status on
December 31, 2018 the Company adopted ASC Topic 606,
Revenue from
Contracts with Customer (“Topic 606”) on January 1, 2018 using
the modified retrospective method applied to those contracts which
were not completed as of January 1, 2018.
There was no impact to retained earnings at January 1, 2018, or to
revenue for the year ended December 31, 2018, after adopting Topic
606, as revenue recognition and timing of revenue did not change as
a result of implementing Topic 606.
Revenue Recognition
Direct Selling. Direct
distribution sales are made through the Company’s network
(direct selling segment), which is a web-based global network of
customers and distributors. The Company’s independent sales
force markets a variety of products to an array of customers,
through friend-to-friend marketing and social networking. The
Company considers itself to be an e-commerce company whereby
personal interaction is provided to customers by its independent
sales network. Sales generated from direct distribution includes;
health and wellness, beauty product and skin care, scrap booking
and story booking items, packaged food products and other
service-based products.
Revenue is recognized when the Company satisfies its performance
obligations under the contract. The Company recognizes revenue by
transferring the promised products to the customer, with revenue
recognized at shipping point, the point in time the customer
obtains control of the products. The majority of the
Company’s contracts have a single performance obligation and
are short term in nature. Sales taxes in domestic and foreign
jurisdictions are collected from customers and remitted to
governmental authorities, all at the local level, and are accounted
for on a net basis and therefore are excluded from
revenues.
Commercial Coffee - Roasted Coffee. The Company engages in the commercial sale of
roasted coffee through CLR, which is sold under a variety of
private labels through major national sales outlets and to
customers including cruise lines and office coffee service
operators, and under its own Café La Rica brand, Josie’s
Java House Brand, Javalution brands and Café Cachita as well
as through its distributor network within the direct selling
segment.
Revenue is recognized when the title and risk of loss is passed to
the customer under the terms of the shipping arrangement,
typically, FOB shipping point. At this point the customer has a
present obligation to pay, takes physical possession of the
product, takes legal title to the product, bears the risks and
rewards of ownership, and as such, revenue will be recognized at
this point in time. Sales taxes in domestic and foreign
jurisdictions are collected from customers and remitted to
governmental authorities, all at the local level, and are accounted
for on a net basis and therefore are excluded from
revenues.
Commercial Coffee - Green Coffee. The commercial coffee segment includes the sale of
green coffee beans, which are sourced from the Nicaraguan
rainforest.
Revenue is recognized when the title and risk of loss is passed to
the customer under the terms of the shipping arrangement,
typically, FOB shipping point. At this point the customer has a
present obligation to pay, takes physical possession of the
product, takes legal title to the product, bears the risks and
rewards of ownership, and as such, revenue will be recognized at
this point in time. Revenues where the Company sells green coffee
beans that it has milled and where the Company has determined it is
the agent with regard to the green coffee beans is recorded at net
or recorded to reflect only the milling services provided. Sales
taxes in domestic and foreign jurisdictions are collected from
customers and remitted to governmental authorities, all at the
local level, and are accounted for on a net basis and therefore are
excluded from revenues.
Commercial Hemp. In the
commercial hemp segment, the Company manufactures commercial
hemp-based CBD extraction and post-processing equipment, and
end-to-end processor of CBD isolate, distillate, water soluble
isolate and water-soluble distillate. The Company develops,
manufactures and sells equipment and related services to customers
which enable them to extract CBD oils from hemp stock. The Company
provides hemp growers, feedstock suppliers, and CBD crude oil
producers the use of equipment, intellectual capital, production
consultancy, tolling services, and wholesale CBD channel sales
capabilities. The Company is also engaged in hemp-based CBD
extraction technology including tolling processing which converts
hemp biomass to hemp extracts such as CBD oil, distillate and
isolate. The Company offers customers turnkey manufacturing
solutions in extraction services and end-to-end processing systems.
In addition, the Company owns a laboratory testing facility that
provides a broad range of capabilities in regard to formulation,
quality control, and testing standards with our CBD products,
including potency analysis for the Company’s supply partners
of hemp derived CBD products.
Revenue is recognized when the title and risk of loss is passed to
the customer under the terms of the shipping arrangement,
typically, FOB shipping point. At this point the customer has a
present obligation to pay, takes physical possession of the
product, takes legal title to the product, bears the risks and
rewards of ownership, and as such, revenue will be recognized at
this point in time. Sales taxes in domestic and foreign
jurisdictions are collected from customers and remitted to
governmental authorities, all at the local level, and are accounted
for on a net basis and therefore are excluded from
revenues.
Disaggregated Revenue
The following table summarizes disaggregated revenue by segment (in
thousands):
|
|
|
|
|
|
|
|
Direct
selling
|
$127,011
|
$138,855
|
|
Processed
green coffee
|
1,046
|
12,281
|
|
Milling
and processing services
|
6,416
|
–
|
|
Roasted
coffee and other
|
12,082
|
11,309
|
|
Commercial
coffee
|
19,544
|
23,590
|
|
Commercial
hemp
|
887
|
–
|
|
Total
|
$147,442
|
$162,445
|
Contract Balances
Timing of revenue recognition may differ from the timing of
invoicing to customers. The Company records contract assets when
performance obligations are satisfied prior to
invoicing.
Contract liabilities are reflected as deferred revenues in current
liabilities on the Company’s consolidated balance sheets and
includes deferred revenue and customer deposits. Contract
liabilities relate to payments invoiced or received in advance of
completion of performance obligations and are recognized as revenue
upon the fulfillment of performance obligations. Contract
Liabilities are classified as short-term as all performance
obligations are expected to be satisfied within the next twelve
months.
At December 31, 2019 and 2018, deferred revenues were approximately
$1,943,000 and $2,312,000, respectively. The Company records
deferred revenue related to its direct selling segment which is
primarily attributable to the Heritage Makers product line and
represents Heritage Maker’s obligation for points purchased
by customers that have not yet been redeemed for product. In
addition, deferred revenues include future Company convention and
distributor events.
Of the
deferred revenue at December 31, 2018, the Company recognized
revenue of approximately $1,549,000 from the Heritage Makers
product line and approximately $228,000 from the Company’s
convention and distributor events during the year ended December
31, 2019. No deferred revenues were recognized with the commercial
coffee or the commercial hemp segment for the year ended December
31, 2019.
As part of the adoption of the ASC Topic 606, the Company elected
to use the practical expedient to account for shipping and handling
activities as fulfillment costs, which are recorded in cost of
revenues.
Note 5. Selected Consolidated Balance Sheet
Information
Accounts Receivable, net
Net accounts receivable consists of the following (in
thousands):
|
|
|
|
|
|
|
|
Accounts
receivable
|
$11,142
|
$4,263
|
|
Allowance
for doubtful accounts
|
(8,240)
|
(235)
|
|
Accounts
receivable, net
|
$2,902
|
$4,028
|
At December 31, 2019 and 2018, CLR's accounts receivable balance
for customer related revenue by H&H Export were approximately
$8,707,000 and $673,000, respectively, of which the full amount was
past due at December 31, 2019. As a result, we have reserved
$7,871,000 as bad debt related to the accounts receivable balance
at December 31, 2019 which is net of collections through
December 31, 2020. (See Note
11)
Inventory
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
Finished
goods
|
$14,890
|
$11,300
|
|
Raw
materials
|
11,694
|
12,744
|
|
Total
inventory
|
26,584
|
24,044
|
|
Reserve
for excess and obsolete inventory
|
(3,878)
|
(2,268)
|
|
Inventory,
net
|
$22,706
|
$21,776
|
The inventory reserve amount for excess and obsolete inventory as
of December 31, 2019, includes the addition of approximately
$469,000 acquired in the Company’s acquisition of BeneYOU LLC
(See Note 2.) Excluding, the addition of BeneYou, LLC the change in
the Company’s reserve for excess and obsolete inventory is
$1,141,000.
Property and Equipment, net
Property and equipment consist of the following (in
thousands):
|
|
|
|
|
|
|
|
Building
|
$4,789
|
$3,879
|
|
Leasehold
improvements
|
2,948
|
3,024
|
|
Land
|
3,307
|
2,544
|
|
Land
improvements
|
606
|
606
|
|
Producing
coffee trees
|
553
|
553
|
|
Manufacturing
equipment
|
9,568
|
5,825
|
|
Furniture
and other equipment
|
2,050
|
1,885
|
|
Computer
software
|
1,420
|
1,420
|
|
Computer
equipment
|
2,648
|
2,665
|
|
Vehicles
|
326
|
222
|
|
Construction
in process
|
6,562
|
1,966
|
|
Total property and
equipment, gross
|
34,777
|
24,589
|
|
Accumulated
depreciation
|
(11,461)
|
(9,484)
|
|
Total
property and equipment, net
|
$23,316
|
$15,105
|
Depreciation expense totaled approximately $2,134,000 and
$1,819,000 for the years ended December 31, 2019 and 2018,
respectively.
Operating and Financing Leases
The Company’s operating and financing lease assets and
liabilities recognized within its consolidated balance sheets were
classified as follows (in thousands):
|
|
|
|
Assets
|
|
|
Operating
lease right-of-use assets
|
$8,386
|
|
Finance lease right-of-use assets
(1)
|
10,521
|
|
Total
lease assets
|
$18,907
|
|
Liabilities
|
|
|
Operating
lease liabilities, current portion
|
$1,740
|
|
Finance
lease liabilities, current portion
|
736
|
|
Total
lease liabilities, current portion
|
2,476
|
|
Operating
lease liabilities, net of current portion
|
6,646
|
|
Finance
lease liabilities, net of current portion
|
408
|
|
Total
lease liabilities
|
$9,530
|
|
(1)
|
Finance lease right-of-use assets are recorded within property and
equipment, net of accumulated amortization of approximately
$1,367,000 at December 31, 2019.
|
Operating and finance lease costs were as follows (in
thousands):
|
Lease Cost
|
Classification
|
|
|
Operating
lease cost
|
Sales
and marketing, general and administrative
|
$1,508
|
|
Finance
lease cost:
|
|
|
|
Amortization
of leased assets
|
Depreciation
and amortization
|
712
|
|
Interest
on lease liabilities
|
Interest
expense, net
|
128
|
|
Total
operating and finance lease cost
|
|
$2,348
|
Operating lease cost for the year ended December 31, 2018 was
approximately $1,475,000.
Scheduled annual lease payments were as follows (in
thousands):
|
|
|
|
|
Years
ending December 31:
|
|
|
|
2020
|
$2,159
|
$807
|
|
2021
|
1,900
|
387
|
|
2022
|
1,464
|
17
|
|
2023
|
969
|
13
|
|
2024
|
637
|
7
|
|
Thereafter
|
2,921
|
2
|
|
Total
lease payments
|
10,050
|
1,233
|
|
Less
imputed interest
|
(1,664)
|
(89)
|
|
Present
value of lease liabilities
|
$8,386
|
$1,144
|
The weighted-average remaining lease term and weighted-average
discount rate used to calculate the present value of lease
liabilities are as follows:
|
Lease Term and Discount Rate
|
|
|
Weighted-average
remaining lease term (in years)
|
|
|
Operating
leases
|
6.8
|
|
Finance
leases
|
1.6
|
|
Weighted-average
discount rate
|
|
|
Operating
leases
|
5.47%
|
|
Finance
leases
|
4.57%
|
Assets
Intangible assets consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributor
organizations
|
$15,735
|
$10,418
|
$5,317
|
$14,559
|
$9,575
|
$4,984
|
|
Trademarks
and trade names
|
8,430
|
2,539
|
5,891
|
7,337
|
1,781
|
5,556
|
|
Customer
relationships
|
10,442
|
6,413
|
4,029
|
10,398
|
5,723
|
4,675
|
|
Internally
developed software
|
720
|
657
|
63
|
720
|
558
|
162
|
|
Non-compete
agreement
|
277
|
11
|
266
|
–
|
–
|
–
|
|
Intangible
assets
|
$35,604
|
$20,038
|
$15,566
|
$33,014
|
$17,637
|
$15,377
|
Amortization expense related to intangible assets was approximately
$2,401,000 and $2,879,000 for the years ended December 31, 2019 and
2018, respectively.
For the year ended December 31, 2019, the Company recorded a loss
on impairment of intangible assets related to the acquisition of
Khrysos Global of approximately $8,461,000. (See Note
2)
At December 31, 2019, future expected amortization expense related
to definite lived intangible
assets was as follows (in thousands):
|
Years
ending December 31,
|
|
|
2020
|
$2,439
|
|
2021
|
2,358
|
|
2022
|
2,336
|
|
2023
|
2,257
|
|
2024
|
1,638
|
|
Thereafter
|
2,889
|
|
Total
|
$13,917
|
The weighted-average remaining amortization period for intangibles
assets at December 31, 2019 was approximately 5.3
years.
Trademarks and trade names, which do not have legal, regulatory,
contractual, competitive, economic, or other factors that limit the
useful lives are considered indefinite lived assets and are not
amortized but are tested for impairment on an annual basis or
whenever events or changes in circumstances indicate that the
carrying amount of these assets may not be recoverable. At December
31, 2019 and 2018, approximately $1,649,000 in trademarks and
tradenames from business combinations have been identified as
having indefinite lives.
During
the year ended December 31, 2018, the
Company also determined that the underlying intangible assets
associated with its BeautiControl, Inc. and Future Global Vision,
Inc., acquisitions were impaired and recorded a loss on impairment
of intangible assets in our direct selling segment of approximately
$3,175,000.
Goodwill
Goodwill activity by reportable segment consists of the following
(in thousands):
|
|
|
|
|
|
|
Balance
at December 31, 2018
|
$3,009
|
$3,314
|
$–
|
$6,323
|
|
Goodwill
recognized
|
669
|
–
|
6,831
|
7,500
|
|
Loss
on impairment of goodwill
|
–
|
–
|
(6,831)
|
(6,831)
|
|
Balance
at December 31, 2019
|
$3,678
|
$3,314
|
$–
|
$6,992
|
Based on results of the 2019 annual goodwill impairment test, the
Company recorded a loss on impairment of goodwill of $6,831,000
which represented the full amount of goodwill recognized in
connection with the acquisition of Khrysos Global in February 2019.
The impairment was driven by a decline in the estimated fair value
primarily due to the reduction in the profitability forecasts, as
well as increased working capital requirements which increased the
commercial hemp segment’s carrying value. (See Note
2)
A
hybrid method valuation approach was used to determine the fair
value of the commercial hemp segment which included (i) the income
approach (also referred to as a discounted cash flow or DCF), which
is dependent upon estimates for future revenue, operating income,
depreciation and amortization, income tax payments, working capital
changes, and capital expenditures, as well as, expected long-term
growth rates for cash flows; (ii) the guideline public company
method, which uses valuation metrics from similar publicly-traded
companies, and (iii) the transactional method, which compares
valuation results from other businesses that have recently been
sold or acquired in the same industry. All of these approaches are
affected by economic conditions related to industry as well as
conditions in the U.S. capital markets.
To
determine fair value, the income approach method, guideline public
company method and transactional method were weighted 50%, 25% and
25%, respectively. The three methods returned value indications
that were supportive of one another and corroborative of the value
conclusion.
The
fair value measurement was calculated using unobservable inputs to
the discounted cash flow method, which are classified as Level 3
within the fair value hierarchy under GAAP. The key assumptions
used to estimate the fair values of the commercial hemp segment
were:
●
Compounded
annual revenue growth rates;
●
Average
operating margins;
●
Terminal
value capitalization rate (capitalization rate); and
●
Guideline
company valuations.
Of the
key assumptions, the discount rates and the capitalization rate are
market driven. These rates are derived from the use of market data
and employment of the capital asset pricing model. The
Company-dependent key assumptions are the compounded annual revenue
growth rates and the average operating margins and are subject to
much greater influence from the Company’s actions. The
Company used discount rates that are commensurate with the risk and
uncertainty inherent in the commercial hemp segment and in its
internally developed forecasts. Actual results may differ from
those assumed in the forecasts and changes in assumptions or
estimates could materially affect the determination of the fair
value of a reporting unit, and therefore could affect the amount of
potential impairment.
Inherent
in the development of the present value of future cash flow
projections are assumptions and estimates derived from a review of
the Company’s expected revenue growth rates, profit margins,
business plans, cost of capital, and tax rates. The Company also
makes assumptions about future market conditions, market prices,
interest rates, and changes in business strategies. Changes in
assumptions or estimates could materially affect the determination
of the fair value of a reporting unit and, therefore, could
eliminate the excess of fair value over the carrying value of a
reporting unit entirely and, in some cases, could result in
impairment.
The Company determined no impairment of its goodwill occurred for
the year ended December 31, 2018.
Note 6. Notes Payable and Line of Credit
Credit Note
In December 2018, CLR entered into a credit agreement
(“Credit Note”) with Mr. Grover pursuant to which CLR
borrowed $5,000,000 from Mr. Grover and in exchange issued to him a
$5,000,000 Credit Note. In addition,
CLR’s subsidiary Siles, as guarantor, executed a separate
Guaranty Agreement (“Guaranty”). The
Credit Note is secured by CLR’s green coffee inventory,
subordinate to certain debt owed to Crestmark Bank and pari passu with certain holders of
notes issued by the borrowers of the company in 2014. At both
December 31, 2019 and 2018, the outstanding principal balance of
the Credit Note was $5,000,000. As of the date of this filing, CLR
is in default regarding the settlement terms of the Credit Note and
the Credit Note remains outstanding; however, demand for payment
has not been made.
The
credit note accrues interest at 8.00% per annum and is paid
quarterly. All principal and accrued interest under the credit note
is due and payable on December 12, 2020. The credit note contains
customary events of default including the Company or Siles failure
to pay its obligations, commencing bankruptcy or liquidation
proceedings, and breach of representations and warranties. Upon the
occurrence of an event of default, the unpaid balance of the
principal amount of the credit note together with all accrued but
unpaid interest thereon, may become, or may be declared to be, due
and payable by Mr. Grover and shall bear interest from the due date
until such amounts are paid at the rate of 10.00% per annum. In
connection with the credit agreement, the Company issued to Mr.
Grover a four-year warrant to purchase 250,000 shares of its common
stock, exercisable at $6.82 per share (“Warrant 1”),
and a four-year warrant to purchase 250,000 shares of its common
stock, exercisable at $7.82 per share (“Warrant
2”).
In
connection with the credit note, the Company also entered into an
advisory agreement with a third party not affiliated with Mr.
Grover, pursuant to which the Company agreed to pay to the advisor
a 3.00% fee on the transaction with Mr. Grover and issued to the
advisor’s designee a four-year warrant to purchase 50,000
shares of the Company’s common stock, exercisable at $6.33
per share.
The Company recorded debt discounts of approximately $1,469,000
related to the fair value of warrants issued in the transaction and
$175,000 of transaction issuance costs both of which are amortized
to interest expense over the life of the credit note. The Company
recorded amortization of approximately $699,000 and $30,000 related
to the debt discount and issuance cost during the years ended
December 31, 2019 and 2018, respectively. At December 31, 2019 and
2018, the combined remaining balance of the debt discounts and
issuance cost was approximately $915,000 and $1,614,000,
respectively.
Promissory Notes
In
March 2019, the Company entered into a two-year secured promissory
note (“Note” or “Notes”) with two
accredited investors that had a substantial pre-existing
relationship with the Company pursuant to which the Company raised
cash proceeds in the aggregate of $2,000,000. The Notes pay interest at a rate of 8.00% per
annum and interest is paid quarterly in arrears with all principal
and unpaid interest due at maturity on March 18, 2021. At
December 31, 2019, the outstanding principal balance of the Notes
was $2,000,000. The promissory notes
are secured by all equity in KII.
On
February 18, 2021, the Company entered into amendment agreements
extending the Notes, see Note 14 for further discussion. As of the
date of this filing the Notes remain outstanding and the Company is
in default of the terms of settlement set forth in the amendment
agreements.
In
conjunction with the promissory note, the Company also issued
20,000 shares of the Company’s common stock for each
$1,000,000 invested and a five-year warrant to purchase 20,000
shares of the Company’s common stock at a price of $6.00
per share for each $1,000,000
invested. The Company issued in the aggregate 40,000 shares of
common stock and 40,000 warrants with the
Notes.
The Company recorded debt discounts of approximately $212,000
related to transaction issuance costs and $139,000 related to the
fair value of warrants issued in the transaction both of which are
amortized to interest expense over the life of the promissory
notes. The Company recorded amortization of approximately $123,000
related to the debt discount and issuance cost related to the
promissory notes during the year ended December 31, 2019. At
December 31, 2019, the combined remaining balance of the debt
discount and issuance costs was approximately
$228,000.
2400 Boswell Mortgage Note
In March 2013, the Company acquired 2400 Boswell for approximately
$4,600,000. 2400 Boswell is the owner and lessor of the building
occupied by the Company for its corporate office and warehouse in
Chula Vista, California. The purchase was from an immediate family
member of the Company’s Chief Executive Officer and consisted
of approximately $248,000 in cash, approximately $334,000 of debt
forgiveness and accrued interest, and a promissory note of
approximately $393,000, payable in equal payments over 5 years and
bears interest at 5.0%. Additionally, the Company assumed a
long-term mortgage of $3,625,000, payable over 25 years with an
initial interest rate of 5.75%. The interest rate is the prime rate
plus 2.5%. At December 31, 2019 and 2018, the interest rate was
7.50% and 7.75%, respectively. The lender will adjust the interest
rate on the first calendar day of each change period. The Company
and its Chief Executive Officer are both co-guarantors of the
mortgage. As of December 31, 2019 and 2018, the balance on the
long-term mortgage was approximately $3,143,000 and $3,217,000,
respectively, and the balance on the promissory note is
zero.
Khrysos Mortgage Notes
In conjunction with the Company’s acquisition of Khrysos
Global, the Company assumed an interest only mortgage for
properties located in Clermont, FL in the amount of $350,000 with
all principal due in September 2021 and interest paid monthly at a
rate of 8.00% per annum. In addition, the Company assumed a
mortgage of approximately $177,000 for properties located in
Mascotte, FL with all unpaid principal due in June 2023 and
interest paid monthly at a rate of 7.00% per annum. At December 31,
2019, the aggregate outstanding principal balance on the mortgages
was approximately $528,000.
In February 2019, the Company purchased a 45-acre tract of land in
Groveland, FL (“Groveland”), for $750,000, which is
intended to host a research and development facility, a greenhouse
and allocate a portion for farming. The Company paid $300,000 as a
down payment and assumed a mortgage of $450,000. Unpaid principal
is due in February 2024 and interest is paid monthly at a rate of
6.00% per annum. At December 31, 2019, the remaining mortgage
balance was approximately $440,000.
In February 2021, the Company determined that
certain properties acquired with the February 2019 KII acquisition
were redundant after KII moved its primary operations to Orlando,
FL thereby no longer needing multiple locations.
The Company determined that its
original plan for use of the 45-acres discussed above is no longer
viable as KII shifted its focus back to its primary core business
of extraction of cannabinoids and the production of products for
sale with the cannabinoids. Currently KII has listed for sale its
Clermont, FL property which was used as a testing laboratory
facility. On May 26, 2021, the Groveland property was sold for
$800,000. KII’s remaining
production property in Mascotte, FL is expected to be listed for
sale by the end of 2021.
Lending Agreements
In July 2018, the Company entered into lending
agreements with three separate entities and received loans in the
total amount of $1,907,000, net of loan fees to be paid back over
an eight-month period on a monthly basis. Payments were made
monthly and comprised of principal and accrued interest with an
effective interest rate between 15% and 20%. The
Company’s outstanding balance related to the lending
agreements was approximately $504,000 at December 31, 2018, and is
included in other current liabilities on the Company’s
balance sheet. The loans were paid in full in the first quarter of
2019.
M2C Purchase Agreement
In March 2007, the Company entered into an agreement to purchase
certain assets of M2C Global, Inc., a Nevada corporation, for
$4,500,000. The agreement required payments totaling
$500,000 in three installments during 2007, followed by monthly
payments in the amount of 10.00% of the sales related to the
acquired assets until the entire note balance is paid. At
December 31, 2019 and 2018, the carrying value of the liability was
approximately $1,027,000 and $1,071,000, respectively.
Other Notes
The Company’s other notes relate to loans for commercial vans
at CLR in the amount of $71,000 and $96,000 at December 31, 2019
and 2018, respectively, which expire at various dates through
2023.
Line of Credit
In November 2017, CLR entered into a loan and security agreement
with Crestmark Bank (“Crestmark”) providing for a line
of credit related to accounts receivables resulting from sales of
certain products that includes borrowings to be advanced against
acceptable eligible inventory related to CLR. In December 2017, the
loan and security agreement were amended to increase the maximum
overall borrowing to $6,250,000. The line of credit may not exceed
an amount which is the lesser of (a) $6,250,000 or (b) the sum of
up (i) to 85% of the value of the eligible accounts; plus, (ii) the
lesser of $1,000,000 or 50% of eligible inventory or 50% of the
amount calculated in (i) above, plus (iii) the lesser of $250,000
or eligible inventory or 75% of certain specific inventory
identified within the agreement.
The agreement contains certain financial and nonfinancial covenants
with which the Company must comply to maintain its borrowing
availability and avoid penalties. At December 31, 2019, the Company
was in compliance with the covenants. As of the filing date of this
Annual Report on Form 10-K, the Company is not in compliance with
the covenants under the terms of the agreement, specifically
related to the delay in the Company’s filings of its
financial statements for the year ended December 31, 2019 and for
the quarters ended March 31, 2020, June 30, 2020, September 30,
2020, December 31, 2020, and March 31, 2021, however the Company
has received a waiver of such covenants. Delays could result in the
Company being in default for not providing the required quarterly
financial information in a timely manner and Crestmark calling the
loan balance due immediately.
The outstanding principal balance of the line of credit bears
interest based upon a 360-day year with interest charged for each
day the principal amount is outstanding including the date of
actual payment. The interest rate is a rate equal to the prime rate
plus 2.50% with a floor of 6.75%. At December 31, 2019 and 2018,
the interest rate was 7.25% and 8.00%, respectively. In addition,
other fees are incurred for the maintenance of the loan in
accordance with the agreement. Other fees may be incurred in the
event the minimum loan balance of $2,000,000 is not maintained. The
agreement was effective until November 16, 2020 and will continue
to be effective for additional one-year terms unless written notice
of termination is provided to Crestmark not less than thirty days
to the end of any renewal term.
The Company and Stephan Wallach entered into a corporate guaranty
and personal guaranty, respectively, with Crestmark guaranteeing
payments in the event that the Company’s commercial coffee
segment CLR were to default. In addition, David Briskie, the
Company’s president and chief financial officer, personally
entered into a guaranty of validity representing the
Company’s financial statements so long as the indebtedness is
owed to Crestmark, maintaining certain covenants and
guarantees.
The Company’s outstanding line of credit liability related to
the Crestmark Loan was approximately $2,011,000 and $2,256,000 at
December 31, 2019 and 2018, respectively.
Note 7. Convertible Notes Payable
The Company’s total convertible notes payable at December 31,
2019 and 2018, net of debt discount outstanding consisted of the
amount set forth in the following table (in
thousands):
|
|
|
|
|
|
|
|
6.00%
Convertible Notes (2019 PIPE Notes), principal
|
$3,090
|
$–
|
|
Debt
discounts
|
(415)
|
–
|
|
Carrying
value of 2019 PIPE Notes
|
2,675
|
–
|
|
|
|
|
|
8.00%
Convertible Notes (2014 PIPE Notes), principal
|
25
|
750
|
|
Debt
discounts
|
–
|
(103)
|
|
Carrying
value of 2014 PIPE Notes
|
25
|
647
|
|
Total
carrying value of convertible notes payable
|
$2,700
|
$647
|
Unamortized debt discounts and issuance costs are included with
convertible notes payable, net of debt discount on the consolidated
balance sheets.
2014 PIPE Notes
Between July and September 2014, the Company entered into note
purchase agreements (the “2014 PIPE Note” or
“2014 PIPE Notes”) related to its private placement
offering (the “2014 private placement”) with seven
accredited investors pursuant to which the Company raised aggregate
gross proceeds of $4,750,000 and sold units consisting of five year
senior secured convertible 2014 PIPE Notes in the aggregate
principal amount of $4,750,000 that were convertible into 678,568
shares of our common stock, at a conversion price of $7.00 per
share, and warrants to purchase 929,346 shares of common stock at
an exercise price of $4.60 per share. The 2014 PIPE Notes bear
interest at a rate of 8.00% per annum and interest is paid
quarterly in arrears.
In September 2019, the Company extended the maturity date of one
holder of a 2014 PIPE Note for one year, with interest being paid
under the original terms of 8.00% per annum and interest paid
quarterly in arrears. All other 2014 PIPE Notes have been settled.
At December 31, 2019 and 2018, the remaining principal balance of
the 2014 PIPE Notes was $25,000 and $750,000, respectively. The
remaining 2014 PIPE Note of $25,000 was paid in September
2020.
In October 2018, the Company entered into an a stockholder approved
agreement with Mr. Grover to exchange all amounts owed under the
2014 PIPE Note held by him in the principal amount of $4,000,000
for (i) 747,664 shares of the Company’s common stock at a
conversion price of $5.35 per share and (ii) a four-year warrant to
purchase 631,579 shares of common stock at an exercise price of
$4.75 per share. Upon the closing, the Company issued Ascendant Alternative
Strategies, LLC (or its designees), which acted as the
Company’s advisor in connection with a debt exchange
transaction, 30,000 shares of common stock in accordance with an
advisory agreement and four-year warrants to purchase 80,000 shares
of common stock at an exercise price of $5.35 per share and
four-year warrants to purchase 70,000 shares of common stock at an
exercise price of $4.75 per share.
The Company considered the guidance of ASC 470-20, Debt:
Debt with
Conversion and Other Options and ASC 470-60, Debt: Debt Troubled Debt
Restructuring by Debtors and
concluded that the 2014 PIPE Note held by Mr. Grover should be
recognized as a debt modification for an induced conversion of
convertible debt under the guidance of ASC 470-20. The Company
recognized all remaining unamortized discounts of approximately
$679,000 immediately subsequent to the transaction date as interest
expense. The fair value of the warrants and additional shares
issued were recorded as a loss on induced debt conversion on the
consolidated statement of operations in the amount of $4,706,000
during the year ended December 31, 2018, with the corresponding
entry recorded to equity.
In 2014, the Company initially recorded debt discounts of
$4,750,000 related to the beneficial conversion feature and related
detachable warrants. The beneficial conversion feature discount and
the detachable warrants discount are amortized to interest expense
over the life of the 2014 PIPE Notes. The unamortized debt
discounts recognized with the debt exchange was approximately
$679,000. The Company recorded approximately $94,000 and $795,000,
respectively, of amortization of the debt discounts during the
years ended December 31, 2019 and 2018. At December 31, 2018, the
remaining balance of the debt discounts was approximately $94,000.
At December 31, 2019, the debt discounts relating to the 2014 PIPE
Notes were fully amortized.
In 2014, the Company paid approximately $490,000 in expenses
including placement agent fees relating to issuance costs with
the 2014 private placement. The unamortized issuance costs
recognized with the debt exchange was approximately $63,000. The
issuance costs were amortized to interest expense over the term of
the 2014 PIPE Notes. The Company recorded approximately $10,000 and
$82,000 of amortization of the issuance costs during the years
ended December 31, 2019 and 2018, respectively. At December 31,
2018, the remaining balance of the issuance costs was approximately
$10,000. At December 31, 2019, all issuance costs relating to the
2014 private placement and debt exchange were fully
amortized.
2015 PIPE Notes
Between October and November 2015, the Company entered into note
purchase agreements (the “2015 PIPE Note” or
“2015 PIPE Notes”) related to its private placement
offering (the “2015 private placement”) with three
accredited investors pursuant to which the Company raised cash
proceeds of $3,188,000 in the offering and converted $4,000,000 of
debt from the Company’s private placement in January 2015 to
this offering in consideration of the sale of aggregate units
consisting of three-year senior secured convertible 2015 PIPE Notes
in the aggregate principal amount of $7,188,000, convertible into
1,026,784 shares of common stock at a conversion price of $7.00 per
share, subject to adjustment as provided therein; and five-year
warrants exercisable to purchase 479,166 shares of the
Company’s common stock at a price of $9.00 per share. The
2015 PIPE Notes paid interest at a rate of 8.00% per annum and
interest was paid quarterly in arrears with all principal and
unpaid interest due at maturity on October 12, 2018.
In October 2018, Mr. Grover exercised his right to convert all
amounts owed under the 2015 PIPE Note in the principal amount of
$3,000,000 into 428,571 shares of common stock at a conversion rate
of $7.00 per share. At December 31, 2018, the 2015 PIPE Notes were
fully converted, and no principal remained
outstanding.
During 2017, in connection with the 2017 private placement three
investors from the 2015 private placement converted their 2015 PIPE
Notes in the aggregate amount of $4,200,000 including principal and
accrued interest thereon into new convertible notes for an equal
principal amount in the 2017 private placement as discussed below.
The Company accounted for the conversion of the notes as an
extinguishment in accordance with ASC 470-20 and ASC
470-50.
The Company recorded issuance debt discounts associated with the
2015 PIPE Notes of $309,000 related to the beneficial conversion
feature and the detachable warrants. The beneficial conversion
feature discount and the detachable warrants discount were
amortized to interest expense over the term of the 2015 PIPE Notes.
The Company recorded approximately $36,000 of the debt discounts
amortization during the year ended December 31, 2018 and was
recorded as interest expense. At December 31, 2018, the debt
discounts related to the 2015 PIPE Notes were fully
amortized.
The Company paid $786,000 in expenses including placement
agent fees relating to issuance costs with the 2015 private
placement. The issuance costs were amortized to interest expense
over the term of the 2015 PIPE Notes. The Company recorded
approximately $92,000 of the amortization of issuance costs during
the year ended December 31, 2018. At December 31, 2018, all
issuance costs relating to the 2015 PIPE Notes were fully
amortized.
In addition, the Company issued warrants to the placement agent in
connection with the 2015 PIPE Notes which were valued at
approximately $384,000. These warrants were not protected against
down-round financing and accordingly, were classified as equity
instruments and the corresponding deferred issuance costs were
amortized to interest expense over the term of the 2015 PIPE Notes.
At December 31, 2018, the Company recorded approximately $45,000 of
amortization relating to the issuance costs from the warrants. At
December 31, 2018, the issuance costs related to the warrants were
fully amortized.
2017 PIPE Notes
Between July and August 2017, the Company entered into note
purchase agreements (the
“2017 PIPE Note” or “2017 PIPE Notes”)
related to its private placement offering (“2017 private
placement”) with accredited investors pursuant to
which the Company raised aggregate gross cash proceeds of
approximately $3,054,000 in the offering and converted $4,200,000
of debt from the 2015 PIPE Notes for an aggregate principal amount of approximately
$7,254,000. The Company's used the proceeds from the 2017
private placement for working capital purposes.
In March 2018, the Company completed the Series B offering pursuant
to which the Company sold 381,173 shares of Series B convertible
preferred stock and received aggregate gross proceeds of
$3,621,000, which triggered the automatic conversion of the 2017
PIPE Notes to common stock. The 2017 PIPE Notes consisted of
three-year senior secured convertible notes in the aggregate
principal amount of approximately $7,254,000, which converted into
1,577,033 shares of common stock at a conversion price of $4.60 per
share, and three-year warrants exercisable to purchase 970,581
shares of the Company’s common stock at a price per share of
$5.56 (the “2017 Warrants”). The 2017 Warrants were not
impacted by the automatic conversion of the 2017 PIPE
Notes.
As a result of the Company completing a preferred stock transaction
with aggregate gross proceeds of more than $3,000,000 for the
purpose of raising capital, the 2017 PIPE Notes automatically
converted to common stock prior to the maturity date.
The
Company accounted for the automatic conversion of the 2017 PIPE Notes as an extinguishment in
accordance with ASC 470-20 and ASC 470-50, and as such the related
debt discounts, issuance costs and bifurcated embedded conversion
feature were adjusted as part of accounting for the conversion.
The Company recorded a non-cash
extinguishment loss on debt of $1,082,000 during the year ended
December 31, 2018 as a result of the conversion of the 2017 PIPE
Notes. This loss represents the difference between the carrying
value of the 2017 PIPE Notes and embedded conversion feature and
the fair value of the shares that were issued. The fair value of
the shares issued was based on the stock price on the date of the
conversion.
At December 31, 2018, the 2017 PIPE Notes were fully converted, and
no principal remained outstanding. The 2017 PIPE Notes would have matured in July
2020 and bore interest at a rate of 8.00% per annum. For twelve
months following the closing, the investors in the 2017 private
placement had the right to participate in any future equity
financings, subject to certain conditions.
The
Company recorded debt discounts associated with the 2017 PIPE Notes of $330,000 related to the
bifurcated embedded conversion feature. The embedded conversion
feature was amortized to interest expense over the term of the
2017 PIPE Notes. During the
year ended December 31, 2018, the Company recorded approximately
$28,000 of amortization related to the debt discount
cost.
The Company paid $1,922,000 in expenses including placement
agent fees relating to the issuance costs with the 2017
private placement. The issuance costs were being amortized to
interest expense over the term of the 2017 PIPE Notes.
During the year ended December 31, 2018, the Company recorded
approximately $136,000 of amortization related to the warrant
issuance cost.
The
Company issued the placement agent a three-year warrant to purchase
179,131 shares of the Company’s common stock at an exercise
price of $5.56 per share and 22,680 shares of the Company’s
common stock. The issuance costs were
amortized to interest expense over the term of the 2017 PIPE
Notes. During the year ended December 31, 2018, the Company recorded approximately $53,000 of
amortization related to the issuance costs.
2019 PIPE Notes
Between
February and July 2019, the Company closed five tranches related to
the 2019 private placement debt offering, pursuant to which the
Company offered for sale up to $10,000,000 in principal amount of
notes (the “2019 PIPE Notes”), with each investor
receiving 2,000 shares of common stock for each $100,000 invested.
The Company entered into subscription agreements with thirty-one
accredited investors, that had a substantial pre-existing
relationship with the Company, pursuant to which the Company
received aggregate gross proceeds of $3,090,000 and issued 2019
PIPE Notes in the aggregate principal amount of $3,090,000 and an
aggregate of 61,800 shares of common stock. The placement agent
received 15,450 shares of common stock for the closed tranches.
Each 2019 PIPE Note matures 24 months after issuance, bears
interest at a rate of 6.00% per annum which is paid quarterly, and
the outstanding principal is convertible into shares of common
stock at any time after the 180th day anniversary of the issuance
of the 2019 PIPE Notes, at a conversion price of $10.00 per share,
subject to adjustment for stock splits, stock dividends and
reclassification of the common stock. The 2019 PIPE Notes are secured by all equity in
KII. (See Note 14)
Upon issuance of the 2019 PIPE Notes, the Company recognized debt
discounts of approximately $671,000, resulting from the allocated
portion of offering proceeds to the separable common stock
issuance. The debt discount will be amortized to interest expense
over the term of the 2019 PIPE Notes. During the year
ended December 30, 2019, the Company recorded approximately
$256,000 of amortization related to the debt
discounts.
Debt Maturities
The following summarizes the maturities of notes payable and line
of credit (See Note 6) and convertible notes payable (in
thousands):
|
Years
ending December 31,
|
|
|
2020
|
$7,227
|
|
2021
|
1,454
|
|
2022
|
4,365
|
|
2023
|
325
|
|
2024
|
532
|
|
Thereafter
|
3,431
|
|
Total
|
$17,334
|
In February 2021, the two March 2019 promissory notes totaling
$2,000,000 which bear interest at a rate of 8.00% per annum and
matured in March 2021, were extended by way of an amendment to the
notes (the “8% Note Amendment”) to extend the maturity
date to March 2022 which is reflected in the table above. In
addition, the Company agreed to increase the interest rate to 16%
per annum. As of the date of this filing, the Company is in default
of the terms of settlement set forth in the 8% Note
Amendment.
Between February and March 2021, the 2019 6% Notes totaling
$1,190,000 that were maturing in February and March 2021 were
extended by way of an amendment to the convertible notes (the
“6% Note Amendments”), whereby the Company agreed to
make certain principal payments as agreed upon within the
amendment, extending the maturity dates between February 2022 and
March 2022 which is reflected in the table above. In addition, the
Company agreed to increase the interest rate between 12% and 16%
per annum. As of the date of this filing, the Company is in default
of the terms of settlement set forth in the 6% Note
Amendments.
Note 8. Derivative Financial Instruments
Warrants
Between August and October of 2018, the Company issued 630,526
three-year warrants to investors in the 2018 private placement. The
exercise price of the warrants is protected against down-round
financing throughout the term of the warrant. Pursuant to ASC Topic
815, the fair value of the warrants of approximately $1,689,000 was
recorded as a derivative liability on the issuance
dates. The estimated fair values of the warrants were
computed at issuance using a Monte Carlo pricing model. The
Company adopted ASU No. 2017-11 effective January 1, 2019 and
determined that it’s 2018 warrants were to no longer be
classified as a derivative, as a result of the adoption and
subsequent change in classification of the 2018 warrants, the
Company reclassed approximately $1,494,000 of warrant derivative
liability to equity.
In January 2018, the Company approved an amendment to its warrant
agreements issued to the placement agent, pursuant to which
warrants were issued to purchase 179,131 shares of the
Company’s common stock as compensation associated with the
Company’s 2017 private placement. The warrant amendment
amended the transfer provisions of the warrants and removed the
down-round price protection provision. As a result of this change
in terms, the Company considered the guidance of ASC 815-40-35-8 in
regard to the appropriate treatment related to the modification of
these warrants that were initially classified as derivative
liabilities. In accordance with the guidance, the warrants should
now be classified as equity instruments.
The Company determined that the liability associated with the 2018
warrants should be remeasured and adjusted to fair value on the
date of the modification with the offset to be recorded through
earnings and then the fair value of the warrants should be
reclassified to equity. The Company recorded the change in the
fair value of the July 2017 warrants as of the date of modification
to earnings. The fair value of the modified warrants at the date of
modification, in the amount of $284,000 was reclassified from
warrant derivative liability to additional paid in capital as a
result of the change in classification of the
warrants.
The estimated fair value of the outstanding warrant derivative
liabilities was $1,542,000 and $9,216,000 at December 31, 2019 and
2018, respectively.
Increases or decreases in the fair value of the derivative
liability are included as a component of total other expense in the
accompanying consolidated statements of operations for the
respective period. The changes to the derivative liability for
warrants resulted in a decrease of $5,502,000 and an increase of
$4,645,000 for the years ended December 31, 2019 and 2018,
respectively.
The estimated fair value of the warrants was computed at December
31, 2019 and 2018 using the Monte Carlo option pricing models,
using the following assumptions:
|
|
|
|
|
|
|
|
Stock
price volatility
|
64.10
|
83.78% –
136.76%
|
|
Risk-free
interest rates
|
1.59% –
1.60%
|
2.47% –
2.58%
|
|
Annual
dividend yield
|
0
|
0
|
|
Expected
life (in years)
|
0.58 – 0.96
|
0.58 – 2.76
|
In addition, management assessed the probabilities of future
financing assumptions in the valuation models.
Embedded Conversion Derivatives
In
March 2018, the Company completed the Series B offering and raised
in excess of $3,000,000 of aggregate gross proceeds which triggered
an automatic conversion of the 2017
PIPE Notes to common stock. As a result, the related
embedded conversion option was extinguished with the 2017 PIPE Notes. The Company did not
revalue the embedded conversion liability associated with the
2017 PIPE Notes as the change
in the fair value was insignificant.
Note 9. Fair Value of Financial
Instruments
The following table details the fair value measurement within the
fair value hierarchy of the Company’s financial instruments,
which includes the Level 3 liabilities (in thousands):
|
|
Fair Value at December 31, 2019
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Contingent
acquisition debt, current portion
|
$1,263
|
$–
|
$–
|
$1,263
|
|
Contingent
acquisition debt, less current portion
|
7,348
|
–
|
–
|
7,348
|
|
Warrant
derivative liability
|
1,542
|
–
|
–
|
1,542
|
|
Total
derivative liabilities
|
$10,153
|
$–
|
$–
|
$10,153
|
|
|
Fair Value at December 31, 2018
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Contingent
acquisition debt, current portion
|
$795
|
$–
|
$–
|
$795
|
|
Contingent
acquisition debt, less current portion
|
7,466
|
–
|
–
|
7,466
|
|
Warrant
derivative liability
|
9,216
|
–
|
–
|
9,216
|
|
Total
derivative liabilities
|
$17,477
|
$–
|
$–
|
$17,477
|
The following table reflects the activity for the Company’s
warrant derivative liability associated with the Company’s
private placements measured at fair value using Level 3 inputs (in
thousands):
|
Balance
at December 31, 2017
|
$3,365
|
|
Issuance
|
1,689
|
|
Adjustments
to estimated fair value
|
4,645
|
|
Adjustment
related to warrant exercises
|
(199)
|
|
Adjustment
related to the modification of warrants (Note 10)
|
(284)
|
|
Balance
at December 31, 2018
|
9,216
|
|
Issuance
|
399
|
|
Adjustments
to estimated fair value
|
(5,502)
|
|
Adjustment
related to warrant exercises
|
(1,077)
|
|
Adjustments
related to the reclassification of warrants to equity
|
(1,494)
|
|
Balance
at December 31, 2019
|
$1,542
|
The following table reflects the activity for the Company’s
embedded conversion feature derivative liability associated with
the 2017 PIPE Notes measured at fair value using Level 3 inputs (in
thousands):
|
Balance
at December 31, 2017
|
$200
|
|
Adjustment
related to the conversion of the 2017 PIPE Notes
|
(200)
|
|
Balance
at December 31, 2019 and 2018
|
$–
|
The following table reflects the activity for the Company’s
contingent acquisition debt measured at fair value using Level 3
inputs (in thousands):
|
Balance
at December 31, 2017
|
$14,404
|
|
Liabilities
acquired
|
2,460
|
|
Liabilities
settled
|
(165)
|
|
Adjustments
to liabilities included in earnings
|
(6,600)
|
|
Adjustment
to purchase price
|
(1,838)
|
|
Balance
at December 31, 2018
|
8,261
|
|
Liabilities
acquired
|
2,648
|
|
Liabilities
settled
|
(460)
|
|
Adjustments
to liabilities included in earnings
|
(1,838)
|
|
Balance
at December 31, 2019
|
$8,611
|
The weighted-average discount rate used to determine the fair value
of contingent acquisition debt was 18.42% at both December 31, 2019
and 2018.
During
the year ended December 31, 2019 and 2018, the net adjustment to
the fair value of the contingent acquisition debt was a decrease of
approximately $1,838,000 and $6,600,000, respectively, and was
included in the Company’s statement of operations in general
and administrative expenses.
In 2018, the Company recorded a decrease to the contingent
acquisition debt of $1,246,000 as a result of the removal of the
debt associated with its 2016 acquisition of Nature's Pearl whereby
the Company was no longer obligated under the related asset
purchase agreement to make payments.
Note 10. Stockholders’ Equity
The Company’s Certificate of Incorporation, as amended,
authorizes the issuance of two classes of stock to be designated
“common stock” and “preferred
stock”.
At December 31, 2019, the total number of shares of stock which the
Company has authority to issue was 50,000,000 shares of common
stock, par value $0.001 per share and 5,000,000 shares of preferred
stock, par value $0.001 per share, of which (i) 161,135 shares was
designated as Series A preferred stock (ii) 1,052,631 was
designated as Series B preferred stock, (iii) 700,000 was
designated as Series C preferred stock, and (iv) 650,000 was
designated as Series D preferred stock.
The Company’s common stock is traded on the OTC Pink Market
operated by OTC Markets under the symbol “YGYI”. From
June 2017 until November 2020, the Company’s common stock was
traded on Nasdaq Capital Market under the symbol
“YGYI.” From June 2013 until June 2017, the
Company’s common stock was traded on the OTCQX Marketplace
operated by OTC Markets under the symbol “YGYI”.
Previously, the common stock was quoted on the OTC Markets OTC Pink
market system under the symbol “JCOF”.
The Company’s 9.75% Series D Cumulative Redeemable Perpetual
Preferred Stock, $0.001 par value is traded on OTC Pink market
operated by OTC Markets Group under the symbol
“YGYIP”.
Shelf Registration
In May 2018, the SEC declared the Company’s shelf
registration statement on Form S-3 effective to register shares of
the Company’s common stock for sale of up to $75,000,000
giving the Company the opportunity to raise funding when considered
appropriate at prices and on terms to be determined at the time of
any such offerings. The Company’s ability to sell securities
registered on its registration statement on Form S-3 (the
“Shelf”) was limited until such time the market value
of its voting securities held by non-affiliates is $75 million or
more. During the year ended December 31, 2019, the Company raised
net proceeds under the Shelf in the aggregate of approximately
$12,371,000 from the issuance of the Company’s preferred
stock series D offering and the ATM noted below. During the year
ended December 31, 2018, the Company did not use the Shelf. The
Company is no longer eligible to use the Shelf.
Common Stock
At December 31, 2019 and 2018 there were 30,274,601 and 25,760,708
shares of common stock outstanding, respectively. The
holders of the common stock are entitled to one vote for each share
held at all meetings of stockholders (and written actions in lieu
of meetings).
Stock Offerings
2019 Share Purchase Agreements
In June 2019, the Company entered into a securities purchase
agreement with one accredited investor that had a substantial
pre-existing relationship with the Company pursuant to which the
Company sold 250,000 shares of common stock at an offering price of
$5.50 per share. The Company received gross proceeds of
$1,375,000.
In February 2019, the Company entered into a purchase agreement
with one accredited investor that had a substantial pre-existing
relationship with the Company pursuant to which the Company sold
250,000 shares of common stock at an offering price of $7.00 per
share. Pursuant to the purchase agreement, the Company also issued
to the investor a three-year warrant to purchase 250,000 shares of
common stock at an exercise price of $7.00. The Company received
gross proceeds of $1,750,000. Consulting fees to the placement
agent for arranging the purchase agreement included the issuance of
5,000 shares of restricted shares of the Company’s common
stock with a fair value of $7.00 per share, and three-year warrants
to purchase 100,000 shares of common stock expiring in February
2022 priced at $10.00. The Company used the Black-Scholes
option-pricing model to estimate the fair value of the warrants
issued to the selling agent to be $324,000 at the time of issuance
as direct issuance costs and recorded in equity. No cash
commissions were paid.
2019 Promissory Notes
In March 2019, the Company entered into a two-year secured
promissory note with two accredited investors that the Company had
a substantial pre-existing relationship with and from whom the
Company raised cash proceeds in the aggregate of $2,000,000. The
promissory notes are secured by all equity in KII. In consideration
of the promissory notes, the Company issued 20,000 shares of common
stock and five-year warrants to purchase 20,000 shares of common
stock at a price per share of $6.00 for each $1,000,000 invested.
The promissory notes pay interest at a rate of 8.00% per annum and
interest is paid quarterly in arrears with all principal and unpaid
interest due at maturity on March 18, 2021. The Company issued in
the aggregate 40,000 shares of common stock and 40,000 warrants
with the Notes. The Company used the Black-Scholes
option-pricing model to estimate the aggregate fair value of the
warrants issued to be $138,000 at the time of issuance as direct
issuance costs and recorded as a debt discount and is being
amortized as expense over the life of the promissory notes. The
aggregate fair value of the shares issued was based on the closing
price of the Company’s common stock on the closing date was
approximately $212,000 was recorded as a debt discount and is being
amortized as expense over the life of the promissory
notes.
2019 Private Placement - Convertible Notes
Between February and July 2019, the Company closed five tranches
related to the 2019 January private placement debt offering,
pursuant to which the Company offered the 2019 PIPE Notes, with
each investor receiving in addition to a 2019 PIPE Notes, 2,000
shares of common stock for each $100,000 invested. The Company
issued an aggregate of 61,800 shares of common stock as a result of
the 2019 private placement. The placement agent received 15,450
shares of common stock for the closed tranches. The 2019 PIPE Notes
are secured by all equity in KII. The aggregate fair value of the
shares issued was based on the closing price of the Company’s
common stock on the closing date was approximately $451,000 was
recorded as a debt discount and is being amortized as expense over
the life of the promissory notes. (See Note 14)
2018 Private Placement
Between
August 2018 and October 2018, the Company completed its 2018
private placement and entered into securities purchase agreements
with nine investors with whom the Company had a substantial
pre-existing relationship pursuant to which the Company sold an
aggregate of 630,526 shares of common stock at an offering price of
$4.75 per share. In addition, the Company issued the investors an
aggregate of 150,000 additional shares of common stock as an
advisory fee and issued the investors three-year warrants to
purchase an aggregate of 630,526 shares of common stock at an
exercise price of $4.75 per share. The
fair value of the warrants as issuance was approximately
$1,689,000.
The Company adopted ASU No. 2017-11 effective January 1, 2019 and
determined that the 2018 warrants were to no longer be classified
as a derivative, as a result of the adoption and subsequent change
in classification of the 2018 warrants, the Company reclassed
approximately $1,494,000 of warrant derivative liability to equity.
(See Note 8) At December 31,
2019 and 2018, 448,420 and 630,526 warrants, respectively, were
outstanding.
The
purchase agreement requires the Company to issue the investor
additional shares of the Company’s common stock in the event
that the average of the 15 lowest closing prices for the
Company’s common stock during the period beginning on August
31, 2018 and ending on the date 90 days from the effective date of
the registration statement (the “subsequent pricing
period”) is less than $4.75 per share. The additional common
shares to be issued are calculated as the difference between the
common stock that would have been issued using the average price of
such lowest 15 closing prices during the subsequent pricing period
less shares of common stock already issued pursuant to the 2018
private placement. Notwithstanding the foregoing, in no event may
the aggregate number of shares issued by the Company, including
shares of common stock issued, shares of common stock underlying
the warrants, the shares of common stock issued as advisory shares
and true-up shares exceed 2.9% of the Company’s issued and
outstanding common stock at August 31, 2018 for each $1,000,000
invested in the Company.
The
true-up share feature was considered to be embedded in the specific
common shares purchased by each investor, by way of the purchase
agreement. As the economic characteristics and risks of the true-up
share feature are clearly and closely related to the common stock
host contract, the true-up share feature was not separately
recognized in the private placement transaction.
The
aggregate gross proceeds of approximately $2,995,000 from the aggregate
closings of the 2018 private placement were first allocated to the
investor warrants, with an aggregate initial fair value of
approximately $1,689,000, with the residual amount allocated to the
common stock issued in the offering, including the common stock
issued to each investor as an advisory fee. The net cash proceeds to the Company from the
2018 private placement were
approximately $2,962,000 after deducting advisory fees, closing and
issuance costs.
2015 Convertible Note
In
October 2018, Mr. Grover, an investor in the Company’s 2014
and 2015 private placements, exercised his right to convert all
amounts owed under the note issued to him in the 2015 private
placement in the principal amount of $3,000,000 which matured in
October 2018, into 428,571 shares of common stock (at a conversion
rate of $7.00 per share), in accordance with its stated terms. (See
Note 7)
2014 Convertible Note – Debt Exchange
In October 2018, the Company entered into an agreement with Mr.
Grover to exchange all amounts owed under the 2014 Note held by him
in the principal amount of $4,000,000 which matured in July 2019,
for 747,664 shares of the Company’s common stock, at a
conversion price of $5.35 per share and a four-year warrant to
purchase 631,579 shares of common stock at an exercise price of
$4.75 per share. The warrant to purchase 747,664 shares of common
stock remained outstanding at both December 31, 2019 and 2018. The
agreement was subject to shareholder approval which was received on
December 5, 2018.
A FINRA
broker dealer acted as the Company’s advisor in connection
with the debt exchange. Upon the closing of the debt exchange, the
Company subsequently received shareholder approval to issue the
broker dealer 30,000 shares of common stock, a four-year warrant to
purchase 80,000 shares of common stock at an exercise price of
$5.35 per share and a four-year warrant to purchase 70,000 shares
of common stock at an exercise price of $4.75 per share.
The warrants to purchase an aggregate
150,000 shares remained outstanding at both December 31, 2019 and
2018.
2018 Note Payable
In
December 2018, CLR entered into a credit agreement with Mr. Grover
pursuant to which CLR borrowed $5,000,000 from Mr. Grover and in
exchange issued to him a $5,000,000 credit note. In addition, CLR’s subsidiary Siles, as
guarantor, executed a separate Guaranty Agreement
(“Guaranty”). In connection with the credit
agreement, the Company issued to Mr. Grover a four-year warrant to
purchase 250,000 shares of its common stock, exercisable at $6.82
per share and a four-year warrant to purchase 250,000 shares of its
common stock, exercisable at $7.82 per share, pursuant to a warrant
purchase agreement with Mr. Grover. The Company also entered into
an advisory agreement with Ascendant, a third party not affiliated
with Mr. Grover, in connection with the credit agreement, pursuant
to which the Company agreed to pay to Ascendant a 3.00% fee on the
transaction with Mr. Grover and issued to Ascendant a four-year
warrant to purchase 50,000 shares of its common stock, exercisable
at $6.33 per share.
2019 At-the-Market Equity Offering Program
In January 2019, the Company entered into the “ATM
agreement with the Benchmark Company LLC (“Benchmark”)
pursuant to which the Company may sell from time to time, at the
Company’s option, shares of its common stock through
Benchmark as sales agent, for the sale of up to $60,000,000 of
shares of the Company’s common stock. The Company is not
obligated to make any sales of common stock under the ATM agreement
and the Company cannot provide any assurances that it will continue
to issue any shares pursuant to the ATM agreement. During the year
ended December 31, 2019, the Company sold 17,524 shares of common
stock under the ATM agreement and received net proceeds of
approximately $102,000. The Company paid the Benchmark 3.0%
commission of the gross sales proceeds. The Company is not
currently eligible to register the offer and sale of the
Company’s securities using a registration statement on Form
S-3 and therefore cannot make sales under the ATM agreement until
such time that the Company once again becomes S-3
eligible.
Preferred Stock
Series A Preferred Stock
The Company has 161,135 shares of Series A preferred stock
outstanding at December 31, 2019, and December 31, 2018 and accrued
dividends of approximately $150,000 and $137,000, respectively. The
holders of the Series A preferred stock are entitled to receive a
cumulative dividend at a rate of 8.00% per year, payable annually
either in cash or shares of the Company's common stock at the
Company's election. Each share of Series A preferred
stock is convertible into common stock at a conversion rate of
one-tenth of a share. The holders of Series A preferred stock are
entitled to receive payments upon liquidation, dissolution or
winding up of the Company before any amount is paid to the holders
of common stock. The holders of Series A preferred stock have no
voting rights, except as required by law.
Series B Preferred Stock
In March 2018, the Company completed the Series B offering,
pursuant to which the Company sold 381,173 shares of Series B
preferred stock at an offering price of $9.50 per share. Each share
of Series B preferred stock is initially convertible at any time,
in whole or in part, at the option of the holders, at a conversion
price of $4.75 per share, into 2 shares of common stock and
automatically converts into 2 shares of common stock on its
two-year anniversary of issuance.
In connection with the Series B offering, the Company issued the
placement agent 38,117 warrants as compensation, exercisable at
$5.70 per share and expire in February 2023. The Company determined
that the warrants should be classified as equity instruments and
used Black-Scholes to estimate the fair value of the warrants
issued to the placement agent of $75,000 at the issuance date March
30, 2018. At December 31, 2019 and 2018, 6,098 warrants issued to
the placement agent remain outstanding.
The Company received gross proceeds in aggregate of $3,621,000. The
net proceeds to the Company from the Series B offering were
$3,289,000 after deducting commissions, closing and issuance
costs.
The Company has 129,332 and 129,437 shares of Series B preferred
stock outstanding at December 31, 2019 and 2018, respectively.
During the year ended December 31, 2019, the Company received
notice of conversion for 105 shares of Series B preferred stock
which converted to 210 shares of common stock. During the year
ended December 31, 2018, the Company received notice of conversion
for 251,736 shares of Series B preferred stock which converted to
503,472 shares of common stock.
The shares of Series B preferred stock issued in the Series B
offering were sold pursuant to the Company’s registration
statement, which was declared effective on February 13, 2018. Upon
the receipt of the proceeds of the Series B offering, the 2017 PIPE
Notes in the principal amount of approximately $7,254,000
automatically converted into 1,577,033 shares of common
stock.
Upon liquidation, dissolution or winding up of the Company, each
holder of Series B preferred stock shall be entitled to receive a
distribution, to be paid in an amount equal to $9.50 for each and
every share of Series B preferred stock held by the holders of
Series B preferred stock, plus all accrued and unpaid dividends in
preference to any distribution or payments made or any asset
distributed to the holders of common stock, the Series A preferred
stock, or any other class or series of stock ranking junior to the
Series B preferred stock.
Pursuant to the certificate of designation, the Company has agreed
to pay cumulative dividends on the Series B preferred stock from
the date of original issue at a rate of 5.0% per annum payable
quarterly in arrears on or about the last day of March, June,
September and December of each year, beginning June 30,
2018.
At December 31, 2019 and 2018, accrued dividends were approximately
$15,000 and $11,000, respectively. During the years ended December
31, 2019 and 2018, a total of approximately $51,000 and $77,000,
respectively, of dividends was paid to the holders of the Series B
preferred stock. The Series B preferred stock ranks senior to the
Company’s outstanding Series A preferred stock and the common
stock with respect to dividend rights and rights upon liquidation,
dissolution or winding up. Holders of the Series B preferred stock
have no voting rights.
Series C Preferred Stock
Between August and October 2018, the Company closed three tranches
of its Series C offering, pursuant to which the Company sold
697,363 shares of Series C preferred stock at an offering price of
$9.50 per share and agreed to issue two-year warrants to
purchase up to 1,394,726 shares of the Company’s common stock
at an exercise price of $4.75 per share to Series C preferred
holders that voluntary convert their shares of Series C preferred
stock to the Company’s common stock within two-years from the
issuance date. Each share of Series C preferred stock was
initially convertible at any time, in whole or in part, at the
option of the holders, at an initial conversion price of $4.75 per
share, into 2 shares of common stock and automatically converts
into 2 shares of common stock on its two-year anniversary of
issuance.
The Series C preferred stock was automatically redeemable at a
price equal to its original purchase price plus all accrued but
unpaid dividends in the event the average of the daily volume
weighted average price of the Company’s common stock for the
30 days preceding the two-year anniversary date of issuance is less
than $6.00 per share. As redemption was outside of the
Company’s control, the Series C preferred stock was
classified in temporary equity at issuance. At December 31, 2018,
all of the shares of Series C preferred stock were converted to
common stock and the Company issued 1,394,726 warrants. At December
31, 2018, no shares of Series C preferred stock remained
outstanding.
In connection with the Series C offering, the Company issued the
placement agent 116,867 warrants as compensation, exercisable at
$4.75 per share and expire in December 2020. The Company determined
that the warrants should be classified as equity instruments and
used Black-Scholes to estimate the fair value of the warrants
issued to the placement agent of $458,000 at the issuance date in
December 2018. At December 31, 2019 and 2018, 17,724 and 116,867,
respectively, of warrants issued to the placement agent remained
outstanding.
The Company received aggregate gross proceeds totaling
approximately $6,625,000. The net proceeds to the Company from the
Series C offering were approximately $6,236,000 after deducting
commissions, closing and issuance costs.
The Company paid cumulative dividends on the Series C preferred
stock from the date of original issue at a rate of 6.00% per
annum payable quarterly in arrears on or about the last day of
March, June, September and December of each year, beginning
September 30, 2018. During the year ended December 31, 2018,
approximately $51,000 of dividends was paid to the holders of the
Series C preferred stock.
The contingent obligation to issue warrants was considered an
outstanding equity-linked financial instrument and therefore was
recognized as equity-classified warrants, initially measured at
relative fair value of approximately $3,727,000, resulting in an
initial discount to the carrying value of the Series C preferred
stock.
Due to the reduction of allocated proceeds to the contingently
issuable common stock warrants and Series C preferred stock, the
effective conversion price of the Series C preferred stock was less
than the Company’s common stock price on each commitment
date, resulting in an aggregate beneficial conversion feature of
approximately $3,276,000, which reduced the carrying value of the
Series C preferred stock. Since the conversion option of the Series
C preferred stock was immediately exercisable, the beneficial
conversion feature was immediately accreted as a deemed dividend,
resulting in an increase in the carrying value of the Series C
preferred stock of approximately $3,276,000.
Series D Preferred Stock
In September and December 2019, the Company closed
two tranches of its Series D offering (the “Series D
Offering”), pursuant to which the Company issued and sold a
total of 578,898 shares of its 9.75% Series D cumulative preferred
stock at a weighted average price to the public of $24.05 per
share, less underwriting discounts and commissions, pursuant to the
terms of the underwriting agreements that the Company entered into
with Benchmark, as representative of the several
underwriters. The 578,898 shares of Series D preferred stock
that were sold included 43,500 shares sold pursuant to the
overallotment option– that the Company granted to the underwriters. At
December 31, 2019, 36,809 overallotment shares were unissued and
available for purchase by the underwriters within 45 days from
December 17, 2019. In January 2020 the Company issued an additional
11,375 shares of Series D preferred stock upon the partial exercise
by the underwriters of the overallotment option granted to such
underwriters. (See Note 14)
The Series D preferred stock was approved for listing on the Nasdaq
Capital Market under the symbol “YGYIP,” and trading
the Series D preferred stock on Nasdaq commenced on September 20,
2019. The net proceeds to the Company from the Series D
Offering were approximately $12,269,000 after deducting
underwriting discounts and commissions and expenses which were paid
by the Company.
At December 31, 2019, a total of 650,000 shares of the preferred
stock was designated as Series D preferred stock. At December 31,
2019, the Company has available for issuance an additional 71,102
shares of Series D preferred stock. The Series D preferred stock
does not have a stated maturity date and is not subject to any
sinking fund or mandatory redemption provisions. The holders of the
Series D preferred stock are entitled to cumulative dividends from
the first day of the calendar month in which the Series D preferred
stock is issued and payable on the fifteenth day of each calendar
month, when, as and if declared by the Company's board of
directors. The Company’s board of directors has declared an
annual cash dividend of $2.4375 per share, or a monthly dividend of
$0.203125 per share, on the Series D preferred stock.
During the
year ended December 31, 2019, the Company paid $203,000 in cash
dividends to holders of Series D preferred stock.
At December 31, 2019, accrued
dividends payable to holders of record at December 31, 2019 were
approximately $118,000, which were paid in January
2020.
Upon liquidation, dissolution or winding up of the Company, each
holder of Series D preferred stock would be entitled to receive a
distribution, to be paid in an amount equal to $25.00 per share
held by the holders of Series D preferred stock, plus all accrued
and unpaid dividends in preference to any distribution or payments
made or any asset distributed to the holders of common stock, the
Series A preferred stock, the Series B preferred stock, the Series
C preferred stock or any other class or series of stock ranking
junior to the Series D preferred stock.
The Series D preferred stock is not redeemable by the Company prior
to September 23, 2022, except upon a change of control (as defined
in the certificate of designations). On and after such date, the
Company may, at its option, redeem the Series D preferred stock, in
whole or in part, at any time or from time to time, for cash at a
redemption price equal to $25.00 per share, plus any accumulated
and unpaid dividends to, but not including, the redemption date.
Upon the occurrence of a change of control, the Company may, at its
option, redeem the Series D preferred stock, in whole or in part,
within 120 days after the first date on which such change of
control occurred, for cash at a redemption price of $25.00 per
share, plus any accumulated and unpaid dividends to, but not
including, the redemption date. Holders of the Series D
preferred stock generally have no voting rights. The Company has
578,898 shares of Series D preferred stock outstanding at December
31, 2019.
Advisory Agreements
The
Company records the fair value of common stock issued in
conjunction with advisory service agreements based on the closing
stock price of the Company’s common stock on the measurement
date. The fair value of the stock issued was recorded through
equity and prepaid advisory fees included in prepaid expenses and other current
assets on the Company’s consolidated balance sheets
and amortized over the life of the service agreement. The stock issuance expense associated with the
amortization of advisory fees was recorded as stock issuance
expense and was included in general and administrative expense on
the Company’s consolidated statements of operations for the
years ended December 31, 2019 and 2018.
Capital Market Solutions, LLC
In July
2018, the Company entered into an agreement with Capital Market
Solutions, LLC (“Capital Market”), pursuant to which
Capital Market agreed to provide investor relations services for a
period of 18 months in exchange for 100,000 shares of restricted
common stock which were issued in advance of the service
period. In addition, the Company agreed to pay a cash base fee
of $300,000 of which $50,000 was paid in August 2018 and the
remaining balance was to be paid monthly in the amount of $25,000.
The Company subsequently extended the term of the Capital Market
agreement for an additional 24 months through December 31, 2021.
The Company also issued an additional 100,000 shares of restricted
common stock to Capital Market in advance of the service period and
paid $125,000 for additional fees. The
fair value of the shares issued was approximately
$1,226,000.
In January 2019, the Capital Market agreement was amended pursuant
to which the aggregate base fee increased to $525,000 and the
Company issued an additional 75,000 of restricted common stock,
with a fair value of $417,000. In addition, the Company issued to
Capital Market a four-year warrant to purchase 925,000 shares of
the Company’s common stock at $6.00 per share, vesting 50% at
issuance, 25% vesting in January 2020 and 25% vesting in January
2021.
During the years ended December 31, 2019 and 2018, the
Company recorded expense of $100,000 and $425,000,
respectively, in connection with the base fee. During the years
ended December 31, 2019 and 2018, the Company recorded
expense of approximately $514,000 and $102,000, respectively, in
connection with amortization of the stock issuance expense. During
the year ended December 31, 2019, the Company recorded
expense of approximately $2,466,000
in connection with amortization of
equity issuance expense related to fair value of the vested portion
of the warrant.
Corinthian Partners, LLC
In August 2019, the Company issued 600 shares of restricted common
stock to Corinthian Partners, LLC, the initial placement agent for
the issuance of the 2018 warrants which represented 10% of the
shares issued to certain investors. The fair value of the shares
issued of approximately $3,000 was fully expensed in
2019.
Greentree Financial Group, Inc.
In March 2018, the Company entered into an agreement
with Greentree Financial Group,
Inc. (“Greentree”), pursuant to which Greentree
agreed to provide investor relations services for a period of 21
months in exchange for 75,000 shares of restricted common stock
which were issued in advance of the service period. The fair
value of the shares issued was approximately $311,000. During
the years ended December 31, 2019 and 2018, the
Company recorded expense of approximately $178,000 and
$133,000, respectively, in connection with amortization of the
stock issuance.
I-Bankers Securities Incorporated
In April 2019, the Company entered into an agreement
with I-Bankers Securities Incorporated
(“I-Bankers”), pursuant to which I-Bankers agreed to
provide financial advisory services for a period of twelve months
in exchange for 100,000 shares of restricted common stock which
were issued in advance of the service period. The fair value
of the shares issued was approximately $571,000. During the
year ended December 31, 2019, the Company recorded
expense of approximately $428,000 in connection with amortization
of the stock issuance expense. In addition, the Company agreed to
pay in cash a base fee for debt arrangements and equity offerings
in conjunction with any transactions I-Bankers closes with the
Company in accordance with the agreement. During the year ended
December 31, 2019, the Company did not engage in any financing
activity with I-Bankers.
Ignition Capital, LLC
In April 2018, the Company entered into an agreement
with Ignition Capital, LLC (“Ignition”),
pursuant to which Ignition agreed to provide investor relations
services for a period of 21 months in exchange for 50,000 shares of
restricted common stock which were issued in advance of the service
period. The fair value of the shares issued was approximately
$208,000. During the years ended December 31, 2019 and
2018, the Company recorded expense of approximately
$119,000 and $89,000, respectively, in connection with amortization
of the stock issuance.
In
March 2019, the Ignition agreement was amended to provide
additional compensation of 55,000 shares of the Company’s
common stock for advisory fees and additionally 5,000 shares of the
Company’s common stock were issued in conjunction with one of
the Company’s equity transactions. Under the amended Ignition
agreement, the Company also issued a warrant convertible upon
exercise of 100,000 shares of the Company’s common stock
exercisable at $10.00 per share for a period of three years for
services provided by Ignition at the amendment date. The fair value
of the shares issued was approximately $384,000 and the fair value
of the warrant issued was approximately $414,000 and was fully
expensed as equity issuance cost and recorded as equity in
2019.
ProActive Capital Resources Group, LLC
The Company entered into an agreement with ProActive
Capital Resources Group, LLC (“PCG”) in
2015 pursuant to which PCG agreed to provide investor relations
services in exchange for fees paid in cash of $6,000 per month and
5,000 shares of restricted common stock to be issued upon
successfully meeting certain criteria in accordance with the
agreement. The Company issued in the aggregate 30,000 shares
of restricted common stock in connection with the PCG agreement
which ended in August 2018.
During the year ended December 31, 2018, the
Company issued 15,000 shares of restricted common stock under
this agreement and recorded equity issuance expense in general and
administrative expenses in the Company’s consolidated
statement of operations of approximately $31,000 in connection with
amortization of the stock issuance.
The Benchmark Company, LLC
In August 2019, the board of directors approved the issuance of
20,000 shares of restricted common stock to Benchmark for
investment banking services provided to the Company. The fair value
of shares issued was approximately $91,000 and was fully expensed
in 2019.
Warrants
At December 31, 2019 and 2018, warrants to purchase 6,238,182 and
5,876,980 shares, respectively, of the Company's common
stock at prices ranging from $2.00 to $10.00 were outstanding. At
December 31, 2019, 6,006,932 warrants are exercisable and expire at
various dates through March
2024 and have a weighted
average remaining term of approximately 1.8 years, a
weighted average exercise price of $4.65, and are included in the
table below at December 31, 2019.
The Company uses a combination of option-pricing models to estimate
the fair value of the warrants including the Monte Carlo, Lattice
and Black-Scholes.
A summary of the warrant activity is presented in the following
table:
|
Balance
at December 31, 2017
|
2,710,066
|
|
Issued
|
3,511,815
|
|
Expired
/ cancelled
|
(120,606)
|
|
Exercised
|
(224,295)
|
|
Balance
at December 31, 2018
|
5,876,980
|
|
Issued
|
1,415,000
|
|
Expired
/ cancelled
|
–
|
|
Exercised
|
(1,053,798)
|
|
Balance
at December 31, 2019
|
6,238,182
|
Warrant Modification – loss on modification of
warrants
In July
2019, Mr. Grover, a beneficial owner of in excess of five percent
of the Company’s outstanding common shares, acquired 600,242
shares of common stock, upon the partial exercise at $4.60 per
share of a 2014 Warrant to purchase 782,608 shares of common stock
held by him. In connection with such exercise, the Company received
approximately $2,761,000 from Mr. Grover and issued to Mr. Grover
50,000 shares of restricted common stock as an inducement fee
(“Inducement Shares”) and agreed to extend the
expiration date of the remaining unexercised 2014 Warrant held by
him to December 15, 2020 with respect to 182,366 shares of common
stock, in addition the warrant exercise price was adjusted to
$4.75. The 2014 Warrant was classified as a liability.
Between
July and August 2019, two investors from the Company’s 2014
private placement acquired 34,238 shares in the aggregate of the
Company’s common stock upon exercise of their 2014 Warrants.
The investors used the proceeds from their 2014 Note in the amount
of $100,000 and $75,000 which was payable on July 31, 2019 and
August 14, 2019, respectively, by the Company and applied this
amount to the exercise of the warrants. In connection with the
exercise, the Company paid to the investor’s the remaining
balance due on their respective 2014 Note including interest in the
aggregate of approximately $19,000, In addition, as an inducement
to exercise the 2014 Warrant an additional 2,500 Inducement Shares
was issued to one of the investors. The Company recorded in the
aggregate approximately $161,000 related to the noncash portion of
the warrant exercises. The 2014 Warrant was classified as a
liability.
In
August 2019, one investor from the Company’s 2014 private
placement acquired 48,913 shares of the Company’s common
stock upon exercise of their 2014 Warrant. In connection with the
exercise, the Company received approximately $225,000 and issued as
an inducement to exercise the 2014 Warrant issued an additional
5,750 Inducement Shares. The 2014 Warrant was classified as a
liability. The Company also agreed to amend a warrant issued to the
placement agent for the 2014 private placement to purchase 44,107
shares of common stock at $7.00 per share, and a warrant issued to
purchase 60,407 shares of common stock at $4.60 per share of common
stock, both of which were to expire on September 10, 2019
(collectively, the “placement agent warrants”), to
extend the expiration date of the placement agent warrants to
December 15, 2020 for assistance in connection with the above
transaction with Mr. Grover. The placement agent warrants were
classified as equity.
In
August 2019, one investor from the Company’s Series C
offering acquired 63,156 shares of common stock of the Company,
upon the exercise at $4.75 per share of a preferred warrant to
purchase 63,156 shares of common stock held by them. In connection
with such exercise, the Company received approximately $300,000
from the investor, issued to the investor 6,000 Inducement Shares.
The preferred warrant was classified as equity.
The
Company considered the guidance of ASC 470-20-40, Debt with Conversion and Other
Options, ASC 505-50, Equity-Based Payments to Non-Employees and ASC
718-20-35, Awards Classified as Equity to determine the
appropriate accounting treatment to record the impact of the
modification of the warrants and the inducement shares issued upon
the exercise of the warrants. The Company concluded that the
inducement of shares and the change in the terms of the warrants
were considered modification of the warrant terms.
The
liability classified warrants were measured before and after the
modification with changes in the fair value recorded to earnings.
The fair value of the inducement shares was recorded as a loss on
modification of warrants and a credit to additional paid in
capital/common stock. Some of the equity-classified warrants were
modified by issuing common shares, not called for by the warrant
agreement, to induce exercise of the warrant. Other
equity-classified warrants, such as the Placement Agent Warrants,
were modified by increasing the exercise period of the warrants.
All of these changes are considered modifications of the warrant
terms.
These
modifications result in the recognition of incremental fair value.
Incremental fair value is equal to the difference between the fair
value of the modified warrant and the fair value of the original
warrant immediately before it was modified. Based on the above
guidance, the incremental fair value of the warrants was recognized
immediately, as a non-operating expense, since the warrants were
not subject to vesting conditions.
The
fair value of the placement agent warrants was estimated in July
2019 using a Black-Scholes option pricing model both before and
after modification. The increase in fair value was recognized as a
debit to loss on modification of warrants expense and a credit to
additional paid-in capital. The fair value of the inducement shares
issued with the preferred warrant was calculated as the number of
shares issued times the per share price of the Company’s
common stock on the exercise date in August 2019. The recorded a
loss on modification of warrants of approximately $876,000 related to the
above warrant modifications.
The Company concluded that the 2014 Warrant held by Mr. Grover
would continue to be treated as a liability
Stock-based Compensation
The Company’s 2012 Stock Option Plan, as amended (the
“2012 Stock Plan”), authorizes the granting of awards
for up to 9,000,000 shares of common stock. In February 2019, the
Company’s board of
directors received consent of the Company’s majority
stockholders to further amend the 2012 Stock Plan to increase the
number of shares of the Company’s common stock that may be
delivered pursuant to awards granted during the life of the 2012
Stock Plan from 4,000,000 to 9,000,000 shares
authorized.
The purpose of the 2012 Stock Plan is to promote the long-term
growth and profitability of the Company by (i) providing key people
and consultants with incentives to improve stockholder value and to
contribute to the growth and financial success of the Company and
(ii) enabling the Company to attract, retain and reward the best
available persons for positions of substantial responsibility. The
2012 Stock Plan allows for the grant of: (a) incentive stock
options; (b) nonqualified stock options; (c) stock appreciation
rights; (d) restricted stock; and (e) other stock-based and
cash-based awards to eligible individuals qualifying under Section
422 of the IRC, in any combination. At December 31, 2019, the
Company had 3,753,656 shares of common stock remaining available
for future issuance under the 2012 Stock Plan.
Stock-based compensation expense related to stock options and
restricted stock units included in the consolidated statements of
operations was charged as follows (in thousands):
|
|
|
|
|
|
|
|
Cost
of revenues
|
$95
|
$20
|
|
Sales
and marketing
|
594
|
117
|
|
General
and administrative
|
12,008
|
1,316
|
|
Total
stock-based compensation
|
$12,697
|
$1,453
|
Stock Options
During the year-ended December 31, 2019, the Company issued
2,340,000 10-year incentive stock options to certain employees and
executive officers. The options vest immediately with an exercise
price between $5.56 and $7.47.
During the year-ended December 31, 2019, the Company issued 387,586
10-year non-qualified stock options to its nonemployee board
members other nonemployee service providers. The options vest
immediately with an exercise price between $3.60 and
$5.60.
During the year-ended December 31, 2018, the Company issued 537,500
10-year incentive stock options to certain employees and executive
officers. The options vest monthly over 36 months with an exercise
price of $3.92.
During the year-ended December 31, 2018, the Company issued 356,795
10-year non-qualified stock options to its nonemployee board
members other nonemployee service providers. The options vest
immediately with an exercise price between $3.92 and
$4.80.
A summary of stock option activity is presented in the following
table:
|
|
|
Weighted
Average
Exercise Price
|
Weighted
Average
Remaining Contract Life (years)
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
Outstanding
December 31, 2017
|
1,584,523
|
$4.76
|
6.2
|
$126
|
|
Issued
|
894,295
|
4.02
|
|
|
|
Canceled/expired
|
(73,303)
|
5.81
|
|
|
|
Exercised
|
(11,136)
|
3.80
|
|
33
|
|
Outstanding
December 31, 2018
|
2,394,379
|
4.45
|
6.9
|
3,049
|
|
Issued
|
2,727,586
|
6.51
|
|
|
|
Canceled
/ expired
|
(373,945)
|
5.00
|
|
|
|
Exercised
|
(110,378)
|
4.23
|
|
252
|
|
Outstanding
December 31, 2019
|
4,637,642
|
$5.63
|
7.8
|
–
|
|
Exercisable
December 31, 2019
|
4,145,382
|
$5.75
|
|
–
|
The weighted-average fair value per share of the granted options
for the years ended December 31, 2019 and 2018 was approximately
$4.18 and $2.39, respectively.
At December 31, 2019, there was approximately $1,294,000 of total
unrecognized compensation expense related to unvested stock options
granted under the 2012 Stock Plan. The expense is expected to be
recognized over a weighted-average period of 1.9
years.
The Company uses the Black-Scholes to estimate the fair value of
stock options. The use of a valuation model requires the Company to
make certain assumptions with respect to selected model inputs.
Expected volatility is calculated based on the historical
volatility of the Company’s stock price over
the expected term of the option. The expected life is based on
the contractual life of the option and expected employee
exercise and post-vesting employment termination behavior. The
risk-free interest rate is based on U.S. Treasury zero-coupon
issues with a remaining term equal to the expected life assumed at
the date of the grant.
The following assumptions were used in the Black-Scholes model to
calculate the compensation cost of stock options:
|
|
|
|
|
|
|
|
Dividend
yield
|
–
|
–
|
|
Stock
price volatility
|
77% - 101%
|
67% - 75%
|
|
Risk-free
interest rate
|
1.47% - 2.6%
|
2.73% - 2.85%
|
|
Expected
life of options (in years)
|
1.5 - 6.5
|
3.0 - 6.0
|
Restricted Stock Units
In August 2019, the Company issued 50,000 restricted stock units to one of its
consultants. Vesting occurs monthly over a three-year period with
the first vesting period commencing one month from the grant date.
The fair value of the restricted stock units issued to the
consultant was based on the grant date closing stock price of $4.55
and is recognized as stock-based compensation expense over the
vesting term of the award. As
of December 31, 2019, 5,556 restricted stock units vested from the
August 2019 issuance.
In August 2017, the Company issued restricted stock units for an
aggregate of 500,000 shares of common stock, to its employees and
consultants. These shares of common stock will be issued upon
vesting of the restricted stock units. Full vesting occurs on the
sixth-year anniversary of the grant date, with 10% vesting on the
third-year, 15% on the fourth-year, 50% on the fifth-year and 25%
on the sixth-year anniversary of the vesting commencement date. The
fair value of each restricted stock unit issued to employees was
based on the closing price on the grant date of $4.53 and
restricted stock units issued to consultants were revalued with the
closing stock price at each change in financial period. As of
December 31, 2019 and 2018, there were no restricted stock units
vested from the August 2017 issuance.
The Company adopted ASU 2018-07 on January 1, 2019 and the
stock-based compensation expense for non-employee grants was based
on the closing price of our common stock of $5.72 on December 31,
2018, which was the last business day before we adopted ASU
2018-07.
A summary of restricted stock unit activity is presented in the
following table:
|
|
|
|
Balance
at December 31, 2017
|
500,000
|
|
Issued
|
–
|
|
Canceled
|
(25,000)
|
|
Balance
at December 31, 2018
|
475,000
|
|
Issued
|
50,000
|
|
Canceled
|
(67,500)
|
|
Vested
|
(5,556)
|
|
Balance
at December 31, 2019
|
451,944
|
During the year ended December 31, 2019, the Company recognized
approximately $289,000 stock-based compensation expense. At
December 31, 2019, total unrecognized stock-based compensation
expense related to restricted stock units to employees and
consultants was approximately $1,340,000, which will be recognized
over a weighted average period of 3.6 years. As of December 31,
2019 and 2018, there were no restricted stock units
vested.
Note 11. Commitments and Contingencies
Credit Risk
The Company maintains cash balances at various financial
institutions primarily located in the U.S. Accounts held at the
U.S. institutions are secured, up to certain limits, by the Federal
Deposit Insurance Corporation. At times, balances may exceed
federally insured limits. The Company has not experienced any
losses in such accounts. There is credit risk related to the
Company’s ability to collect on its accounts receivables from
its major customers. Management believes that the Company is not
exposed to any significant credit risk with respect to its cash and
cash equivalent balances and accounts receivables.
Litigation
The Company is party to litigation at the present time and may
become party to litigation in the future. In general, litigation
claims can be expensive, and time consuming to bring or defend
against and could result in settlements or damages that could
significantly affect financial results. However, it is not possible
to predict the final resolution of any litigation to which the
Company is, or may be party to, and the impact of certain of these
matters on the Company’s business, results of operations, and
financial condition could be material. At December 31, 2019, the
Company believes that existing litigation has no merit and it is
not likely that the Company would incur any losses with respect to
litigation.
Vendor Concentration
For the year ended December 31, 2019, the Company’s direct
selling segment made purchases from two vendors, Global Health
Labs, Inc. and Michael Schaeffer, LLC, that individually comprised
more than 10% of total segment purchases and in aggregate
approximated 41% of total segment purchases. For the year ended
December 31, 2018, the Company’s direct selling segment made
purchases from two vendors, Global Health Labs, Inc. and Purity
Supplements, that individually comprised more than 10% of total
segment purchases and in aggregate approximated 41% of total
segment purchases.
For the year ended December 31, 2019, the commercial coffee segment
primarily made purchases of processed green coffee beans from four
vendors, INTL FC Stone Merchant Services, Rothfos Corporation,
Sixto Packaging and the Serengeti Trading Co., that individually
comprised more than 10% of total segment purchases and in aggregate
approximated 73% of our total segment purchases. For the year ended
December 31, 2018, the commercial coffee segment made purchases of
processed green coffee beans from two vendors, H&H and Rothfos
Corporation, which individually comprised more than 10% of total
segment purchases and in aggregate approximated 83% of total
segment purchases.
For the year ended December 31, 2019, the Company’s
commercial hemp segment made purchases from two vendors,
BioProcessing Corp. Ltd. and Xtraction Services, Inc., that
individually comprised more than 10% of total segment purchases and
in aggregate approximated 47% of total segment
purchases.
Customer Concentration
For the
year ended December 31, 2019, the Company’s commercial coffee
segment had three customers,
H&H Export, Carnival Cruise
Lines, Inc. and Topco Associates,
LLC, that individually comprised more than 10% of segment
revenue and in aggregate approximated 54% of total segment revenue. For the year
ended December 31, 2018, the Company’s commercial coffee
segment had two customers, H&H Export and Rothfos Corporation,
that individually comprised more than 10% of segment revenue and in
aggregate approximated 52% of total segment revenue.
At
December 31, 2019 and 2018, CLR's accounts receivable balance for
customer related revenue by H&H Export were approximately
$8,707,000 and $673,000, respectively, of which the full amount was
past due at December 31, 2019. As a result, the Company has
reserved $7,871,000 as bad debt related to this accounts receivable
which is net of collections through December 31, 2020.
The Company has purchase obligations related to minimum future
purchase commitments for green coffee to be used in the
Company’s commercial coffee segment. Each individual contract
requires the Company to purchase and take delivery of certain
quantities at agreed upon prices and delivery dates. The
contracts have minimum future purchase commitments of approximately
$4,219,000 at December 31, 2019, which are to be delivered in
2020. The contracts contain provisions whereby any
delays in taking delivery of the purchased product will result in
additional charges related to the extended warehousing of the
coffee product. The Company has not incurred fees
however fees can average approximately $0.01 per pound for every
month of delay.
For the
year ended December 31, 2019, the Company’s commercial hemp
segment had three customers, Air Spec, Inc., BioProcessing Corp. Ltd., and Vash Holding,
LLC that individually comprised more than 10% of revenue and
in aggregate approximated 72% of total revenue generated by the
commercial hemp segment.
Note 12. Income Taxes
The income tax provision contains the following components (in
thousands):
|
|
|
|
|
|
|
|
Current:
|
|
|
|
Federal
|
$(66)
|
$(146)
|
|
State
|
(59)
|
292
|
|
Foreign
|
59
|
132
|
|
Total
current
|
(66)
|
278
|
|
Deferred:
|
|
|
|
Federal
|
75
|
239
|
|
State
|
–
|
(112)
|
|
Foreign
|
–
|
11
|
|
Total
deferred
|
75
|
138
|
|
Income
tax provision
|
$9
|
$416
|
During the years ended December 31, 2019 and 2018, the loss before
income taxes related to international operations was $699,000 and
$258,000, respectively.
The reconciliation of income tax computed at the Federal statutory
tax rate to the provision for income taxes is as follows (in
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
Federal
tax provision at statutory rates
|
21.00%
|
21.00%
|
|
State
taxes, net of federal benefit
|
4.11%
|
(2.52)%
|
|
Warrant
modification and debt discount
|
1.97%
|
(6.05)%
|
|
Effect
of permanent differences and other adjustments
|
(0.22)%
|
(0.60)%
|
|
Stock
compensation
|
(4.53)%
|
(0.37)%
|
|
Decrease
in valuation allowance
|
(22.15)%
|
(7.32)%
|
|
Tax
rate change
|
0.03%
|
(0.87)%
|
|
Loss
on debt modification
|
(0.35)%
|
(6.12)%
|
|
|
0.13%
|
0.73%
|
Provision
for income taxes
|
(0.01)%
|
(2.12)%
|
The material items increasing or decreasing the effective tax rate
include the removal of the change in the fair value of the warrant
liability, accounting for state income taxes, the disallowance of
the stock compensation expense associated with Income Stock
Options, and the change in the valuation allowance associated with
the increase in deferred tax assets that are not "more likely than
not" to be realized in future years.
The provision for income taxes differs from the amount of income
tax determined by applying the applicable U.S. statutory federal
income tax rate to pretax income (loss) as a result of the
following differences (in thousands):
|
|
|
|
|
|
|
|
Income
tax benefit at federal statutory rate
|
$(10,916)
|
$(4,171)
|
|
Adjustments
for tax effects of:
|
|
|
|
Foreign
rate differential
|
–
|
74
|
|
State
taxes, net
|
(2,134)
|
540
|
|
Warrant
modification and debt discount
|
(1,025)
|
-
|
|
Stock-based
compensation
|
2,356
|
122
|
|
Other
nondeductible items
|
53
|
40
|
|
Deferred
tax asset adjustment
|
-
|
1,202
|
|
Change
in valuation allowance
|
11,513
|
1,411
|
|
Loss
on debt modification
|
184
|
1,216
|
|
AMT
tax refund
|
(66)
|
(146)
|
|
Tax
rate change
|
(17)
|
173
|
|
Other
|
61
|
(45)
|
|
Income tax provision
|
$9
|
$416
|
Significant components of the Company's deferred tax assets and
liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
Net
operating loss carry-forward
|
$8,203
|
$6,150
|
|
Amortizable
assets
|
4,229
|
548
|
|
Inventory
|
1,337
|
884
|
|
Accruals
and reserves
|
2,249
|
34
|
|
Stock-based
compensation
|
595
|
312
|
|
Credit
carry-forward
|
73
|
148
|
|
Disallowed interest
expense
|
1,886
|
–
|
|
Operating lease
liability
|
2,092
|
–
|
|
Charitable
contributions
|
132
|
104
|
|
Warrants
|
772
|
–
|
|
Total
deferred tax asset
|
21,568
|
8,180
|
|
Deferred
tax liabilities:
|
|
|
|
Prepaids
|
(428)
|
(540)
|
|
Depreciable
assets
|
(95)
|
(148)
|
|
Right-of-use
|
(2,091)
|
-
|
|
Debt
discount - Warrants
|
(22)
|
-
|
|
Total
deferred tax liability
|
(2,636)
|
(688)
|
|
Deferred
tax
|
18,932
|
7,492
|
|
Less
valuation allowance
|
(18,857)
|
(7,344)
|
|
Net
deferred tax asset
|
$75
|
$148
|
The Company has determined through consideration of all positive
and negative evidence that the U.S. deferred tax assets are not
more likely than not to be realized. The Company records a
valuation allowance in the U.S. Federal tax jurisdiction for the
year ended December 31, 2019 to all deferred tax assets and
liabilities. The TCJA enacted
in December 2017 repealed the corporate AMT for tax years beginning
on or after January 1, 2018 and provides for existing AMT tax
credit carryovers to be refunded beginning in 2018. The Company has
approximately $75,000 in refundable credits, and it expects that a
substantial portion will be refunded between 2020 and 2021. As
such, the Company does not have a valuation allowance relating to
the refundable AMT credit carryforward. A valuation allowance
remains on the U.S. state and foreign tax attributes that are
likely to expire before realization. The change in valuation
allowance increased $11,513,000 and $1,411,000 for the years ended
December 31, 2019 and 2018, respectively.
At December 31, 2019, the Company had approximately $13,727,000 in
federal net operating loss carryforwards, which does not expire and
is limited to 80% of federal taxable income when utilized,
$12,636,000 in federal net operating loss carryforwards which begin
to expire in 2029, and $45,222,000 in net operating loss
carryforwards from various states. The Company had $2,965,000 in
net operating losses in foreign jurisdictions.
Pursuant to IRC Section 382, use of net operating loss and credit
carryforwards may be limited if the Company experiences a
cumulative change in ownership of greater than 50% in a moving
three-year period. Ownership changes could impact the
Company's ability to utilize the net operating loss and credit
carryforwards remaining at an ownership change date. The
Company has not completed a Section 382 study.
As a general rule, the Company’s tax returns for fiscal years
after 2016 currently remain subject to examinations by appropriate
tax authorities. None of the Company's tax returns are under
examination at this time.
There was no uncertain tax position related to federal, state and
foreign reporting at December 31, 2019 or 2018.
Note 13. Segment and Geographical
Information
The
Company operates in twothree
segments: the direct selling segment where products are offered
through a global distribution network of preferred customers and
distributors and, the commercial coffee segment where roasted and green
coffee bean products are sold directly to businesses, and the
commercial hemp segment manufactures proprietary systems to provide
end-to-end extraction and processing that allow for the conversion
of hemp feed stock into hemp oil and hemp
extracts.
The Company’s segments reflect the manner in which the
business is managed and how the Company allocates resources and
assesses performance. The Company’s chief operating decision
maker is the Chief Executive Officer. The Company’s chief
operating decision maker evaluates segment performance primarily
based on revenue and segment operating income (loss). The principal
measures and factors the Company considered in determining the
number of reportable segments were revenue, gross margin
percentage, sales channel, customer type and competitive
risks. In
addition, each reporting segment has similar products and
customers, similar methods of marketing and distribution and a
similar regulatory environment.
The accounting policies of the segments are consistent with those
described in the summary of significant accounting policies.
Segment revenue excludes intercompany revenue eliminated in the
consolidation. The following tables present certain financial
information for each segment (in thousands):
The following tables present selected financial information for
each segment (in thousands):
Total tangible
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
Direct
selling
|
$127,011
|
$138,855
|
|
Commercial
coffee
|
19,544
|
23,590
|
|
Commercial
hemp
|
887
|
-
|
|
Total
revenues
|
$147,442
|
$162,445
|
|
Gross profit (loss)
|
|
|
|
Direct
selling
|
$86,160
|
$94,910
|
|
Commercial
coffee
|
8,208
|
122
|
|
Commercial
hemp
|
(408)
|
-
|
|
Total
gross profit
|
$93,960
|
$95,032
|
|
Operating loss
|
|
|
|
Direct
selling
|
$(19,830)
|
$1,733
|
|
Commercial
coffee
|
(13,934)
|
(4,370)
|
|
Commercial
hemp
|
(20,023)
|
-
|
|
Total
operating loss
|
$(53,787)
|
$(2,637)
|
|
Net loss
|
|
|
|
Direct
selling
|
$(20,665)
|
$(3,328)
|
|
Commercial
coffee
|
(11,238)
|
(16,742)
|
|
Commercial
hemp
|
(20,085)
|
-
|
|
Total
net loss
|
$(51,988)
|
$(20,070)
|
|
Capital expenditures
|
|
|
|
Direct
selling
|
$983
|
$356
|
|
Commercial
coffee
|
3,683
|
2,866
|
|
Commercial
hemp
|
5,739
|
-
|
|
Total
capital expenditures
|
$10,405
|
$3,222
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
|
Direct
selling
|
$43,221
|
$38,947
|
|
Commercial
coffee
|
34,348
|
37,026
|
|
Commercial
hemp
|
12,122
|
-
|
|
Total
assets
|
$89,691
|
$75,973
|
Total net property and equipment assets, net located outside the United StatesU.S.
were approximately $6.2 million7,787,000 and $5.3 million as of6,217,000 at December 31, 20182019
and 20172018, respectively.
The Company conducts its operations primarily in the United StatesU.S. For the
years ended December 31, 20182019 and 20172018 approximately 14%
and 12%, respectively, of the
Company’s salesrevenue were derived from sales outside the
United StatesU.S.
The following table displays revenues attributable to thecustomers
geographic location oflocated in the customerU.S. and internationally (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
United
States
|
$125,725
|
$139,985
|
|
International
|
21,717
|
22,460
|
|
Total
revenues
|
$147,442
|
$162,445
|
Note 1314. Subsequent Events
At-the-Market Equity Offering ProgramSeries D Preferred Stock
In January 2020, the
Company issued an additional 11,375 shares of Series D preferred
stock upon the partial exercise by the underwriters in the
Company’s public offering of Series D preferred stock of the
overallotment option granted to such underwriters. The
overallotment shares were sold at a price to the public of $22.75
per share, generating additional gross proceeds of approximately
$259,000. (See Note 10)
On January 7, 2019, the Company Series B Preferred Conversion
In March 2020, all outstanding shares of Series B preferred stock
automatically converted into 2 shares of common stock on the
two-year anniversary date of the issuance of the Series B preferred
stock, pursuant to the automatic conversion feature of the Series B
preferred stock. A total of 129,332 shares of Series B preferred
stock outstanding automatically converted into 258,664 shares of
common stock.
Ivan Gandrud Chevrolet, Inc.
In March 2020, the Company entered into an At-the-Market Offering Agreement (the “ATM Agreement”)
with The Benchmark Company, LLCagreement
with Ivan Gandrud Chevrolet, Inc. (“BenchmarkIGC”),
as sales
agent, pursuant to which IGC agreed to
provide consulting services for the Company may sell’s commercial hemp
from time to time, at
its option,segment in exchange for 125,000 shares of itsrestricted common stock, par value $0.001 per share,
through Benchmark, as sales agent (the “Sales Agent”),
which were issued as fully earned. The fair value of the
shares issued was approximately $158,000. In addition, the
Company issued a 5-year warrant exercisable for the sale of up to $60250,000,000 of shares of
the Company’s common stock. The Company is not obligated to make any sales at an exercise price of $4.75. The
warrant was deemed fully earned. IGC is 100% owned by Daniel
J. Mangless.
March 2020 Private Placement
In March 2020, the Company closed the initial tranche of its March
2020 private placement debt offering of up to an aggregate
principal amount of $5,000,000 together with up to 250,000 shares
of common stock under. Pursuant to the ATM Agreement andterms of the securities purchase
agreement the Company cannot provide
any assurances that itentered into, the Company received proceeds
will issue any shares pursuant to the ATM
Agreement. The Company will payof $1,000,000 from one investor, Daniel J. Mangless and issued to
Mr. Mangless, (i) a Senior Secured Promissory Note (the
“Mangless Note”) in the Sales Agent 3.0% commission of
the gross sales proceeds.principal amount of $1,000,000,
due December 31, 2020, bearing interest at 18.00% per annum,
receiving proceeds of $1,000,000, and (ii) 50,000 shares of the
Company’s common stock in connection with his
investment.
Option Plan / Stock Option Grants
The Mangless Note provided the Company with an option to prepay the
Mangless Note, at any time without permission or penalty. The
Mangless Note is secured pursuant to the terms of a Pledge and
Security Agreement, entered into by the Company and CLR with Mr.
Mangless, whereby the Mangless Note is secured by a first priority
lien granted by CLR in its rights under the pledge and security
agreement, dated March 6, 2020 by and between H&H, H&H
Export and CLR to receive certain payments (the
“Mangless Pledge and Security
Agreement”).
On
December 31, 2020, CLR defaulted on the settlement of the Mangless
Note. On April 13, 2021, the Company entered into a Settlement
Agreement (the “Settlement Agreement”), effective as of
April 2, 2021, by and among the Company, CLR, and Mr. Mangless to
settle all claims related to a lawsuit filed by Mr. Mangless
against the Company and CLR, on February 10, 2021, for the alleged
breach by the Company and CLR of their obligations under the
Mangless Note and the Mangless Pledge and Security Agreement (See
Mangless v. Youngevity
International, Inc. and CLR Roasters LLC, Case No. 2021-CA-996-O
(Fla. Cir. Ct.)) (the “Lawsuit”). Pursuant to
the Settlement Agreement, Mr. Mangless has agreed to dismiss the
Lawsuit, with prejudice within five days of the Company making all
of the payments required under the Settlement Agreement. The
Settlement Agreement provides that the Company shall make a
$195,000 payment to Mr. Mangless no later than April 10, 2021 and
make a $101,668 payment to Mr. Mangless beginning on May 1, 2021,
and on the first day of every month thereafter through and
including January 1, 2022, inclusive. In addition, pursuant to the
Settlement Agreement, the Company has agreed to issue Mr. Mangless
1,000,000 shares of its common stock (the “Settlement
Shares”) and that following the date the Company has
completed the audit of its financial statements for the years ended
December 31, 2019 and 2020, if it is then necessary to register the
Settlement Shares with the Securities and Exchange Commission (the
“SEC”) to allow Mr. Mangless to resell the Settlement
Shares in the open market, to file a registration statement on Form
S-1 within 60 days after bringing its audit filings up to date. As
of the date of this filing, the Company is compliant under the
terms of the Settlement Agreement, whereby all required cash
payments have been made timely and the Company has issued Mr.
Mangless the Settlement Shares.
On January 9, 2019, the Board of Directors granted to David Briskie
an option to purchase 541,471 shares ofSmall Business Administration – Paycheck Protection Program
Loan
In April 2020, the Company’s common
stock. The stock option granted tothree segments participated in
the recent “The Coronavirus Aid, Relief, and Economic
Security Act (the “CARES Act”)”, and the Paycheck
Protection Program (the “PPP”) due to losses caused by
the COVID-19 pandemic. The Company received cash in Mr. Briskie has an exercise
price of $5.56the aggregate
of $3,763,295 from qualified Small Business Administration
(“SBA”) lenders. per shareIn addition, which isunder the closing price ofSBA loans, the
common
stock on the date of the grant of January 9, 2019, vested upon
issuance and expires ten (10) yearsCompany’s Direct Selling segment qualified for mortgage
assistance, whereby the Company’s corporate office’s
mortgage has been paid directly from the date of the grant,
unless terminated earlierSBA lenders. The stockCompany
option was granted pursuantqualified for the mortgage payment program for a period of six
months, as such the SBA has paid approximately $50,000 directly to
the Company’s Amended and Restated 2012 Stock Option Plan
(the “2012 Option Plan”)mortgage holder.
On JanuaryApril 921, 2019, the Board of Directors also granted to each
non-executive member of the Board an option to purchase 50,000
shares of the Company’s common stock. The stock options
granted have an exercise price of $5.56 per share, which is the2021, CLR received a second PPP loan in the amount of
$632,895, payable within 60 months if relief for the loan is not
closing pricegranted. As of the common stock on the date of the grantthis filing, the Company received relief
of January 9, 2019, vest upon issuance and expire ten (10) years from
the date of the grant, unless terminated earlier. The stock options
were granted pursuant to the 2012 Stock Option Plan$622,500 related to KII.
In addition, on January 9, 2019,The Company is currently in communication with the Board of Directors approved an
amendment (the “Amendment”) to the 2012 Stock Option
Plan to increase the number of shares available for issuance
thereunder from 4,000,000 shares of common stock to 9,000,000
shares of common stock. The Amendment was also approved on January
9, 2019 by the stockholders holding a majority of the Company's
outstanding voting securities andSBA lenders
regarding the potential liability the Company will incur (if any)
became effective on the 21st day
following the mailing of a definitive information statement toin respect for repayment of all the Company’s stockholders regarding the Amendment (the
“Approval Date”)remaining
unforgiven loans and consideration of any portion of loans
forgiveness of the debt.
On January 9, 2019, the Board of Directors awarded an option to
Stephan Wallach to purchase 500,000 shares of the Company’s
common stock, an option to Michelle Wallach to purchase 500,000
shares of the Company’s common stock and an option to David
Briskie to purchase 458,529 shares of the Company’s common
stock, each having an exercise price equal to the fair market value
of the common stock on the Approval Date, vesting upon the grant
date and expiring ten (10) years thereafter.
Cross-Marketing Agreement
On
January 10, 2019, the Company 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 toward construction of a processing plant, office, and
storage facilities (“Mill”) on the property for
processing coffee in Nicaragua. As of December 31, 2018, the
Company has made deposits of $900,000 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. 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 $7.80 per
share.
Stock Offering
On
February 7, 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.
New 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 are engaged in the cannabidiol
(“CBD”) hemp extraction technology equipment business
(the “Business”) and develop and sell equipment and
related services to clients which enable them to extract CBD oils
from hemp stock. The
consideration payable for the assets and the equity of 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 the Company’s common stock
which have a deemed value of $14,000,000 for the purposes of the
AEPA 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.
Convertible Debt Offering
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 minimum of
$100,000 and a maximum of notes in the principal amount $10,000,000
(the “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 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 Note matures 24 months after
issuance, bears interest at a rate of six percent (6%) per annum,
is issued at a 5% original issue discount and the outstanding
principal is convertible into shares of common stock at any time
after the 180th day anniversary of the issuance of the Note, at a
conversion price of $10 per share (subject to adjustment for stock
splits, stock dividends and reclassification of the common
stock).
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. (See Note 9 above.) There were no issuances during the year
ended December 31, 2018.
Note Payable
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 April 1, 2019, we announced that Khrysos executed a one-year
$11,000,000 supply and processing agreement to produce 99%Joint Venture Agreement in Nicaragua for Hemp Processing Center
between the CLR and KII and Nicaraguan partner
On April 20 and July 29, 2020, CLR and pureKII CDB
Isolate. Shipping under the agreement is expected to begin this
month(the “U.S.
Partners”) entered into agreements (“Hemp Joint Venture
Agreement”) with H&H Export and Fitracomex, Inc. (“Fitracomex”)
(collectively “The Nicaraguan Partners”) and
established the hemp joint venture (the “Nicaraguan Hemp Grow
and continue in equal amounts through March of
2020.
F-54Extractions Group” or the “Hemp Joint
Venture”).
The
agreement calls for H&H Export to contribute the 2,200-acre
Chaguitillo Farms in Sebaco-Matagalpa, Nicaragua which will be
owned by H&H Export and the U.S. Partners on a 50/50 basis
separate from the Hemp Joint Venture.
The
agreement calls for Nicaraguan Partners to contribute the
excavation and preparation for hemp growth of the 2,200 acres,
installation of electrical service, and the construction of 45,000
square feet of buildings to be used for office, processing,
storage, drying and green house space.
The
U.S. Partners will contribute all the necessary extraction
equipment to convert hemp to crude oil and will also provide the
feminized hemp seeds for the pilot grow program, along with their expertise in the hemp
business. The U.S. Partners will also provide all necessary
working capital as required.
Additionally,
the U.S. Partners’ parent company Youngevity International
Inc., subject to the approval of Nasdaq agreed to issue 1,500,000
shares of its restricted common stock, par value per share, to
Fitracomex. In accordance with the Hemp Joint Venture Agreement, in
July 2020 the Parent Company issued to Fitracomex the agreed upon
shares of restricted common stock. The U.S. Partners agreed to
issue warrants to Fitracomex for the purchase 5,000,000 shares of
the Parent Company common stock at an exercise price of US $1.50,
exercisable for a term of five (5) years after completion
of the construction and upon the
approval by the Parent Company’s stockholders of the proposed
issuance. In addition, the U.S. Partners agreed to use
its best efforts to register the resale of the shares of the Parent
Company’s common stock to Fitracomex under the U.S.
Securities Act of 1933, as amended (the "Securities Act"), and make
any necessary applications with Nasdaq to list the
shares.
The
U.S. Partners and H&H Export will serve as the managing
partners with all business decisions will require prior consent and
agreement of both parties. The Net Profits and Net Losses for each
fiscal period shall be allocated among the partners as follows:
twenty five percent (25%) to the Nicaraguan Partners and seventy
five percent (75%) to the U.S. Partners.
Restricted Stock Units
In
August 2020, the Company issued 39,750 shares of common stock due
to partial vesting of restricted stock units, issued to certain
employees and consultants of the Company. (See Note 10,
“Restricted Stock Units”)
Resignation of Certain Board Members
On February 11, 2020, in order to maintain compliance with the
corporate governance requirements of The Nasdaq Capital Market, and
specifically Listing Rule 5605(b) which provides that a listed
company’s board of directors shall be comprised of a majority
of independent directors, Michelle Wallach and Richard Renton, two
non-independent members of the Board of Directors of the Company,
resigned as members of the Board of Directors of the Company. The
notices of resignation provided by each director specifically
stated that the resignations were not the result of any
disagreement with the Company on any matter related to the
Company’s operations, policies or practices.
Appointment of Certain Officers and Board Members
On
October 25, 2020, William G. Thompson resigned from the Board of
Directors of the Company and as a member and chairman of the Audit
Committee to accept the position of Chief Financial Officer of the
Company effective October 26, 2020. In connection with Mr.
Thompson’s appointment, David S. Briskie was appointed Chief
Investment Officer of the Company and resigned as the
Company’s Chief Financial Officer. Mr. Briskie also retains
his title as the Company’s President.
On October 27, 2020, Daniel Dorsey was appointed to the Board of
Directors of the Company to fill the vacancy created by Mr.
Thompson’s resignation. Mr. Dorsey serves on the Audit
Committee and his term as a director continues until such time as
his successor is duly elected and qualified, or until his earlier
resignation or removal.
Credit Note
On
December 12, 2020, that certain 8% Credit Note, in the principal
amount of $5,000,000 (the “Credit Note”), issued by
CLR, under that certain Credit Agreement, dated as of December 13,
2018, by and between CLR, Siles Family Plantation Group and Carl
Grover became due and matured in accordance with its terms. CLR did
not make the payment due upon the maturity date of the Credit Note
and is in negotiations with the estate of Mr. Grover regarding a
forbearance. Pursuant to a Security Agreement, dated December 13,
2018, entered into by CLR with Mr. Grover, the Credit Note is
secured by a first priority lien granted by CLR in its green
coffee inventory. In addition, CLR’s subsidiary, Siles Family
Plantation Group S.A. executed a separate Guaranty Agreement,
dated December 13, 2018, and Stephan Wallach and Michelle
Wallach, pledged 1,500,000 shares of the Company’s Common
Stock held by them to secure the Credit Note. As of the date of
this filing, the Company is in default
of the terms of settlement of the Credit Note. (See Note
6)
2019 Private Placement Notes – Convertible Notes
On February 18, 2021, the Company entered into note amendments (the
“6% Note Amendments”) with certain holders of an
aggregate of $1,000,000 in principal amount of those 6% secured
convertible notes (the “6% Notes”), issued by the
Company to such investors (the “Investors”) on February
15, 2019. The 6% Notes had been in default and the 6% Note
Amendments extend the maturity date of the 6% Notes held by the
Investors by one year, to February 15, 2022, as applicable, and
increase the interest rate to 16%. In connection with the
foregoing, as an inducement to enter into the 6% Note Amendments,
the Company issued to certain holders of the 6% Notes an aggregate
of 150,000 shares of its restricted common stock, par value $0.001
per share. As of the date of this filing, the Company is in default
of the terms of settlement set forth in the 6% Note
Amendments. (See Note
7)
On March 16, 2021, the Company entered into note amendments (the
“6% Note Amendments”) with certain note holders of an
aggregate of $1,190,000 in principal amount of those 6% secured
convertible notes (the “6% Notes”), issued by the
Company to such investors (the “Investors”) on February
15, 2019 and March 13, 2019. The 6% Notes had been in default and
the 6% Note Amendments extend the maturity date of the 6% Notes
held by the Investors by one year, to February 15, 2022 and March
15, 2022, as applicable, and increase the interest rate to 12%. In
connection with the foregoing, as an inducement to enter into the
6% Note Amendments, the Company issued to the holders of the 6%
Notes an aggregate of 178,500 shares of its restricted common
stock, par value $0.001 per share. As of the date of this
filing, the Company is in default of the terms of settlement set
forth in the 6% Note
Amendments. (See Note
7)
March 2019 Promissory Note
On February 18, 2021, the Company entered into note amendments (the
“8% Note Amendments”) with the holders of an aggregate
of $2,000,000 in principal amount of those certain 8% secured
promissory notes (the “8% Notes”), issued by the
Company to such investors (the “Investors”) on March
18, 2019. The 8% Notes were not in default at the time of the
amendment. The 8% Note Amendments extend the maturity date of the
8% Notes held by the Investors by one year, to March 18, 2022, as
applicable, and increase the interest rate to 16%. In connection
with the foregoing, as an inducement to enter into the 8% Note
Amendments, the Company issued to certain holders of the 8% Notes
an aggregate of 400,000 shares of its restricted common stock, par
value $0.001 per share. In addition, we issued one of the note
holders a two-year warrant to purchase 150,000 shares of our common
stock at a price per share of $1.00. As of the date of this
filing, the Company is in default of the terms of settlement set
forth in the 8% Note
Amendments. (See Note
7)
Dividends
Declaration of Monthly Dividends for Series "D" Cumulative
Redeemable Perpetual Preferred Stock
During
the year ended December 31, 2020, the
Company announced the declaration of its regular monthly dividend
of $0.203125 per share of its 9.75% Series D Cumulative
Redeemable Perpetual Preferred Stock for each calendar quarter
to holders of record as of the last day of the month in 2020,
payable on the fifteenth day of each calendar month. The
Company paid cash dividends of approximately $1,434,000 during
2020.
Declaration of Monthly Dividend for the 1st Quarter of 2021 for Series "D"
Cumulative Redeemable Perpetual Preferred Stock
On January 1, 2021, the Company announced the declaration of its
regular monthly dividend of $0.203125 per share of its
9.75% Series D Cumulative Redeemable Perpetual Preferred Stock
(OTCM:YGYIP) for each of January, February and March 2021.
The dividend will be payable on February 15, 2021, March
15, 2021 and April 15, 2021 to holders of record as of January
31, February 28 and March 31, 2021. The Company paid cash dividends
of approximately $360,000 for the three months declared
above.
Declaration of Monthly Dividend for the 2nd Quarter of 2021 for Series "D"
Cumulative Redeemable Perpetual Preferred Stock
On April 12, 2021, the Company announced the declaration of its
regular monthly dividend of $0.203125 per share of its
9.75% Series D Cumulative Redeemable Perpetual Preferred Stock
(OTCM:YGYIP) for each of April, May and June 2021. The
dividend will be payable on May 17, 2021, June 15, 2021 and
July 15, 2021 to holders of record as of April 30, May 31 and
June 30, 2021. The Company paid cash dividends of approximately
$120,000 for each month of April and May 2021 on May 17, 2021 and
June 15, 2021, respectively. The Company intends to pay in cash
approximately $120,000 for the month of June 2021 declared
above.
Auditor Appointment & Nasdaq Delisting
On October 25, 2020, the Company’s Audit Committee
approved the appointment of MaloneBailey,
LLP (“MaloneBailey”) as its new independent
registered public accounting firm responsible for auditing its
financial statements. On October 12, 2020, the Board of Directors
was notified by its then registered independent certified public
accounting firm, Mayer Hoffman McCann P.C., of San Diego, CA that
it had resigned, effective immediately. Mayer Hoffman McCann P.C.
had served as the Company’s registered independent certified
public accountants since 2011.
On November 18, 2020, the Company received notice from the Nasdaq
Hearings Panel (the “Panel”) that it had determined to
delist the Company’s securities from The Nasdaq Stock Market
LLC (“Nasdaq”) based upon the Company’s
non-compliance with the filing requirements set forth in Nasdaq
Listing Rule 5250(c)(1) for failing to file its Form 10-K for
the year ended December 31, 2019, and Forms 10-Q for the periods
ended March 31, 2020 and June 30, 2020. Effective with the
open of the markets on Friday, November 20, 2020, the
Company’s common stock and Series D preferred stock commenced
trading under its trading symbols YGYI and YGYIP on the OTC Markets
system.
Updates with H&H
On
March 6, 2020, CLR entered into a Finance, Security and ARAP
Monetization Agreement (the “Agreement”)
with H&H Export Y CIA. LTDA, and H&H Coffee Group
Export Corp (collectively, “H&H”). H&H is the
agent for the independent green coffee growers from which CLR
purchases its unprocessed coffee beans and H&H also purchases
processed coffee beans from CLR that it sells to third parties. The
owners of H&H are also employees of CLR and manage the La Pita
plantation in Nicaragua for which they receive a percentage of
profit derived from green coffee sales processed in Nicaragua.
Pursuant to the Agreement, H&H has agreed to allow a Nicaraguan
agency (the “Agency”), to advance on behalf of H&H,
approximately $22,000,000 of the $30,100,000 of accounts receivable
owed by H&H to CLR for its purchase of processed green coffee
during the 2019 season. The Agency has also entered into a
$46,500,000 credit facility with H&H to provide funding for
H&H’s future coffee purchases of unprocessed green coffee
from independent producers. Of the 2020 sales amounts to be billed
by CLR for future coffee purchases of processed coffee, CLR will be
paid an additional amount, at a rate of $.225 per pound of
processed green coffee shipped to customers, to be applied to the
remaining outstanding 2019 accounts receivable balance owed by
H&H to CLR. Until such time as the entire accounts receivable
balance is paid in full, H&H has agreed not take any profit
interest. However, given the COVID crisis’ impact on the 2020
growing season and the continued delay in full payment of the 2019
receivable balances, management considers the H&H receivable
impaired at December 31, 2019. Subsequent to the Agreement, CLR
adopted the recognition of recording revenues at net for sales
between CLR and H&H.
On March 2, 2021, CLR entered into a Master Relationship Agreement
(“MA Agreement”) with the owners of H&H in order to
memorialize the various agreements and modifications to those
agreements. Additionally, certain events have occurred that have
kept the parties from complying with the terms of each of the
original agreements and have caused there to be an imbalance with
the respect to the funds owed by one party to the other; therefore
this MA Agreement also sets forth a detailed accounting of the
different business relationships and reconciles the monetary
obligations between each party through the end of fiscal year
2020.
This MA Agreement memorialized the key settlement terms and
established that H&H owes CLR approximately $10,700,000,
described as “H&H Coffee Liability”, that is
composed of:
|
●
|
past
due accounts receivable owed to CLR from H&H for 2019 and
2020;
|
|
●
|
the
$5,000,000 note due plus accrued interest on the note;
|
|
●
|
CLR
lost profits in 2019 and 2020;
|
|
●
|
the
return of working capital provided by CLR for the 2019 and 2020
green coffee program.
|
The
agreement also includes an offset against amounts owed by H&H
to CLR consisting of:
|
●
|
H&H’s
25% profit sharing participation for 2019 and 2020;
|
|
●
|
and an
offset of H&H’s open payables owed by CLR to H&H in
the amount of approximately $243,000.
|
The MA
Agreement provides that approximately $10,700,000 is owed to CLR by
H&H and H&H agrees to satisfy this obligation by providing
CLR a minimum of 20 containers of strictly high grown coffee
(approximately 825,000 pounds of coffee) per month, commencing at
the end of March 2021 and continuing monthly until the aforesaid
amount is paid in full. The MA Agreement stipulates that the
parties have agreed that the coffee to be provided to CLR by
H&H for the shipments described above, that in order to satisfy
H&H’s debt to CLR, shall not be produced on any
plantation that the parties have a joint interest in. CLR has
recorded allowances of $7,871,000 related to the H&H trade
accounts receivable $5,340,000 related to the H&H notes
receivable during the year ended December 31, 2019 due to
H&H’s repayment history and risks associated with
redemption of the receivable in coffee.
Properties Available-for-Sale
In February 2021, the Company determined that certain properties
acquired with the February 2019 KII acquisition were redundant
after KII moved its primary operations to Orlando, FL thereby no
longer needing multiple locations.
In addition, subsequent to the acquisition closing, KII
purchased in February 2019
45-acres in Groveland, FL (“Groveland”). The Company
determined that its original plan for use is not viable at the
present time as KII shifted its focus back on its primary core
business of extraction of cannabinoids and the production of
products for sale with the cannabinoids. Currently KII has listed
for sale its Clermont, FL property which was used as a testing
laboratory facility. On May 26,
2021, the Groveland property was sold for $800,000. KII’s
remaining production property in Mascotte, FL is expected to be
listed for sale by the end of 2021.
Item 9. ngesChanges in
and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
ItemItem 9A. Co
ntrolsControls and
Procedures
Evaluation of Disclosure Controls and Procedures
Update on Prior Period Disclosure Controls and Procedures and
Internal Control Over Financial Reporting
Commercial Coffee Segment
On
April 15, 2019, we filed our 2018 Form 10-K disclosing that during
the fourth quarter of the year ended December 31, 2018, we
identified a material weakness (“2018 Material
Weakness”) for our commercial
coffee segment with respect to certain operations in Nicaragua,
relating to not having proper processes and controls in place to
require sufficient documentation of significant agreements and
arrangements in accounting for significant transactions. During the
preparation of our financial statements for the year ended December
31, 2019, we identified material weaknesses in our internal control
over financial reporting associated with revenue recognition within
the coffee segment. These material weaknesses resulted in the
determination that restatements to our financial statements for the
quarters ended March 31, 2019, June 30, 2019, and September 30,
2019 related to revenue recognition within our coffee segment are
required.
During
2019, management implemented a remediation plan that included
updating our current policies and
implementing procedures and controls over the documentation of
significant agreements and arrangements with respect to certain
operations in our commercial coffee segment. This remediation plan
is still in process and we determined that the controls were not
operating effectively,
therefore management determined that these material weaknesses were
not remediated and remained open at the time of this
filing.
Commercial Hemp Segment
On February 12, 2019, we completed the acquisition of Khrysos
Global, Inc. (related to our commercial hemp segment), detailed in
Note 2, to the consolidated financial statements. During our 2019
annual audit we determined that certain fixed assets acquired in
the acquisition and the share price valuation for the common stock
issued as consideration were not fairly valued as of the closing
date which resulted in a decrease to the net assets acquired
including; a) $1,127,000 related to the certain fixed assets, and
b) $1,351,000 related to a change in the fair value of common stock
issuance resulting in an increase to goodwill of $2,478,000
acquired and an adjusted aggregate purchase price of $15,894,000.
Our management concluded that we have a material weakness in our
control procedures related to acquisitions.
These material weaknesses resulted in the determination that
restatements to our financial statements for the quarters ended
March 31, 2019, June 30, 2019, and September 30, 2019 related to
the accounting for acquisitions within our commercial hemp segment
are required.
During
2020, management implemented a remediation plan that included
updating our current policies and
implementing procedures and controls over future acquisitions.
Until the material weaknesses are remediated, and our associated
disclosure controls and procedures improve, there is a risk that a
material error could occur and not be
detected.
Other
At the
end of the second fiscal quarter 2019, we determined that the
aggregate market value of our common stock held by non-affiliates
exceeded $75 million, resulting in accelerated filer status. As a
result, we are now required to obtain an auditor’s
attestation of management’s assessment of internal control
over financial reporting required under Sarbanes-Oxley
Act Section 404(b).
Evaluation of Disclosure Controls and Procedures
We maintainOur disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Exchange Act
reports is recorded, processed, summarized and reported within the
time periods specified in the SEC’s rules and forms, and that
such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control
objectives.
As required by Rule 13a15(b) under the Exchange Act, our management
conducted an evaluation, under the supervision and with the
participation of our Chief Executive Officer and our Chief
Financial Officer, of the effectiveness of the design and operation
of our disclosure controls and procedures as of the end of the
period covered by this Annual Report. and as disclosed below
determined that our disclosure controls and procedures were not
effective as of December 31, 2019. During the course of the quarter ended December
31, 20182019, we identified a material weakness in our internal
controls for our commercial coffee segment relating to not having proper processes and controls in
place to require sufficient documentation of significant agreements
and arrangements inrevenue
recognition on revenue related to green coffee processing that was
initially recorded at gross but should have been recorded at net.
In addition, we identified a material weakness in controls related
to our accounting for significant transactions, as
described below.acquisitions. During the course of the quarter ended December 31, 2019,
we identified control deficiencies, that individually, or when
aggregated, represent material weaknesses in our internal controls.
As described below a material weakness is a deficiency, or
combination of deficiencies, in internal control over financial
reporting, such that there is a
reasonable possibility that a material misstatement of the annual
or interim financial statements will not be prevented or detected
on a timely basis.
Management’s Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f). With the participation
of our Chief Executive Officer and Chief Financial Officer,
management conducted an evaluation of the effectiveness of our
internal control over financial reporting as of December 31, 2019
based on the framework and criteria established by the Committee of
Sponsoring Organizations of the Treadway Commission
(“COSO”) in Internal Control Integrated
Framework (2013), and concluded
that our disclosure controls and procedures were not effective as
of the end of the period covered by this annual report, as a result
of material weaknesses in our internal control over financial
reporting which is discussed further below.
Our management, including our Chief Executive Officer and Chief
Financial Officer, has determined that due to the underlying
critical lack of automated reporting systems, trained accounting
and information technology personnel, control designs and
effectiveness, management was unable to review the risk assessment
and the design of the organization's internal control systems to
establish a baseline for ongoing and separate evaluations that
includes assessment of fraud risk, therefore management does not
expect that our disclosure controls and procedures and our internal
control processes will prevent all errors and all
fraud.
Based on the evaluation of our disclosure controls and procedures
as of the end of the period covered by this report and upon that
discovery, our Chief Executive Officer and Chief Financial Officer
concluded that as of the end of the period covered by this report
our disclosure controls and procedures were not effective to ensure
that information required to be disclosed by us in the reports that
we file or submit under the Exchange Act, is recorded, processed,
summarized and reported, within the time periods specified in the
SEC’s rules and forms, and that such information is
accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure.
Management has assessed these deficiencies and has determined that
they individually and in aggregate led to material
weaknesses. These material weaknesses led to material
misstatements in our financial statements for the periods ending
March 31, 2019, June 30, 2019 and September 30, 2019 related to the
recognition of revenue within our commercial coffee segment and our
commercial hemp segment. In order to consider these material
weaknesses fully remediated, we believe additional time is needed
to demonstrate sustainability as it relates to the revised
controls. There were seven general
categories of deficiencies in our internal control over financial
reporting.
Management’s Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining
adequateRisk
Assessment. We did not have an
effective risk assessment process that defined clear financial
reporting objectives and evaluated risks, including fraud risks,
and risks resulting from changes in the external environment and
business operations, at a sufficient level of detail to identify
all relevant risks of material misstatement across the
entity.
Deficiencies
in the Overall Control Environment. We
have not maintained an effective control environment to provide
reasonable assurance relating to operations, reporting, and
compliance for the purpose of meeting the requirements set forth in
the 2013 COSO Framework. More specifically, we did not have (a)
adequate segregation of duties and oversight over material
agreements and arrangements entered into by the Company (b)
adequate information technology systems required to develop
controls and oversight over our existing operations and most recent
acquisitions (c) a sufficient number of personnel with an
appropriate level of US GAAP knowledge and experience to create the
proper environment for effective internal control over financial
reporting as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f). With the participation
of our Chief Executive Officer and Chief Financial Officer,
management conducted an evaluation of the effectiveness of our
internal control over financial reporting as of December 31, 2018
based on the framework and criteria established by the
Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) in Internal Control Integrated
Framework (2013), and concluded
that our disclosure controls and procedures were not effective as
of the end of the period covered by this annual report, as a result
of a material weakness in ourand to ensure that (i) there were adequate processes for
oversight, and (ii) there was accountability for the performance of
internal control over financial reporting
responsibilities.
Deficiencies
in the Controls over Monitoring. We
have not maintained effective controls over monitoring to provide
reasonable assurance relating to operations, reporting, and
compliance for the purpose of meeting the requirements set forth in
the 2013 COSO Framework. More specifically, we did not have
adequate oversight processes and procedures that guide individuals
in applying internal control and proper documentation to support
reporting of certain transactions within the financial reporting
and that there is a reasonable possibility that a material
misstatement of our financial statements will not be prevented or
detected on a timely basis.
Deficiencies
pertaining to a lack of human resources within our finance and
accounting functions. We have not maintained
sufficient accounting personnel with the appropriate level of
knowledge, experience and training commensurate with maintaining an
effective control environment, within the current operational
environment, to meet the financial reporting requirements of a
publicly traded company with international operations. We did not
have a sufficient number of trained resources with assigned
responsibility and accountability for the design, operation and
documentation of internal control over financial reporting in
accordance with the 2013 COSO Framework. The result of the lack of
sufficient accounting personnel has led to us not having effective
and codified accounting policies and procedures throughout our
Company, including our subsidiaries, which can lead to inconsistent
accounting treatment of transactions. The lack of sufficient
personnel has also resulted in a failure to maintain appropriate
segregation of duties throughout the internal control over
financial reporting process. We have had numerous instances where
review and approval is performed by the same employee negating any
monitoring or approval controls.
Deficiencies
pertaining to the lack of controls or ineffectively designed
controls impacting our financial reporting. Our control design analysis and process
walkthroughs disclosed a number of instances where review approvals
were not sufficiently documented and retained, where established
policies and procedures were not defined, and controls were not in
place to adequately (i) address relevant risks, (ii) provide
evidence of performance, (iii) provide appropriate segregation of
duties, or (iv) operate at a level of precision to identify all
potentially material errors.
Deficiencies
related to information technology control design and operating
effectiveness weaknesses. The
Company did not have formalized information technology policies and
procedures which the lack thereof could result in (1) unauthorized
system access, (2) application changes being implemented without
adequate reliability testing, and (3) over reliance on spreadsheet
applications without quality control
assurances.
Deficiencies
related to failures in operating effectiveness of the internal
control over financial reporting. Certain internal control procedures were developed
or enhanced during the latter part of 2019. When testing occurred
to confirm the effectiveness of the internal control over financial
reporting, controls were not operating effectively. Insufficient
time remained to remediate these material weaknesses prior to
year-end.
The
effectiveness of our internal control over financial reporting as
of December 31, 2019 has been audited by MaloneBailey LLP, an
independent registered public accounting firm, and expressed an
adverse opinion on the operating effectiveness of the Company's
internal control over financial reporting whichas is discussed further below.
Our management, including our Chief Executive Officer and Chief
Financial Officer, does not expect that our disclosure controls and
procedures and our internal control processes will prevent all
error and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be
considered relative to their costs.stated in their report
Because of the inherent
limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of
error or fraud, if any, within our company have been detected.
These inherent limitations include the realities that judgments in
decision-making can be faulty, and that the breakdowns can occur
because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion
of two or more people, or by management override of the control.
The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions. Over time,
controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud
may occur and may not be detected. However, these inherent
limitations are known features of the financial reporting process.
Therefore, it is possible to design into the process safeguards to
reduce, though not eliminate, this riskwhich appears herein.
Changes in Our Controls
Management’s Remediation Efforts
During the fourth quarter of the year ended December 31, 2018, we
identified a material weakness in our internal controls forManagement
has been implementing and continues to implement measures designed
to ensure that control deficiencies contributing to the material
weaknesses are remediated, such that these controls are designed,
implemented, and operating effectively. The remediation measures include or are expected
to include the following:
●
Implementing
or enhancing the Company’s infrastructure to ensure
our
commercial coffee segmentappropriate software and concluded that we did not have proper
processes and controlsreporting tools are in place to require sufficient documentation
of significant agreements and arrangementsensure
financial reporting systems and processes are reporting
effectively. Pending the Company’s ability to secure timely
financial resources to implement such improvements in its
processes.
●
Review
and update, as necessary, documentation of relevant processes,
policies and procedures, and design of relevant controls, with
respect to certain
operations in Nicaragua. This material weakness did not
result in any adjustments in the current year ended December 31,
2018 or restatements of our audited and unaudited consolidated
financial statements or disclosures for any prior period previously
reported by us. However, until the material weakness is remediated,
and our associated disclosure controls and procedures improve,
there is a risk that an error could occurthe Company’s internal control over financial
reporting. The Company intends to implement any necessary changes
as a result of the deficiencies identified in its relevant
processes, policies and procedures as promptly as practical and notto
be
detectedsatisfy documentation requirements under Section 404 of the
Sarbanes-Oxley Act.
We plan to update our current policies and implement procedures and
controls over●
Seek
to ensure that the Company’s internal control over financial
reporting is properly designed, implemented, operating effectively,
and appropriately documented by (i) enhancing the documentationdesign of
significant agreementsexisting control activities and
arrangements with respect to certain operations in
Nicaragua. We will continue to assess the effectiveness of our
internal control over financial reporting and take steps to
remediate any potentially material weaknesses
expeditiously/or implementing additional control
activities, as needed, (ii) monitoring the operating effectiveness
of those controls, and (iii) ensuring that sufficient documentation
exists to evidence the design, implementation, and operation of
those controls.
●
Execute
and monitor the remediation plan, with appropriate executive
sponsorship and with the assistance of outside consultants, to
enhance the Company’s internal control over financial
reporting and accomplish the goals of the remediation as set forth
above.
●
Continue
to seek, train and retain individuals that have the appropriate
skills and experience related to designing, operating and
documenting internal controls.
We intend to adopt additional remediation measures related to the
identified control deficiencies as necessary as well as to continue
to evaluate our internal controls on an ongoing basis in order to
upgrade and enhance when appropriate. Our audit committee has taken
an active role in reviewing and discussing the internal control
deficiencies with our auditors and financial management. Our
management and the audit committee will actively monitor the
implementation and effectiveness of the remediation efforts
undertaken by our financial management. We believe that
these actions will remediate material weaknesses. The material
weaknesses will not be considered remediated, however, until the
applicable controls operate for a sufficient period of time and
management has concluded, through testing, that these controls are
operating effectively.
This Annual Report on Form 10K does not include an attestation
report of our registered public accounting firm regarding internal
control over financial reporting. Management’s report was not
subject to attestation by our registered public accounting firm
pursuant to rules of the SEC that permit us to provide only
management’s report in this Annual Report on Form
10K.
Item 9B. OtItem 9B.
Other Information
None.
ItemItem 10. Directors, Executive Officers and Corporate
Governance
Pursuant
to our bylaws, the number of directors is fixed and may be
increased or decreased from time to time by resolution of our Board
of Directors, or the Board. The Board has fixed the number of
directors at seven members.
Information Regarding the Board of Directors
Information Regarding the Board of Directors and Executive
Officers
Information with respect to our current directors and executive
officers as of May 28, 2021 is shown below.
|
Name
|
|
Age
|
|
Position held Since
|
|
Position
|
|
Stephan Wallach
|
|
54
|
|
2011*
|
|
Chairman and Chief Executive Officer
|
|
William Thompson
|
|
60
|
|
2020
|
|
Chief Financial Officer
|
|
David Briskie
|
|
60
|
|
2011
|
|
President, Chief Investment Officer and Director
|
|
Michelle Wallach
|
|
50
|
|
2011
|
|
Chief Operating Officer
|
|
|
|
|
|
|
|
|
|
Paul Sallwasser
|
|
66
|
|
2017
|
|
Director
|
|
Kevin Allodi
|
|
64
|
|
2017
|
|
Director
|
|
Daniel Dorsey
|
|
44
|
|
2020
|
|
Director
|
* Since 1996, Stephan Wallach
and Michelle Wallach havehas been directorsa director of AL Global, Corporation the private company
that merged with and into Javalution Coffee Company, our
predecessors in 2011.
Stephan Wallach, Chief Executive Officer and
Chairman of the Board
Mr. Stephan Wallach was appointed to the position of Chief
Executive Officer on July 11, 2011 pursuant to the terms of the
merger agreement between Youngevity® and Javalution. He
previously served as President and Chief Executive Officer of AL
Global Corporation. He has served as a director of our Company
since inception and was appointed Chairman of the Board on January
9, 2012. In 1996, Mr. Wallach and the Wallach family together
launched our Youngevity® division and served as its co-founder
and Chief Executive Officer from inception until the merger with
Javalution. Mr. Wallach’s extensive knowledge about our
business operations and our products makes him an exceptional board
member.
David Briskie, President, Chief FinancialInvestment
Officer and Director
Mr. David Briskie was appointed to the position of President on
October 30, 2015 and Chief Investment Officer on October 25, 2020.
Mr. Briskie was appointed to the position of Chief Financial
Officer on May 15, 2012 and resigned his position on October 25,
2020. Prior to that, Mr. Briskie served as President of Commercial
Development, a position he was appointed to on July 11, 2011
pursuant to the terms of the merger agreement between
Youngevity® and Javalution. From February 2007 until the
merger he served as the Chief Executive Officer and director of
Javalution and since September 2007 has served as the Managing
Director of CLR Roasters. Prior to joining Javalution in 2007, Mr.
Briskie had an 18-year career with Drew Pearson Marketing
(“DPM”), a consumer product company marketing headwear
and fashion accessories. He began his career at DPM in 1989 as
Executive Vice President of Finance and held numerous positions in
the companyCompany, including vice president of marketing, chief financial
officer, chief operating officer and president. Mr. Briskie
graduated magna cum laude from Fordham University with a major in
marketing and finance. Mr. Briskie’s experience in financial
matters, his overall business understanding, as well as his
familiarity and knowledge regarding public companies make him an
exceptional board member.
Michelle G. Wallach,
Chief Operating
Officer and Director
Ms. Michelle Wallach was appointed to the position of Chief
Operating Officer on July 11, 2011 pursuant to the terms of the
merger agreement between Youngevity® and Javalution. She
previously served as Corporate Secretary and Manager of AL Global
Corporation and served as a director on the Board of Directors from
2011 until February 11, 2020. She has a background in network
marketing, including more than 10 years in distributor management.
Her career in network marketing began in 1991 in Portland, Oregon,
where she developed a nutritional health product distributorship.
In 1996, Ms. Wallach and the Wallach family together launched our
Youngevity® division and served as its co-founder and Chief
Operations Officer from inception until the merger with Javalution.
Ms. Wallach has an active role in promotion, convention and event
planning, domestic and international training, and product
development. Ms.
Wallach’s prior experience with network marketing and her
extensive knowledge about our business operations and our products
make her an exceptional board member.
Richard Renton, Director
Mr. Richard Renton was appointed to our Board of Directors on
January 9, 2012, and currently serves on the Youngevity Science and
Athletic Advisory Boards. For the past 22 years, Mr. Renton owned
his own business providing nutritional products to companies like
ours. We purchase certain products from Mr. Renton’s company
WVNP, Inc. Mr. Renton attended University of Oregon and Portland
State University, earning degrees in Sports Medicine, Health,
Physical Education, and Chemistry. He has served as an Associate
Professor at PSU in Health and First Aid, and was the Assistant
Athletic Trainer for PSU, the Portland Timbers Soccer Team, and the
Portland Storm Football team. Mr. Renton is a board-certified
Athletic Trainer with the National Athletic Trainers Association.
Mr. Renton’s understanding of nutritional products makes him
an exceptional board member
William Thompson, Director
Mr. William Thompson was appointed to the position of Chief
Financial Officer on October 25, 2020. Mr. William Thompson was
appointed to our Boardboard of Directorsdirectors on June 10, 2013 and currently servesuntil his
resignation from our board of directors on October 25, 2020. He
served as the Chief Financial Officer of Broadcast Company of the
Americas, a radio station operator in San Diego, California from
2013 to 2019. He served as Corporate Controller for the Company
from 2011 to March 2013 and for Breach Security, a developer of web
application firewalls, from 2007 to 2010. Prior to 2007, Mr.
Thompson was Divisional Controller for Mediaspan Group and Chief
Financial Officer of Triathlon Broadcasting Company.
Mr. Thompson’s achievements in
financial matters and his overall business understanding make him
an exceptional board member.
Paul Sallwasser, Director
Mr. Paul Sallwasser was appointed to our Boardboard of Directorsdirectors on June
5, 2017. Mr. Sallwasser is a certified public accountant, joined
the audit staff of Ernst & Young LLP in 1976 and remained with
Ernst & Young LLP for 38 years. Mr. Sallwasser served a broad
range of clients primarily in the healthcare and biotechnology
industries of which a significant number were SEC registrants. He
became a partner of Ernst & Young in 1988 and from 2011 until
he retired from Ernst & Young LLP Mr. Sallwasser served in the
national office as a member of the Quality and Regulatory Matters
Group working with regulators and the Public Company Accounting
Oversight Board (PCAOB)PCAOB. Mr. Sallwasser currentlyhas
servesserved as the chief executive officer of Florida Community Health
Network, a private equity fund that is focused on investing in
healthcare companies in the South Florida area since 2015. Mr.
Sallwasser’s qualification as an “audit committee
financial expert,” as defined by the rules of the SEC, and
his vast audit experience serves as the basis for his position on
the Board and its Audit Committeeaudit committee. Mr. Sallwasser serves as a
director on the Board of Directors of Elys Game Technology, Corp.
(Nasdaq:ELYS).
Kevin Allodi, Director
Mr. Kevin Allodi was appointed to our Boardboard of Directorsdirectors on June 5,
2017. Mr. Allodi is currentlyhas served as the CEO and Co-Founder of Philo
Broadcasting, a media holding company that includes award-winning
digital content studio Philo Media and a commercial television
production company, Backyard Productions since 2012. Philo is
headquartered in Chicago with production offices in Los Angeles.
Prior to joining Portal (described above)Philo, Mr. Allodi spent six years with
infrastructure software startup Portal Software (NASDAQ:PRSF) where
he was President/Corporate VP and ten years with the Communications
Industry Division of Computer Sciences Corporation (NYSE:CSC) where
he was VP Global Billing & Customer Care practice. Currently,
Mr. Allodi also serves as a Managing Partner of KBA Holdings, LLC,
a private equity investment firm active in the digital media,
hi-tech, alternative energy and bio-tech industries. Mr. Allodi
serves as a partner, limited partner, director and/or advisory
board member to several portfolio companies including G2T3V LLC,
uBid, Ridge Partners LLC, IMI Innovations and is on the Boardboard of
Directorsdirectors of FNBC Bank & Trust. Mr. Allodi’s business experience and
investment experience serves as the basis for his position on the
Board and its Audit Committeeaudit committee.
Daniel Dorsey, Director
Mr. Daniel Dorsey was appointed to our board of directors on
October 27, 2020. Mr. Dorsey’s past corporate experience
includes serving roles in financial and/or accounting management
and/or as a financial officer for private companies. Since July
2019, Mr. Dorsey has been the Senior Vice President of Finance for
MacuLogix, Inc., a medical device equipment manufacturer providing
eye care professionals with the instrument, tools and education
needed to effectively diagnose, manage, and treat patients with
age-related macular degeneration (AMD). Mr. Dorsey was a
partner of Capital Market Solutions, LLC, from September 2018 to
June 2019 where he was involved with creating strategic initiatives
with companies ranging from legacy media enterprises to digital
start-ups. From October 2016 to August 2018, he was Vice President
and Corporate Controller of Rodale, Inc., an American publisher of
health and wellness magazines, books, and digital properties. From
August 2015-September 2016, Mr. Dorsey also served as the Chief
Financial Officer of Hudson News Distributors, LLC, the second
largest distributor of magazines and books in the USA. From March
2014-March 2015, he served as the Senior Vice President and
Corporate Controller of the Tribune Publishing Company, (NASDAQ:
TPCO).
Family Relationships
Other than Stephan Wallach and Michelle Wallach, who are husband
and wife, none of our officers or directors has a family
relationship with any other officer or director.
INFORMATION REGARDING THE COMMITTEES OF THE BOARD OF
DIRECTORS
Committees of the Board of Directors
The Boardboard of Directorsdirectors has a standing Audit Committee, Compensation
Committee,audit committee, compensation
committee and Investment Committeenominating and corporate governance committee. The
following table shows the directors who are currently members or
Chairman of each of these committees.
|
Board Members
|
|
|
Nominating and Corporate Governance
Committee
|
|
Stephan
Wallach
|
-
|
-
|
-
|
|
David
Briskie
|
-
|
-
|
-
|
|
Paul
Sallwasser
|
|
|
|
|
Kevin
Allodi
|
|
|
|
|
Daniel
Dorsey
|
|
-
|
-
|
|
William Thompson (1)
|
-
|
-
|
-
|
|
(1)
|
Mr. William Thompson was a member of the board of directors until
October 25, 2020. On
October 25, 2020, Mr. Thompson resigned from the Board of Directors
of the Company and as a member and chairman of the Audit Committee
to accept the position of Chief Financial Officer of the
Company.
|
Director Independence
Our BoardOur
board of Directorsdirectors has determined that William ThompsonDaniel Dorsey, Paul
Sallwasser and Kevin Allodi are each an independent director in
accordance with the definition of independence applied by the
NASDAQNasdaq Stock Market. Until February 2019, we qualified as a
“controlled company” and were eligible for certain
exemptions to the NASDAQ Capital Market listing
requirements. Since ceasing to be a controlled company we
have one year in which to comply with the requirement that a
majority of our directors be "independent" under the NASDAQAlthough our securities are not listed on the
Nasdaq Capital Market, we apply the Nasdaq Capital Market
independence standards. A majoritywhen evaluating the independence of our
directors. Stephan Wallach and David Briskie are not currently "independent" underindependent
due to the NASDAQ Capital Market
independence standards.their management roles.
Board Committees
Audit Committee. The
Audit
Committeeaudit committee of the Boardboard of Directorsdirectors currently consists of
William
ThompsonPaul Sallwasser (Chair), Paul SallwasserDaniel Dorsey and Kevin Allodi. The
functions of the Audit Committeeaudit committee include the retention of our
independent registered public accounting firm, reviewing and
approving the planned scope, proposed fee arrangements and results
of the Company’s annual audit, reviewing the adequacy of the
Company’s accounting and financial controls and reviewing the
independence of the Company’s independent registered public
accounting firm. The Board has determined that William Thompson,
Paul Sallwasser,
Daniel Dorsey and Kevin Allodi are each an “independent
director” under the listing standards of The NASDAQNasdaq Stock
Market. The Boardboard of Directorsdirectors has also determined that each of Mr.
Thompson and Mr.
Sallwasser is an “audit committee financial expert”
within the applicable definition of the SEC. The Audit Committeeaudit committee is
governed by a written charter approved by the Boardboard of Directorsdirectors, a
copy of which is available on our website at www.ygyi.com.
Information contained on our website are not incorporated by
reference into and do not form any part of this registration
statement. We have included the website address as a factual
reference and do not intend it to be an active link to the
website.
Compensation Committee. The
Compensation Committee The compensation committee of the Boardboard of
Directorsdirectors currently consists of Paul Sallwasser (Chair) and Kevin
Allodi. As a controlled
company we were exempt from the NASDAQ independence requirements
for the Compensation Committee. The functions of the Compensation
Committeecompensation committee include the
approval of the compensation offered to our executive officers and
recommending to the full Boardboard of Directorsdirectors the compensation to be
offered to our directors, including our Chairman. Both of the
members of the Compensation Committeecompensation committee are independent under the
listing standards of The NASDAQNasdaq Stock Market. In addition, the
members of the Compensation Committeecompensation committee qualify as
“non-employee directors” for purposes of Rule 16b-3
under the Exchange Act and as “outside directors” for
purposes of Section 162(m) of the Internal Revenue Code of 1986, as
amended. The Compensation Committeecompensation committee is governed by a written
charter approved by the Boardboard of Directorsdirectors, a copy of which is
available on our website at www.ygyi.com.
Information contained on our website
are not incorporated by reference into and do not form any part of
this registration statement. We have included the website
address as a factual reference and do not intend it to be an active
link to the website.
InvestmentNominating and Corporate Governance Committee. . The
Investment CommitteeThe nominating
and corporate governance committee of the Boardboard of Directorsdirectors
currently consists of David BriskieKevin Allodi (Chair) and Stephan Wallach as a member. This
Committee determines, approves, and reports to the Board of
Directors on all elements of acquisitions and investments for the
CompanyPaul Sallwasser. All
of the members of the nominating and corporate governance committee
are independent under the listing standards of The Nasdaq Stock
Market. Our nominating and corporate governance committee performs
several functions including identifying individuals to become
members of the board of directors, recommending appointments to the
board of directors and committees as well as assessing the
appropriate size of the board of directors. In the event that
vacancies are anticipated, or otherwise arise, the nominating and
corporate governance committee will consider various potential
candidates who may come to their attention through current board
members, professional search firms, stockholders or other persons.
The committee seeks individuals who have an inquisitive and
objective perspective, practical wisdom and mature judgment, and
the talent and expertise to understand, and provide sound and
prudent guidance with respect to, our activities, operations and
interests. Candidates must also be individuals who have the highest
personal and professional integrity, who have demonstrated
exceptional ability and judgment, and who are likely to be the most
effective, in conjunction with the other members of the board of
directors, in collectively serving the long-term interests of
stockholders. The nominating and corporate governance committee
will consider candidates proposed for nomination by our significant
stockholders. Stockholders may propose candidates by submitting the
names and supporting information to: board of directors in care of
the Corporate Secretary, Youngevity International, Inc., 2400
Boswell, Chula Vista, California 91914. Supporting information
should include (a) the name and address of the candidate and the
proposing stockholder, (b) a comprehensive biography of the
candidate and an explanation of why the candidate is qualified to
serve as a director taking into account the criteria identified in
our corporate governance guidelines, (c) proof of ownership, the
class and number of shares, and the length of time that the shares
of our voting securities have been beneficially owned by each of
the candidate and the proposing stockholder, and (d) a letter
signed by the candidate stating his or her willingness to serve, if
elected. The nominating
and corporate governance committee is governed by a written charter
approved by the board of directors, a copy of which is available on
our website at www.ygyi.com.
Information contained on our website
are not incorporated by reference into and do not form any part of
this registration statement. We have included the website
address as a factual reference and do not intend it to be an active
link to the website.
We do not currently have a separate nominating
Other Committees. From time to
time the board of directors may establish ad hoc committees to
address matters. During 2020, the board of directors established a
special transaction committee and
instead our full Board of Directors performs the functionscomprised of Kevin Allodi (Chair) and
of a
nominating committee. Due to our size we believe that this is an
appropriate structure; however, director nominees are recommended
for selection by the Board of Directors by a majority of the
independent directors in a vote in which only independent directors
participate.
Paul Sallwasser.
Board Leadership Structure
We currently have the same person serving as our Chairman of the
Board and Chief Executive Officer and we do not have a formal
policy on whether the same person should (or should not) serve as
both the Chief Executive Officer and Chairman of the Board. Mr.
Briskie currently serves as our President and Chief FinancialInvestment
Officer. Due to the size of our companyCompany, we believe that this
structure is appropriate. Mr. Wallach has served as the Chairman of
the Board and Chief Executive Officer since AL Global Corporation,
the private company that he owned, merged into our predecessor in
2011 and he served as the Chairman of the Board and Chief Executive
Officer of AL Global Corporation, since inception. In serving as
Chairman of the Board, Mr. Wallach serves as a significant resource
for other members of management and the Boardboard of
Directorsdirectors.
We
believe that our Company and its stockholders are best served by
having Mr. Wallach, our Chief Executive Officer, serve as
Chairman of the board of directors. Mr. Wallach’s
combined role as Chairman and Chief Executive Officer promotes
unified leadership and direction for the board of directors and
executive management, and it allows for a single, clear focus for
the chain of command to execute our strategic initiatives and
business plans.
We do not have a separate lead director. We believe the combination
of Mr. Wallach as our Chairman of the Board and Chief Executive
Officer and Mr. Briskie as our President and Chief FinancialInvestment
Officer has been an effective structure for our companyCompany. Our
current structure is operating effectively to foster productive,
timely and efficient communication among the independent directors
and management. We do have active participation in our committees
by our independent directors. Each committee performs an active
role in overseeing our management and there are complete and open
lines of communication with the management and independent
directors.
Oversight of Risk Management
The Boardboard of Directorsdirectors has an active role, as a whole and also at
the committee level, in overseeing management of our risks. The
Boardboard of Directors regularly reviews information regarding our
strategy, finances and operations, as well as the risks associated
with each.directors regularly reviews information regarding our
strategy, finances and operations, as well as the risks associated
with each.
Overview
Corporate Governance Guidelines
We are committed to maintaining the highest standards of business
conduct and corporate governance, which we believe are fundamental
to the overall success of our business, serving our stockholders
well and maintaining our integrity in the marketplace. Our
Corporate Governance Guidelines and Code of Business Conduct and
Ethics, together with our Certificate of Incorporation, Bylaws and
the charters of our Board Committees, form the basis for our
corporate governance framework. As discussed above, our Boardboard of
Directorsdirectors has established three standing committees to assist it in
fulfilling its responsibilities to us and our stockholders: the
Audit Committeeaudit committee, the Compensation Committee and the Investment
Committee. The Board of Directors performs the functions typically
assigned to a Nominating and Corporate Governance
Committeecompensation committee and the nominating and
corporate governance committee.
Our Corporate Governance Guidelines are designed to ensure
effective corporate governance of our companyCompany. Our Corporate
Governance Guidelines cover topics including, but not limited to,
director qualification criteria, director responsibilities,
director compensation, director orientation and continuing
education, communications from stockholders to the Board,
succession planning and the annual evaluations of the Board and its
Committees. Our Corporate Governance Guidelines are reviewed
regularly by the Board and revised when appropriate.
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics that applies
to all of our employees, officers and directors. This Code
constitutes a “code of ethics” as defined by the rules
of the SEC. Copies of the code may be obtained free of charge from
our website, www.ygyi.com.
Any amendments to, or waivers from, a provision of our code of
ethics that applies to any of our executive officers will be posted
on our website in accordance with the rules of the
SEC.
Section 16(a) Beneficial Ownership Reporting
Compliance
Delinquent Section 16(a) Reports
Section
16 of the Exchange Act and the related rules of the Securities and
Exchange Commission require our directors and executive officers
and beneficial owners of more than 10% of our common stock to file
reports, within specified time periods, indicating their holdings
of and transactions in our common stock and derivative securities.
Based solely on a review of such reports provided to us and written
representations from such persons regarding the necessity to file
such reports, we are not aware of any failures to file reports or
report transactions in a timely manner during our fiscal year ended
December 31, 2018.2019.
Our Board regularly assesses the appropriate size of our Board, and
whether any vacancies on our Board are expected due to retirement
or otherwise. In the event that vacancies are anticipated, or
otherwise arise, the Board will consider various potential
candidates who may come to the attention of the Board through
current Board members, professional search firms, stockholders or
other persons. Each candidate brought to the attention of the
Board, regardless of who recommended such candidate, is considered
on the basis of the criteria set forth in our corporate governance
guidelines. As stated above, our Board will consider candidates
proposed for nomination by our significant stockholders.
Stockholders may propose candidates by submitting the names and
supporting information to: Board of Directors in care of the
Corporate Secretary, Youngevity International, Inc. 2400 Boswell,
Chula Vista, California 91914. Supporting information should
include (a) the name and address of the candidate and the proposing
stockholder, (b) a comprehensive biography of the candidate and an
explanation of why the candidate is qualified to serve as a
director taking into account the criteria identified in our
corporate governance guidelines, (c) proof of ownership, the class
and number of shares, and the length of time that the shares of our
voting securities have been beneficially owned by each of the
candidate and the proposing stockholder, and (d) a letter signed by
the candidate stating his or her willingness to serve, if
elected.
Item 11. ExecutiveItem 11. Executive
Compensation.
Summary Compensation Table
The following table sets forth a summary of cash and non-cash
compensation awarded, earned or paid for services rendered to us
during the years ended December 31, 20182019 and 20172018 by our
“named executive officers,” consisting of each
individual serving as (i) principal Chief Executive Officer, (ii)
our principal Chief Financial Officer, and (iii) Chief Operating
Officer.
|
Named
Executive Officer
|
|
|
|
|
|
|
Stephan Wallach (1)
|
2019
|
375,000
|
-
|
2,390,900
|
2,765,900
|
|
Chief Executive Officer
|
2018
|
375,000
|
59,439
|
-
|
434,439
|
|
|
|
|
|
|
|
David Briskie (1)(2)(3)
|
2019
|
375,000
|
-
|
4,119,797
|
4,494,797
|
|
President and Former Chief Financial Officer
|
2018
|
375,000
|
59,439
|
566,500
|
1,000,939
|
|
|
|
|
|
|
|
Michelle Wallach (1)
|
2019
|
222,660
|
-
|
2,390,900
|
2,613,560
|
|
Chief Operating Officer
|
2018
|
214,583
|
-
|
-
|
214,583
|
|
(1)
|
Mr.
Stephan Wallach, Mr. David Briskie, and Ms. Michelle Wallach have
direct and or indirect (beneficially) distributor positions in our
CorporationCompany that pay income based on the performance of those
distributor positions in addition to their base salaries, and the
people and or companies supporting those positions based upon the
contractual agreements that each and every distributor enter into
upon engaging in the network marketing business. The contractual
terms of these positions are the same as those of all the other
individuals that become distributors in our Company. There are no
special circumstances for these officers/directors. Mr. Stephan
Wallach and Ms. Michelle Wallach received or beneficially received
an aggregate of $289,096 and $330,429 and $362,292 in 20182019 and 20172018,
respectively related to their distributor positions, which are not
included above. Mr. Briskie beneficially received $16,299 and
$17,209 and
$19,196 in 20182019 and 20172018, respectively, related to his
spouse’s distributor position, which is not included
above.
|
|
(2)
|
Represents value of
restricted stock unit (“RSU”) awards determined in
accordance with FASB ASC Topic 718.
|
|
(32)
|
We
use a Black-Scholes option-pricing model (Black-Scholes model) to estimate the fair value
of the stock option grant in accordance with FASB ASC Topic 718.
Expected volatility is calculated based on the historical
volatility of the Company’s stock. The risk-free interest
rate is based on the U.S. Treasury yield for a term equal to the
expected life of the options at the time of grant. The amounts do
not represent the actual amounts paid to or released by any of the
Named Executive Officers during the respective periods.
|
See the
table below Outstanding Equity Awards at Fiscal
Year-End.
|
|
|
|
(3)
|
Mr.
David Briskie was the Company’s Chief Financial Officer
through December 31, 2019. On October 25, 2020, Mr. Briskie was
appointed Chief Investment Officer of the Company and resigned as
the Company’s Chief Financial Officer.
|