Notes to Unaudited Condensed Consolidated Financial
Statements
Note 1. Basis of Presentation and Description of
Business
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission (the
“SEC”) for interim financial information. Accordingly,
certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted
accounting principles, have been condensed or omitted pursuant to
such rules and regulations.
Youngevity International, Inc. (the “Company”)
consolidates all wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
The statements presented as of June 30, 2019 and for
the three and six months ended June 30, 2019 and 2018 are
unaudited. In the opinion of management, these
financial statements reflect all normal recurring and other
adjustments necessary for a fair presentation, and to make the
financial statements not misleading. These condensed consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements included in the Company’s
Form 10-K for the year ended December 31, 2018, filed with the SEC
on April 15, 2019. The results for interim periods are not
necessarily indicative of the results for the entire
year.
Nature of Business
Youngevity International, Inc. (the “Company”), founded
in 1996, develops and distributes health and nutrition related
products through its global independent direct selling network,
also known as multi-level marketing, and sells coffee products to
commercial customers. During the year ended December 31, 2018
the Company operated in two business segments, its direct selling
segment where products are offered through a global distribution
network of preferred customers and distributors and its commercial
coffee segment where products are sold directly to businesses.
During the first quarter of 2019, the Company through the
acquisition of the assets of Khrysos Global, Inc. added a third
business segment to its operations, the commercial hemp
segment.
Information on the operation of the Company's three segments is as
follows:
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Direct selling segment is operated through four domestic
subsidiaries: AL Global Corporation, 2400 Boswell LLC, MK
Collaborative LLC, and Youngevity Global LLC and nine
foreign subsidiaries: Youngevity Australia Pty. Ltd., Youngevity
NZ, Ltd., Youngevity Mexico S.A. de CV, Youngevity Israel, Ltd.,
Youngevity Russia, LLC, Youngevity Colombia S.A.S, Youngevity
International Singapore Pte. Ltd., Mialisia Canada, Inc. and Legacy
for Life Limited (Hong Kong). The Company also operates through the
BellaVita Group LLC, with operations in Taiwan, Hong Kong,
Singapore, Indonesia, Malaysia and Japan. The Company
also operates subsidiary branches of
Youngevity Global LLC in the Philippines and
Taiwan.
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Commercial coffee segment is operated through the
Company’s subsidiaries CLR
Roasters LLC (“CLR”) and its wholly owned subsidiary,
Siles Plantation Family Group S.A.
(“Siles”).
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Commercial hemp segment is operated through the Company’s
subsidiaries, Khrysos Industries, Inc., a Delaware corporation
(“KII”), which acquired the assets of Khrysos Global
Inc. a Florida corporation (“Khrysos Global”), in
February 2019 and the wholly-owned subsidiaries of Khrysos Global,
INXL Laboratories, Inc., a Florida corporation (“INXL”)
and INX Holdings, Inc., a Florida corporation
(“INXH”).
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Segment Information
The Company has three reportable segments: direct selling,
commercial coffee, and commercial hemp. The direct selling segment
develops and distributes health and wellness products through its
global independent direct selling network also known as multi-level
marketing. The commercial coffee segment is engaged in coffee
roasting and distribution (specializing in gourmet coffee), mill
processing of green coffee, and sales of green coffee. The
commercial hemp segment manufactures proprietary systems to provide
end-to-end extraction and processing that allow for the conversion
of hemp feed stock into hemp oil and hemp extracts. The
determination that the Company has three reportable segments is
based upon the guidance set forth in Accounting Standards
Codification (“ASC”) Topic
280, “Segment
Reporting.”
During the three months ended June 30, 2019, the Company derived
approximately 84.1% of its revenue from its direct selling segment
and approximately 15.2% of its revenue from its commercial coffee
segment and 0.7% from the commercial hemp segment. During the three
months ended June 30, 2018, the Company had two reportable segments
and derived approximately 83% of its revenue from its direct
selling segment and approximately 17% of its revenue from its
commercial coffee segment.
During the six months ended June 30, 2019, the Company derived
approximately 82.5% of its revenue from its direct selling segment
and approximately 17% of its revenue from its commercial coffee
segment and 0.4% from the commercial hemp segment. During the six
months ended June 30, 2018, the Company had two reportable segments
and derived approximately 83% of its revenue from its direct
selling segment and approximately 17% of its revenue from its
commercial coffee segment.
Liquidity and Going Concern
The accompanying condensed consolidated financial statements have
been prepared and presented on a basis assuming the Company will
continue as a going concern. The Company has sustained significant
net losses during the six months ended June 30, 2019 and 2018 of
approximately $12,549,000 and $2,922,000, respectively. Net cash
used in operating activities was approximately $5,381,000 and
$1,676,000 for the six months ended June 30, 2019 and 2018,
respectively. The Company does not currently believe that its
existing cash resources are sufficient to meet the Company’s
anticipated needs over the next twelve months from the date hereof.
Based on its current cash levels and its current rate of cash
requirements, the Company will need to raise additional capital
and/or will need to further reduce its expenses from current
levels. These factors raise substantial doubt about the
Company’s ability to continue as a going
concern.
The
Company anticipates that revenues will grow, and it intends to make
necessary cost reductions related to international operations that
are not performing well and reduce non-essential
expenses.
The
Company is also considering multiple other fund-raising
alternatives.
On
March 18, 2019, the Company entered into a two-year Secured
Promissory Note (the “Note” or “Notes”) with
two (2) accredited investors that had a substantial pre-existing
relationship with the Company pursuant to which the Company raised
cash proceeds of $2,000,000. (See Note 7
below.)
Between
February 2019 and May 2019, the Company closed four tranches of its
January 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 received aggregate gross proceeds of $2,890,000 and
issued the 2019 PIPE Notes in the aggregate principal amount of
$2,890,000. (See Note 8)
On
February 6, 2019, the Company entered into a Securities Purchase
Agreement (the “Purchase Agreement”) with one
accredited investor that had a substantial pre-existing
relationship with the Company pursuant to which the Company sold
250,000 shares of the Company’s common stock, par value
$0.001 per share, at an offering price of $7.00 per share. Pursuant
to the Purchase Agreement, the Company also issued to the investor
a three-year warrant to purchase 250,000 shares of common stock at
an exercise price of $7.00. The proceeds to the Company were
$1,750,000. Consulting fees for arranging the Purchase Agreement
include the issuance of 5,000 shares of restricted shares of the
Company’s common stock, par value $0.001 per share, and a
3-year warrant priced at $10.00 per share convertible into 100,000
shares of the Company’s common stock upon exercise. No cash
commissions were paid.
On January 7, 2019, the Company entered into an
At-the-Market Offering Agreement (the “ATM Agreement”)
with The Benchmark Company, LLC (“Benchmark”), as sales
agent, pursuant to which the Company may sell from time to time, at
its option, shares of its common stock, par value $0.001 per share,
through Benchmark, as sales agent (the “Sales Agent”),
for the sale of up to $60,000,000 of shares of the Company’s
common stock. The Company is not obligated to make any sales of
common stock under the ATM Agreement and the Company cannot provide
any assurances that it will issue any shares pursuant to the ATM
Agreement. The Company will pay the Sales Agent 3.0% commission of
the gross sales proceeds. In February 2019, the Company sold a
total of 1,000 shares of common stock under the ATM Agreement
for an aggregate purchase price of $6.6118 pursuant to the
ATM Agreement. The Company did not use the ATM Agreement
during the three months ended June 30, 2019.
Depending
on market conditions, there can be no assurance that additional
capital will be available when needed or that, if available, it
will be obtained on terms favorable to the Company or to its
stockholders.
Failure
to raise additional funds from the issuance of equity securities
and failure to implement cost reductions could adversely affect the
Company’s ability to operate as a going concern. The
financial statements do not include any adjustments that
might be necessary from the outcome of this
uncertainty.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
(“GAAP”) requires the Company to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements
and the reported amounts of revenue and expense for each reporting
period. Estimates are used in accounting for, among other
things, allowances for doubtful accounts, deferred taxes and
related valuation allowances, fair value of derivative liabilities,
uncertain tax positions, loss contingencies, fair value of options
granted under the Company’s stock-based compensation plan,
fair value of assets and liabilities acquired in business
combinations, finance leases, asset impairments, estimates of
future cash flows used to evaluate impairments, useful lives of
property, equipment and intangible assets, value of contingent
acquisition debt, inventory obsolescence, and sales
returns.
Actual
results may differ from previously estimated amounts and such
differences may be material to the consolidated financial
statements. Estimates and assumptions are reviewed
periodically, and the effects of revisions are reflected
prospectively in the period they occur.
Cash and Cash Equivalents
The Company considers only its monetary liquid assets with original
maturities of three months or less as cash and cash
equivalents.
Related Party Transactions
Richard Renton
Richard
Renton is a member of the Board of Directors and owns and operates
WVNP, Inc., a supplier of certain inventory items sold by the
Company. The Company made
purchases of approximately $103,000 and $63,000 from WVNP Inc., for
the three months ended June 30, 2019 and 2018, respectively, and
$111,000 and $117,000 for the six months ended June 30, 2019 and
2018, respectively.
Carl Grover
Carl
Grover is the sole beneficial owner of in excess of five percent
(5%) of the Company’s outstanding common shares. On December
13, 2018, CLR, entered into a Credit Agreement with Mr. Grover (the
“Credit Agreement”) pursuant to which CLR borrowed
$5,000,000 from Mr. Grover and in exchange issued to him a
$5,000,000 credit note (“Credit Note”) secured by its
green coffee inventory under a Security Agreement, dated December
13, 2018 (the “Security Agreement”), with Mr. Grover
and CLR’s subsidiary, Siles Family Plantation Group S.A.
(“Siles”), as guarantor, and Siles executed a separate
Guaranty Agreement (“Guaranty”). The Company issued to
Mr. Grover a four-year warrant to purchase 250,000 shares of 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, dated December 13, 2018, with Mr. Grover. (See
Note 7 below.)
On July
31, 2019, Mr. Grover acquired 600,242 shares of the Company's
common stock, $0.001 par value, upon the partial exercise at $4.60
per share of a July 31, 2014 warrant to purchase 782,608 shares of
common stock held by him. In connection with such exercise, the
Company received $2,761,113 from Mr. Grover, issued to Mr. Grover
50,000 shares of restricted common stock as an inducement fee and
agreed to extend the expiration date of the July 31, 2014 warrant
held by him to December 15, 2020 with respect to 182,366 shares of
common stock remaining for exercise thereunder.
Paul Sallwasser
Mr. Paul Sallwasser is a member of the board directors
and prior to joining the Company’s Board of Directors he
acquired a note (the “2014 Note”) issued in the
Company’s private placement consummated in 2014 (the
“2014 Private Placement”) in the principal amount of
$75,000 convertible into 10,714 shares of common stock and a
warrant (the “2014 Warrant”) issued, in the 2014
Private Placement, exercisable for 14,673 shares of common stock.
Prior to joining the Company’s Board of Directors, Mr.
Sallwasser acquired in the 2017 Private Placement a 2017 Note in
the principal amount of approximately $38,000 convertible into
8,177 shares of common stock and a warrant (the “2017
Warrant”) issued, in the 2017 Private Placement, exercisable
for 5,719 shares of common stock. Mr. Sallwasser also acquired in
the 2017 Private Placement in exchange for the “2015
Note” that he acquired in the Company’s private
placement consummated in 2015 (the “2015 Private
Placement”), a 2017 Note in the principal amount of $5,000
convertible into 1,087 shares of common stock and a 2017 Warrant
exercisable for 543 shares of common stock. On March 30, 2018, the
Company completed its Series B Offering, and in accordance with the
terms of the 2017 Notes, Mr. Sallwasser’s 2017 Notes
converted to 9,264 shares of the Company’s common
stock.
2400 Boswell LLC
In March 2013, the Company acquired 2400 Boswell for approximately
$4,600,000. 2400 Boswell is the owner and lessor of the building
occupied by the Company for its corporate office and warehouse in
Chula Vista, California. The purchase was from an immediate family
member of the Company’s Chief Executive Officer and consisted
of approximately $248,000 in cash, approximately $334,000 of debt
forgiveness and accrued interest, and a promissory note of
approximately $393,000, payable in equal payments over 5 years and
bears interest at 5.0%. Additionally, the Company
assumed a long-term mortgage of $3,625,000, payable over 25 years
with an initial interest rate of 5.75%. The interest rate is the
prime rate plus 2.5%. The current interest rate as of June 30, 2019
was 8.0%. The lender will adjust the interest rate on the first
calendar day of each change period or calendar quarter. The Company
and its Chief Executive Officer are both co-guarantors of the
mortgage. As of June 30, 2019, the balance on the long-term
mortgage is approximately $3,180,000 and the balance on the promissory note is
zero.
Other Relationship Transactions
Hernandez, Hernandez, Export Y Company and H&H Coffee Group
Export Corp.
The Company’s 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
of unprocessed green coffee and provide the raw unprocessed green
coffee to CLR’s mill in a timely and efficient manner.
Substantially all the green coffee processed through the Siles mill
was coffee assigned to CLR for processing. In addition, CLR’s
largest customer for green coffee beans during the three and six
months ended June 30, 2019 is H&H Coffee Group Export Corp.,
(“H&H Export”), a Florida based company which is
affiliated with H&H. In consideration for H&H's sourcing of
green coffee for processing within CLR’s mill, CLR and
H&H share in the green coffee profit from milling
operations.
CLR made purchases from H&H of approximately $252,000 and
$2,828,000 of green coffee for the three and six months ended June
30, 2019, respectively, for use in the Company’s Miami
roasting facilities. There were no purchases of green coffee from
H&H to be sold to other third parties during the three and six
months ended June 30, 2019.
CLR made purchases from H&H of approximately $3,339,000 and
$7,073,000 of green coffee for the three and six months ended June
30, 2018, respectively, for use in selling processed green coffee
to other third parties and for use in the Company’s Miami
roasting facilities.
During the three and six months ended June 30, 2019, CLR recorded
net revenues from processing services of approximately $1,561,000
and $6,387,000, respectively. There was no processing service
revenue during the three and six months ended June 30,
2018.
During the three and six months ended June 30, 2018, CLR
recorded processed green coffee beans gross revenues of
$859,000 and $3,302,000, respectively, to H&H Export. There
were no processed green coffee bean sales during the three and six
months ended June 30, 2019 to H&H.
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 it relates to a
Sourcing and Supply Agreement with H&H. During the period ended
September 30, 2017 the Company replaced the non-qualified stock
option and issued a warrant agreement with the same terms. There
was no financial impact related to the cancellation of the option
and the issuance of the warrant. As of June 30, 2019, the warrant
remains outstanding.
In
December 2018, CLR advanced $5,000,000 to H&H Export to provide
services in support of a 5-year contract for the sale and
processing of 41 million pounds of green coffee beans on an annual
basis. The services include providing hedging and financing
opportunities to producers and delivering harvested coffee to the
Company’s mills. On March 31, 2019, this advance was
converted to a $5,000,000 loan agreement as a note receivable and
bears interest at 9% per annum and is due and payable by H&H
Export at the end of each year’s harvest season, but no later
than October 31 for any harvest year. The loan is secured by
H&H Export’s hedging account with INTL FC Stone, trade
receivables, green coffee inventory in the possession of H&H
Export and all green coffee contracts. As of June 30, 2019, the
$5,097,000 note receivable remains outstanding which includes
accrued interest.
Mill Construction Agreement
On January 15,
2019, CLR entered into the CLR Siles Mill Construction Agreement
(the “Mill Construction Agreement”) with H&H and
H&H Export, Alain Piedra Hernandez (“Hernandez”)
and Marisol Del Carmen Siles Orozco (“Orozco”),
together with H&H, H&H Export, Hernandez and Orozco,
collectively referred to as the Nicaraguan Partner, pursuant to
which the Nicaraguan Partner agreed to transfer a 45 acre tract of
land in Matagalpa, Nicaragua (the “Property”) to be
owned 50% by the Nicaraguan Partner and 50% by CLR. In
consideration for the land acquisition the Company issued to
H&H Export, 153,846 shares of common stock. In addition, the
Nicaraguan Partner and CLR agreed to contribute $4,700,000 each
toward the construction of a processing plant, office, and storage
facilities (“Mill”) on the property for processing
coffee in Nicaragua. As of June 30, 2019, the Company paid
$3,350,000 towards construction of a mill, which is included in
construction in process within property and equipment, net on the
Company's condensed consolidated balance sheet.
Amendment to Operating and Profit-Sharing Agreement
On
January 15, 2019, CLR entered into an amendment to the March 2014
operating and profit-sharing agreement with the owners of H&H. CLR previously engaged
Hernandez and Orozco, the owners of H&H as employees to manage
Siles. In addition, CLR and H&H, Hernandez and Orozco have
agreed to restructure their profit-sharing agreement in regard to
profits from green coffee sales and processing that increases
CLR’s profit participation by an additional 25%. Under the
new terms of the agreement with respect to profit generated from
green coffee sales and processing from La Pita, a leased mill, or
the new mill, now will provide for a split of profits of 75% to CLR
and 25% to the Nicaraguan Partner, after certain conditions are
met. The Company issued 295,910 shares of the Company’s
common stock to H&H Export to pay for certain working capital,
construction and other payables. In addition, H&H Export has
sold to CLR its espresso brand Café Cachita in consideration
of the issuance of 100,000 shares of the Company’s common
stock. Hernandez and Orozco are employees of CLR. The shares of
common stock issued were valued at $7.50 per
share.
Revenue Recognition
The Company recognizes revenue from product sales when the
following five steps are completed: i) Identify the contract with
the customer; ii) Identify the performance obligations in the
contract; iii) Determine the transaction price; iv) Allocate the
transaction price to the performance obligations in the contract;
and v) Recognize revenue when (or as) each performance obligation
is satisfied (see Note 4, below).
Revenue is recognized upon transfer of control of promised products
or services to customers in an amount that reflects the
consideration the Company expects to receive in exchange for those
products or services. The Company enters into contracts that can
include various combinations of products and services, which are
generally capable of being distinct and accounted for as separate
performance obligations. Revenue is recognized net of allowances
for returns and any taxes collected from customers, which are
subsequently remitted to governmental authorities.
The transaction price for all sales is based on the price reflected
in the individual customer's contract or purchase
order. Variable consideration has not been identified as a
significant component of the transaction price for any of our
transactions.
Independent distributors receive compensation which is recognized
as Distributor Compensation in the Company’s consolidated
statements of operations. Due to the short-term nature of the
contract with the customers, the Company accrues all
distributor compensation expense in the month earned and pays the
compensation the following month.
The Company also charges fees to become a distributor, and earn a
position in the network genealogy, which are recognized as revenue
in the period received. The Company’s distributors are
required to pay a one-time enrollment fee and receive a welcome kit
specific to that country or region that consists of forms, policy
and procedures, selling aids, access to the Company’s
distributor website and a genealogy position with no down line
distributors.
The
Company has determined that most contracts will be completed in
less than one year. For those transactions where all performance
obligations will be satisfied within one year or less, the Company
is applying the practical expedient outlined in ASC 606-10-32-18.
This practical expedient allows the Company not to adjust promised
consideration for the effects of a significant financing component
if the Company expects at contract inception the period between
when the Company transfers the promised good or service to a
customer and when the customer pays for that good or service will
be one year or less. For those transactions that are expected to be
completed after one year, the Company has assessed that there are
no significant financing components because any difference between
the promised consideration and the cash selling price of the good
or service is for reasons other than the provision of
financing.
Deferred Revenues and Costs
As of June 30, 2019 and December 31, 2018, the balance in deferred
revenues was approximately $2,260,000 and $2,312,000, respectively.
Deferred revenue related to the Company’s direct selling
segment is attributable to the Heritage Makers product line and
also for future Company convention and distributor
events.
Deferred revenues related to Heritage Makers were approximately
$2,065,000 and $2,153,000, as of June 30, 2019, and December 31,
2018, respectively. The deferred revenue represents Heritage
Maker’s obligation for points purchased by customers that
have not yet been redeemed for product. Cash received for points
sold is recorded as deferred revenue. Revenue is recognized when
customers redeem the points and the product is
shipped.
Deferred costs relate to Heritage Makers prepaid commissions that
are recognized in expense at the time the related revenue is
recognized. As of June 30, 2019 and 2018, the balance in deferred
costs was approximately $295,000 and $455,000, respectively, and is
included in prepaid expenses and current assets.
Deferred revenues related to pre-enrollment in upcoming conventions
and distributor events of approximately $173,000 and $159,000
as of June 30, 2019 and December 31, 2018, respectively, relate
primarily to the Company’s 2019 and 2018 events. The Company
does not recognize this revenue until the conventions or
distributor events occur.
Plantation Costs
The Company’s commercial coffee segment includes the results
of Siles, which is a 500-acre coffee plantation and
(ii) a dry-processing facility located on 26 acres
located in Matagalpa, Nicaragua. Siles is a wholly-owned
subsidiary of CLR, and the results of CLR include the
depreciation and amortization of capitalized costs, development and
maintenance and harvesting costs of Siles. In accordance with
GAAP, plantation maintenance and harvesting costs for commercially
producing coffee farms are charged against earnings when
sold. Deferred harvest costs accumulate and are capitalized
throughout the year and are expensed over the remainder of the year
as the coffee is sold. The difference between actual harvest costs
incurred and the amount of harvest costs recognized as expense is
recorded as either an increase or decrease in deferred harvest
costs, which is reported as an asset and included with prepaid
expenses and other current assets in the condensed consolidated
balance sheets. Once the harvest is complete, the harvest costs are
then recognized as the inventory value. Deferred costs associated
with the harvest as of June 30, 2019 and December 31, 2018 are
approximately $150,000 and $400,000, respectively, and are included
in prepaid expenses and other current assets on the Company’s
balance sheets.
Stock-based Compensation
The Company accounts for stock-based compensation in accordance
with ASC Topic 718, “Compensation – Stock
Compensation,” which
establishes accounting for equity instruments exchanged for
employee services. Under such provisions, stock-based compensation
cost is measured at the grant date, based on the calculated fair
value of the award, and is recognized as an expense, under the
straight-line method, over the vesting period of the equity
grant.
The Company accounts for equity instruments issued to non-employees
in accordance with authoritative guidance for equity-based payments
to non-employees. Stock options issued to non-employees are
accounted for at their estimated fair value, determined using the
Black-Scholes option-pricing model. The fair value of options
granted to non-employees is re-measured as they vest, and the
resulting increase in value, if any, is recognized as expense
during the period the related services are rendered.
Income Taxes
The Company accounts for income taxes in accordance with ASC
Topic 740, "Income
Taxes," under the asset
and liability method which includes the recognition of deferred tax
assets and liabilities for the expected future tax consequences of
events that have been included in the consolidated
financial statements. Under this approach, deferred taxes are
recorded for the future tax consequences expected to occur when the
reported amounts of assets and liabilities are recovered or paid.
The provision for income taxes represents income taxes paid or
payable for the current year plus the change in deferred taxes
during the year. Deferred taxes result from differences between
the financial statement and tax basis of assets and
liabilities and are adjusted for changes in tax rates and tax laws
when changes are enacted. The effects of future changes in income
tax laws or rates are not anticipated.
Income taxes for the interim periods are computed using the
effective tax rates estimated to be applicable for the full fiscal
year, as adjusted for any discrete taxable events that occur during
the period.
The Company files income tax returns in the United States
(“U.S.”) on a federal basis and in many U.S. state and
foreign jurisdictions. Certain tax years remain open to examination
by the major taxing jurisdictions to which the Company is
subject.
Commitments and Contingencies
Litigation
The Company is from time to time, the subject of claims and suits
arising out of matters related to the Company’s business. The
Company is party to litigation at the present time and may become
party to litigation in the future. In general, litigation claims
can be expensive, and time consuming to bring or defend against and
could result in settlements or damages that could significantly
affect financial results. It is not possible to predict the final
resolution of the current litigation to which the Company is party
to, and the impact of certain of these matters on the
Company’s business, results of operations, and financial
condition could be material. Regardless of the outcome, litigation
has adversely impacted the Company’s business because of
defense costs, diversion of management resources and other
factors.
Other
Vendor Concentration
The Company purchases its inventory from multiple third-party
suppliers at competitive prices. For the three months ended June
30, 2019, the Company’s commercial coffee segment made
purchases from four vendors, H&H Export, Intl FC Stone Merchant
Services, Sixto Packaging, and The Serengeti Trading Co., that
individually comprised more than 10% of total purchases and in
aggregate approximated 74% of total segment purchases.
For the six months ended June 30, 2019, the Company’s
commercial coffee segment made purchases from two vendors, H&H
Export and Intl FC Stone Merchant Services, that individually
comprised more than 10% of total purchases and in aggregate
approximated 66% of total purchases.
For the three months ended June 30, 2018, the Company’s
commercial coffee segment made purchases from three vendors,
H&H Export, Rothfos Corporation and Sixto Packaging that
individually comprised more than 10% of total purchases and in
aggregate approximated 64% of total purchases. For the six months
ended June 30, 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 86% of total
purchases.
For the three months ended June 30, 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 purchases and in aggregate
approximated 46% of total purchases. For the six months ended June
30, 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 purchases
and in aggregate approximated 41% of total purchases.
For the three months ended June 30, 2018, the Company’s
direct selling segment made purchases from three vendors, Global
Health Labs, Inc., Purity Supplements and Nutritional Engineering,
that individually comprised more than 10% of total purchases and in
aggregate approximated 58% of total purchases. For the six months
ended June 30, 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 45% of total
purchases.
For the three months ended June 30, 2019, the
Company’s hemp segment made purchases from three vendors,
Lab1st, Bio Processing Corp., and ADM Labs, that individually comprised more than 10% of total
purchases and in aggregate approximated 63% of total purchases. For
the six months ended June 30, 2019, the Company’s hemp
segment made purchases from two vendors, Lab1st and Bio Processing Corp., that individually
comprised more than 10% of total purchases and in aggregate
approximated 41% of total
purchases.
Customer Concentration
For the
three months ended June 30, 2019, 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 43% of total revenue. For the six
months ended June 30, 2019, the Company’s commercial coffee
segment had one customer, H&H Export that individually
comprised more than 10% of revenue and in aggregate approximated
47.2% of total revenue.
For the
three months ended June 30, 2018, 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 62% of total revenue. For the six
months ended June 30, 2018, 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 62% of total revenue.
For the
three months ended June 30, 2019, the Company’s hemp segment
had three customers, Xtraction Services, Air Spec and David
Shin that individually comprised more than 10% of
revenue and in aggregate approximated 50% of total revenue. For the
six months ended June 30, 2019, the Company’s hemp segment
had three customers, Xtraction Services, Air Spec and David
Shin that individually comprised more than 10% of
revenue and in aggregate approximated 54% of total
revenue.
The
direct selling segment did not have any customers during the three
and six months ended June 30, 2019 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 June 30, 2019, have minimum future purchase
commitments of approximately $5,680,000, 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.
Recently Issued Accounting Pronouncements
In August 2018, the
Financial Accounting Standards Board
(FASB) issued Accounting
Standards Update (ASU) No. 2018-15, Intangibles
— Goodwill and Other — Internal-Use Software
(Subtopic 350-40): Customer’s Accounting for
Implementation Costs Incurred in a Cloud Computing Arrangement That
Is a Service Contract. Subtopic 350-40
clarifies the accounting for implementation costs of a hosting
arrangement that is a service contract and aligns that accounting,
regardless of whether the arrangement conveys a license to the
hosted software. The amendments in this update are effective for
reporting periods beginning after December 15, 2019, with
early adoption permitted. The Company does not expect
this new guidance to have a material impact on its condensed
consolidated financial statements.
In August 2018, the FASB issued ASU No.
2018-13, Fair Value Measurement (Topic
820): Disclosure Framework-Changes to the Disclosure Requirements
for Fair Value Measurement.
Topic 820 removes or modifies certain current disclosures and
adds additional disclosures. The changes are meant to provide more
relevant information regarding valuation techniques and inputs used
to arrive at measures of fair value, uncertainty in the fair value
measurements, and how changes in fair value measurements impact an
entity's performance and cash flows. Certain disclosures
in Topic 820 will need to be applied on a retrospective
basis and others on a prospective basis. Topic 820 is
effective for fiscal years, and interim periods within those years,
beginning after December 15, 2019. Early adoption is permitted. The Company expects
to adopt the provisions of this guidance on January 1, 2020 and is
currently evaluating the impact that Topic 820 will have on its
related disclosures.
In
January 2017, the FASB issued ASU No.
2017-04, Intangibles —
Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment. This ASU simplifies the test for goodwill
impairment by removing Step 2 from the goodwill impairment test.
Companies will now perform the goodwill impairment test by
comparing the fair value of a reporting unit with its carrying
amount, recognizing an impairment charge for the amount by which
the carrying amount exceeds the reporting unit’s fair value
not to exceed the total amount of goodwill allocated to that
reporting unit. An entity still has the option to perform the
qualitative assessment for a reporting unit to determine if the
quantitative impairment test is necessary. The amendments in this
update are effective for goodwill impairment tests in fiscal years
beginning after December 15, 2019
for public companies, with early adoption permitted for
goodwill impairment tests performed after January 1,
2017. The Company does not expect
this new guidance to have a material impact on its condensed
consolidated financial statements.
Recently Adopted Accounting Pronouncements
In 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 as of the
beginning of the fiscal year of adoption. Topic 718 is effective
for fiscal years beginning after December 15, 2018 and is applied
retrospectively. The Company adopted
the provisions of this guidance on January 1, 2019 and the adoption
of this standard did not have a material impact on the
Company’s condensed consolidated financial
statements.
In
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 Tax Cuts and Jobs Act (H.R.1) (the Act).
Consequently, the amendments eliminate the stranded tax effects
resulting from the Act and will improve the usefulness of
information reported to financial statement users. However, because
the amendments only relate to the reclassification of the income
tax effects of the Act, the underlying guidance that requires that
the effect of a change in tax laws or rates be included in income
from continuing operations is not affected. The amendments in this
Update also require certain disclosures about stranded tax effects.
Topic 220 is effective for fiscal years, and interim periods within
those years, beginning after December 15, 2018. The Company adopted the provisions of this
guidance on January 1, 2019 and the adoption of this standard did
not have a material impact on the Company’s condensed
consolidated financial statements.
In July
2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing
Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic
815): (Part I) Accounting for Certain Financial Instruments with
Down Round Features, (Part II) Replacement of the Indefinite
Deferral for Mandatorily Redeemable Financial Instruments of
Certain Nonpublic Entities and Certain Mandatorily Redeemable
Noncontrolling Interests with a Scope Exception. Topic 260
allows companies to exclude a down round feature when determining
whether a financial instrument (or embedded conversion feature) is
considered indexed to the entity’s own stock. As a result,
financial instruments (or embedded conversion features) with down
round features may no longer be required to be accounted classified
as liabilities. A company will recognize the value of a down round
feature only when it is triggered, and the strike price has been
adjusted downward. For equity-classified freestanding financial
instruments, such as warrants, an entity will treat the value of
the effect of the down round, when triggered, as a dividend and a
reduction of income available to common shareholders in computing
basic earnings per share. For convertible instruments with embedded
conversion features containing down round provisions, entities will
recognize the value of the down round as a beneficial conversion
discount to be amortized to earnings. The guidance in Topic 260 is
effective for fiscal years beginning after December 15, 2018, and
interim periods within those fiscal years. Early adoption is
permitted, and the guidance is to be applied using a full or
modified retrospective approach. The Company adopted Topic 260, Topic 480 and Topic
815 effective January 1, 2019 and determined that it’s 2018
warrants were to no longer be classified as a derivative, as a
result of the adoption and subsequent change in classification of
the 2018 warrants, the company reclassed approximately
$1,494,000 of warrant derivative liability to
equity.
In February
2016, FASB established
Topic 842, Leases, by issuing ASU No. 2016-02, Leases (Topic
842) which required
lessees to recognize leases on-balance sheet and disclose key
information about leasing arrangements.
Topic 842 was
subsequently amended by ASU No. 2018-01, Land Easement Practical
Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to
Topic 842, Leases; ASU No. 2018-11, Targeted
Improvements; ASU No.
2018-20, Narrow-Scope Improvements for
Lessors; and ASU
2019-01, Codification
Improvements. The new standard
establishes a right-of-use model (ROU) that requires a lessee to
recognize a ROU asset and lease liability on the balance sheet for
all leases with a term longer than 12 months. Leases are classified as finance or
operating, with classification affecting the pattern and
classification of expense recognition in the income statement. The
amendments were adopted by the
Company on January 1,
2019. A modified
retrospective transition approach is required, applying the
standard to all leases existing at the date of initial application.
The Company elects to use its effective date as its date of initial
application. Consequently, financial information
will not be
updated, and the disclosures required under the new standard
will not be
provided for dates and periods before January 1, 2019. The new standard provides a number of optional
practical expedients in transition. The Company elected the
“package of practical expedients”, which permits the
Company not to reassess under the new standard prior conclusions
about lease identification, lease classification and initial
direction costs. In addition, the Company elected the practical
expedient to use hindsight when determining lease terms. The
practicable expedient pertaining to land easement is not applicable
to the Company. The Company continues to assess all of the effects
of adoption, with the most significant effect relating to the
recognition of new ROU assets and lease liabilities on the
Company’s balance sheet for real estate operating
leases. The Company
adopted the provisions of this guidance on January 1, 2019 and
accordingly recognized additional operating liabilities of
approximately $5,509,000
with corresponding ROU assets of the same amount based on the
present value of the remaining minimum rental payments under
current leasing standards for existing operating
leases.
Following the expiration of the Company’s Emerging Growth
Company filing status (“EGC”) on December 31, 2018 the
Company adopted the following accounting pronouncements effective
January 1, 2018.
In May
2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic
606), to supersede nearly all existing revenue recognition
guidance under GAAP. Topic 606 also requires new qualitative and
quantitative disclosures, including disaggregation of revenues and
descriptions of performance obligations. The Company adopted the
provision of this guidance using the modified retrospective
approach. The Company has performed an assessment of its revenue
contracts as well as worked with industry participants on matters
of interpretation and application and has not identified any
material changes to the timing or amount of its revenue recognition
under Topic 606. The Company’s accounting policies did not
change materially as a result of applying the principles of revenue
recognition from Topic 606 and are largely consistent with existing
guidance and current practices applied by the Company. (See Note 4,
below.)
Note 2. Restatement of previously reported
unaudited condensed consolidated financial statements
Background of the Restatement
During the Company’s 2019 annual audit, the Company reviewed
revenues related to CLR specifically the 2019 green coffee sales
program, for sales made by the Company to its joint venture
partner, H&H Coffee Group Export Corp. (“H&H
Export”). These sales were originally recorded at
gross, along with the respective cost of
revenue.
As part of the review, the Company assessed whether the 2019 green
coffee sales to H&H Export depicted the transfer of promised
goods or services to H&H Export in an amount that reflects the
consideration to which the Company expects to be entitled in
exchange for those goods or services. The following five steps were
applied to review if the core revenue recognition principles
were met
as such the Company concluded is had not met all the criteria when
applying these steps:
●
Step
1: Identify the contract with the customer
●
Step
2: Identify the performance obligations in the
contract
●
Step
3: Determine the transaction price
●
Step
4: Allocate the transaction price to the performance obligations in
the contract
●
Step
5: Recognize revenue when the company satisfies a performance
obligation
During this review process the Company focused on
identifying the performance obligations in the contracts with
H&H Export (the provider of the “wet” green coffee
and the buyer of the processed coffee). The Company’s
assessment indicated that according to the underlying
terms and conditions of the contracts that CLR entered into with
H&H Export, that CLR had been assigned the green coffee beans
as coffee was delivered to its mill processing facility. Assignment
of the coffee is defined as taking of physical possession of the
green coffee for the purpose of processing the green coffee. Under
the assignment CLR was responsible for insuring all reasonable and
necessary actions to ensure the coffee beans are safeguarded during
processing at the Company’s coffee mill. CLR, however, does
not take ownership and does not incur financial risk associated
with the coffee as it is delivered to its mill for the
purpose of processing.
Therefore, management has determined that for green coffee sales
made by the Company to its joint venture partner, H&H Export,
the Company should have recorded these sales at net, which reflects
the value of the performance obligation to provide milling services
as opposed to on a gross basis.
In addition, during the Company’s 2019 annual audit, the
Company reviewed revenues related to CLR, the Company’s
coffee segment, with regard to sales made to major independent
customers, the Company focused on if recognition of revenue
thresholds were met and if the Company had satisfied its
performance obligation and could reasonably expect payment for
fulfilling these performance obligations. The Company determined
that for certain sales made to Rothfos Corporation, these
thresholds were not met, and therefore revenue should not have been
recognized. As a result, the Company is restating its revenue
related to the three and six months ended June 30, 2019 for sales
recorded during the three months ended June 30, 2019 in the
aggregate of approximately $2,116,000 and approximately $1,874,000
related to the costs of revenues. The related inventory for the
green coffee was returned to CLR’s supplier H&H Export,
as such the related costs $1,874,000 was credited back to CLR and
accounts payable has been adjusted for this amount.
On February 15, 2019, the Company and Khrysos
Industries, Inc., completed the acquisition of Khrysos Global,
Inc., detailed further in Note 5 to the unaudited condensed
consolidated financial statements below. In conjunction with the
Company’s 2019 annual audit the Company concluded that
certain fixed assets acquired in the acquisition and the share
price valuation for the common stock issued as consideration were
not fairly valued as of the closing date including; i) $1,127,000
related to the certain fixed assets, and ii) $1,351,000 related to
a change in the fair value of common stock issuance resulting in an
increase to goodwill of $2,478,000 acquired and an adjusted
aggregate purchase price if $15,894,000. As a result, the
Company is restating the items listed above related to the period
ended March 31, 2019.
The tables below
summarize the effects of the restatement on our (i) unaudited
condensed consolidated balance sheet at June 30, 2019; (ii)
unaudited condensed consolidated statements of operations for the
three and six months ended June 30, 2019; (iii) unaudited
condensed consolidated statements of compressive loss for the three
and six months ended June 30, 2019; and (iv) unaudited condensed
consolidated statement of cash flows for the six months ended June
30, 2019. A summary of the effect of the restatement on
the unaudited condensed consolidated statements of changes to
stockholders’ equity for the three and six months ended June
30, 2019 are not presented because the impact to additional
paid-in-capital are reflected below in the unaudited condensed
consolidated balance sheet summaries.
Summary of Restatement – Unaudited Condensed
Consolidated Balance Sheet
The effects of the restatement on the Company’s unaudited
condensed consolidated balance sheet are as follows:
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash
and cash equivalents
|
$2,088
|
$-
|
$2,088
|
|
Accounts
receivable, trade
|
36,863
|
(26,561)
|
10,302
|
|
Income
tax receivable
|
231
|
-
|
231
|
|
Inventory
|
24,797
|
-
|
24,797
|
|
Notes
receivable (Note 1)
|
5,097
|
-
|
5,097
|
|
Prepaid
expenses and other current assets
|
5,686
|
-
|
5,686
|
|
Total
current assets
|
74,762
|
(26,561)
|
48,201
|
|
|
|
|
|
|
Property
and equipment, net
|
21,249
|
(1,127)
|
20,122
|
|
Operating
lease right-of-use assets
|
5,481
|
-
|
5,481
|
|
Deferred
tax assets
|
75
|
-
|
75
|
|
Intangible
assets, net
|
23,332
|
-
|
23,332
|
|
Goodwill
|
10,676
|
2,478
|
13,154
|
|
Other
assets – notes receivable
|
949
|
-
|
949
|
|
Total
assets
|
$136,524
|
$ (25,210)
|
$ 111,314
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
Accounts
payable
|
$34,061
|
$ (26,319)
|
$ 7,742
|
|
Accrued
distributor compensation
|
3,740
|
-
|
3,740
|
|
Accrued
expenses
|
9,259
|
-
|
9,259
|
|
Deferred
revenues
|
2,260
|
-
|
2,260
|
|
Line
of credit
|
2,002
|
-
|
2,002
|
|
Other
current liabilities
|
983
|
-
|
983
|
|
Operating
lease liabilities, current portion
|
772
|
-
|
772
|
|
Finance
lease liabilities, current portion
|
1,103
|
-
|
1,103
|
|
Notes
payable, current portion
|
159
|
-
|
159
|
|
Convertible
notes payable, current portion
|
716
|
-
|
716
|
|
Warrant
derivative liability
|
4,969
|
-
|
4,969
|
|
Contingent
acquisition debt, current portion
|
695
|
-
|
695
|
|
Total
current liabilities
|
60,719
|
(26,319)
|
34,400
|
|
|
|
|
|
|
Operating
lease liabilities, net of current portion
|
4,708
|
-
|
4,708
|
|
Finance
lease liabilities, net of current portion
|
778
|
-
|
778
|
|
Notes
payable, net of current portion
|
10,525
|
-
|
10,525
|
|
Convertible
notes payable, net of current portion
|
2,358
|
-
|
2,358
|
|
Contingent
acquisition debt, net of current portion
|
6,898
|
-
|
6,898
|
|
Total
liabilities
|
85,986
|
(26,319)
|
59,667
|
|
|
|
|
|
|
Commitments
and contingencies (Note 1)
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
Preferred
Stock, $0.001 par value: 5,000,000 shares authorized
|
-
|
-
|
-
|
|
Convertible
Preferred Stock, Series A – 161,135 shares issued and
outstanding at June 30, 2019 and December 31, 2018
|
-
|
-
|
-
|
|
Convertible
Preferred Stock, Series B – 129,437 shares issued and
outstanding at June 30, 2019 and December 31, 2018; $1.254 million
liquidation preference as of June 30, 2019.
|
-
|
-
|
-
|
|
Common
Stock, $0.001 par value: 50,000,000 shares authorized; 29,316,445
and 25,760,708 shares issued and outstanding at June 30, 2019 and
December 31, 2018, respectively
|
29
|
-
|
29
|
|
Additional
paid-in capital
|
246,584
|
1,351
|
247,935
|
|
Accumulated
deficit
|
(196,070)
|
(242)
|
(196,312)
|
|
Accumulated
other comprehensive loss
|
(5)
|
-
|
(5)
|
|
Total
stockholders’ equity
|
50,538
|
1,109
|
51,647
|
|
Total Liabilities and
Stockholders’ Equity
|
$136,524
|
$ (25,210)
|
$ 111,314
|
Summary of Restatement – Unaudited Condensed
Consolidated Statements of Operations
The
effects of the restatement on our unaudited condensed consolidated
statements of operations are as follows:
|
|
Three Months Ended June 30, 2019
|
|
|
|
|
|
|
Revenues
|
$53,687
|
$(15,470)
|
$38,217
|
|
Cost
of revenues
|
27,765
|
(15,228)
|
12,537
|
|
Gross
profit
|
25,922
|
(242)
|
25,680
|
|
Operating
expenses
|
|
|
|
|
Distributor
compensation
|
14,497
|
-
|
14,497
|
|
Sales
and marketing
|
2,786
|
-
|
2,786
|
|
General
and administrative
|
8,251
|
-
|
8,251
|
|
Total
operating expenses
|
25,534
|
-
|
25,534
|
|
Operating income
|
388
|
(242)
|
146
|
|
Interest
expense, net
|
(1,062)
|
-
|
(1,062)
|
|
Change
in fair value of warrant derivative liability
|
401
|
-
|
401
|
|
Extinguishment
loss on debt
|
-
|
-
|
-
|
|
Total
other expense
|
(661)
|
-
|
(661)
|
|
Loss
before income taxes
|
(273)
|
(242)
|
(515)
|
|
Income
tax benefit
|
(226)
|
-
|
(226)
|
|
Net
loss
|
(47)
|
(242)
|
(289)
|
|
Preferred
stock dividends
|
(28)
|
-
|
(28)
|
|
Net
loss attributable to common stockholders
|
$(75)
|
$(242)
|
$(317)
|
|
|
|
|
|
|
Net
loss per share, basic
|
$(0.00)
|
$(0.01)
|
$(0.01)
|
|
Net
loss per share, diluted (Note 3)
|
$(0.02)
|
$-
|
$(0.02)
|
|
|
|
|
|
|
Weighted
average shares outstanding, basic
|
29,133,150
|
-
|
29,133,150
|
|
Weighted
average shares outstanding, diluted
|
29,357,347
|
-
|
29,357,347
|
|
|
Six Months Ended June 30, 2019
|
|
|
|
|
|
|
Revenues
|
$109,987
|
$(30,578)
|
$79,409
|
|
Cost
of revenues
|
57,216
|
(30,336)
|
26,880
|
|
Gross
profit
|
52,771
|
(242)
|
52,529
|
|
Operating
expenses
|
|
|
|
|
Distributor
compensation
|
29,387
|
-
|
29,387
|
|
Sales
and marketing
|
6,805
|
-
|
6,805
|
|
General
and administrative
|
28,132
|
-
|
28,132
|
|
Total
operating expenses
|
64,324
|
-
|
64,324
|
|
Operating
loss
|
(11,553)
|
(242)
|
(11,795)
|
|
Interest
expense, net
|
(2,569)
|
-
|
(2,569)
|
|
Change
in fair value of warrant derivative liability
|
1,887
|
-
|
1,887
|
|
Extinguishment
loss on debt
|
-
|
-
|
-
|
|
Total
other expense
|
(682)
|
-
|
(682)
|
|
Loss
before income taxes
|
(12,235)
|
(242)
|
(12,477)
|
|
Income
tax provision
|
72
|
-
|
72
|
|
Net
loss
|
(12,307)
|
(242)
|
(12,549)
|
|
Preferred
stock dividends
|
(42)
|
-
|
(42)
|
|
Net
loss attributable to common stockholders
|
$(12,349)
|
$(242)
|
$(12,591)
|
|
|
|
|
|
|
Net
loss per share, basic
|
$(0.44)
|
$-
|
$(0.44)
|
|
Net
loss per share, diluted (Note 3)
|
$(0.48)
|
$(0.01)
|
$(0.49)
|
|
|
|
|
|
|
Weighted
average shares outstanding, basic
|
28,359,660
|
-
|
28,359,660
|
|
Weighted
average shares outstanding, diluted
|
28,700,295
|
-
|
28,700,295
|
Summary
of Restatement – Unaudited Condensed Consolidated
Statement of Comprehensive Loss
The
effect of the restatement on our unaudited condensed consolidated
statements of comprehensive loss are as
follows:
|
|
Three Months Ended June 30, 2019
|
|
|
|
|
|
|
Net
loss
|
$(47)
|
$(242)
|
$(289)
|
|
Foreign
currency translation
|
(62)
|
-
|
(62)
|
|
Total
comprehensive income
|
(62)
|
-
|
(62)
|
|
Comprehensive
loss
|
$(109)
|
(242)
|
$(351)
|
|
|
Six Months Ended June 30, 2019
|
|
|
|
|
|
|
Net
loss
|
$(12,307)
|
$(242)
|
$(12,549)
|
|
Foreign
currency translation
|
40
|
-
|
40
|
|
Total
comprehensive income
|
40
|
-
|
40
|
|
Comprehensive
loss
|
$(12,267)
|
(242)
|
$(12,509)
|
Summary of Restatement – Unaudited Condensed
Consolidated Statement of Cash Flows
The
effect of the restatement on our unaudited condensed consolidated
statement of cash flows are as follows:
|
|
Six Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
Net
loss
|
$(12,307)
|
$(242)
|
$(12,549)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
Depreciation
and amortization
|
2,333
|
-
|
2,333
|
|
Stock-based
compensation expense
|
11,757
|
-
|
11,757
|
|
Amortization
of debt discounts and issuance costs
|
534
|
-
|
534
|
|
Equity
issuance costs for services
|
2,541
|
-
|
2,541
|
|
Change
in fair value of warrant derivative liability
|
(1,887)
|
-
|
(1,887)
|
|
Change
in fair value of contingent acquisition debt
|
(433)
|
-
|
(433)
|
|
Change
in inventory reserve
|
159
|
-
|
159
|
|
Stock
issuance for true-up shares
|
281
|
-
|
281
|
|
Deferred
taxes
|
73
|
-
|
73
|
|
Changes
in operating assets and liabilities, net of effect from business
combinations:
|
|
|
|
|
Accounts
receivable
|
(32,526)
|
26,561
|
(5,965)
|
|
Inventory
|
(1,916)
|
|
(1,916)
|
|
Prepaid
expenses and other current assets
|
(844)
|
-
|
(844)
|
|
Accounts
payable
|
25,254
|
(26,319)
|
(1,065)
|
|
Accrued
distributor compensation
|
451
|
-
|
451
|
|
Deferred
revenues
|
(52)
|
-
|
(52)
|
|
Accrued
expenses and other liabilities
|
1,358
|
-
|
1,358
|
|
Income
taxes receivable
|
(157)
|
-
|
(157)
|
|
Net Cash Used in Operating Activities
|
(5,381)
|
-
|
(5,381)
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
Acquisitions,
net of cash acquired
|
(425)
|
-
|
(425)
|
|
Purchases
of property and equipment
|
(3,269)
|
-
|
(3,269)
|
|
Net Cash Used in Investing Activities
|
(3,694)
|
-
|
(3,694)
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
Proceeds
from issuance of promissory notes, net of offering
costs
|
5,125
|
-
|
5,125
|
|
Proceeds
from private placement of common stock, net of offering
costs
|
2,684
|
-
|
2,684
|
|
Proceeds
from at-the-market-offering and exercise of stock options and
warrants, net
|
1,748
|
-
|
1,748
|
|
Payments
net of repayment on line of credit
|
(254)
|
-
|
(254)
|
|
Payments
of notes payable
|
(68)
|
-
|
(68)
|
|
Payments
of contingent acquisition debt
|
(235)
|
-
|
(235)
|
|
Payments
of finance leases
|
(734)
|
-
|
(734)
|
|
Payments
of dividends
|
(22)
|
-
|
(22)
|
|
Net Cash Provided by Financing Activities
|
8,244
|
-
|
8,244
|
|
Foreign Currency Effect on Cash
|
40
|
-
|
40
|
|
Net
decrease in cash and cash equivalents
|
(791)
|
-
|
(791)
|
|
Cash and Cash Equivalents, Beginning of Period
|
2,879
|
-
|
2,879
|
|
Cash and Cash Equivalents, End of Period
|
$2,088
|
$-
|
$2,088
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
Interest
|
$1,858
|
$-
|
$1,858
|
|
Income
taxes
|
$148
|
$-
|
$148
|
|
|
|
|
|
|
Supplemental Disclosures of Noncash Investing and Financing
Activities
|
|
|
|
|
Purchases
of property and equipment funded by finance leases
|
$42
|
$-
|
$42
|
|
Purchases
of property and equipment funded by mortgage
agreements
|
$450
|
$-
|
$450
|
|
Fair
value of stock issued for services (Note 11)
|
$988
|
$-
|
$988
|
|
Fair
value of stock issued for property and equipment
(land)
|
$1,200
|
$-
|
$1,200
|
|
Fair
value of stock issued for purchase of intangibles
(tradename)
|
$750
|
$-
|
$750
|
|
Fair
value of stock issued for note receivable, net of debt
settlement
|
$2,309
|
$-
|
$2,309
|
|
Fair
value of stock issued in connection with the acquisition of Khrysos
Global, Inc. (Note 5) (1)
|
$12,649
|
1,351
|
$14,000
|
|
Dividends
declared but not paid at the end of period (Note 11)
|
$25
|
$-
|
$25
|
(1)
The Fair value of stock issued in
connection with the acquisition of Khrysos Global, Inc., was
previously reported in Note 4 to the original filing of the
Quarterly Report on Form 10-Q for the quarter ended June 30, 2019
as filed with the SEC on August 14,
2019.
Note 3. Basic and Diluted Net Loss Per Share
Basic loss per share is computed by dividing net loss attributable
to common stockholders by the weighted-average number of common
shares outstanding during the period. Diluted loss per share is
computed by dividing net loss attributable to common stockholders
by the sum of the weighted-average number of common shares
outstanding during the period and the weighted-average number of
dilutive common share equivalents outstanding during the period,
using the treasury stock method. Dilutive common share equivalents
are comprised of stock options, restricted stock, warrants,
convertible preferred stock and common stock associated with the
Company's convertible notes based on the average stock price for
each period using the treasury stock method. Potentially dilutive
shares are excluded from the computation of diluted net loss per
share when their effect is anti-dilutive. In periods where a net
loss is presented, all potentially dilutive securities are
anti-dilutive and are excluded from the computation of diluted net
loss per share.
Potentially dilutive securities for the three and six months ended
June 30, 2019 were 12,731,372. Potentially dilutive securities were 6,560,761 for
the three and six months ended June 30, 2018.
The
calculation of diluted loss per share requires that, to the extent
the average market price of the underlying shares for the reporting
period exceeds the exercise price of the warrants and the presumed
exercise of such securities are dilutive to loss per share for the
period, an adjustment to net loss used in the calculation is
required to remove the change in fair value of the warrants, net of
tax from the numerator for the period. Likewise, an adjustment to
the denominator is required to reflect the related dilutive shares,
if any, under the treasury stock method. During the three and
six months ended June 30, 2019, the Company recorded net of tax
gain of $357,000 and $1,478,000, on the valuation of the Warrant
Derivative Liability which has a dilutive impact on loss per share,
respectively.
|
|
Three Months Ended
June 30,
(unaudited)
|
Six Months Ended
June 30,
(unaudited)
|
|
|
|
|
|
|
|
Loss
per Share – Basic
|
|
|
|
|
|
Numerator
for basic loss per share
|
$(317,000)
|
$(656,000)
|
$(12,591,000)
|
$(2,967,000)
|
|
Denominator
for basic loss per share
|
29,133,150
|
21,506,833
|
28,359,660
|
20,630,383
|
|
Loss
per common share - basic
|
$(0.01)
|
$(0.03)
|
$(0.44)
|
$(0.14)
|
|
|
|
|
|
|
|
Loss per Share - Diluted
|
|
|
|
|
|
Numerator
for basic loss per share
|
$(317,000)
|
$(656,000)
|
$(12,591,000)
|
$(2,967,000)
|
|
Adjust:
Fair value of dilutive warrants outstanding
|
(357,000)
|
-
|
(1,478,000)
|
-
|
|
Numerator
for dilutive loss per share
|
$(674,000)
|
$(656,000)
|
$(14,069,000)
|
$(2,967,000)
|
|
|
|
|
|
|
|
Denominator
for basic loss per share
|
29,133,150
|
21,506,833
|
28,359,660
|
20,630,383
|
|
Adjust:
Incremental shares underlying “in the money” warrants
outstanding
|
224,197
|
-
|
340,635
|
-
|
|
Denominator
for dilutive loss per share
|
29,357,347
|
21,506,833
|
28,700,295
|
20,630,383
|
|
Loss
per common share - diluted
|
$(0.02)
|
$(0.03)
|
$(0.49)
|
$(0.14)
|
* Loss per
share for the three and six months ended June 30, 2019 has been
restated. See Note 2.
Note 4. Balance Sheet Account Detail
Inventory and Cost of Revenues
Inventory is stated at the lower of cost or net realizable value,
net of a valuation allowance. Cost is determined using the
first-in, first-out method. The Company records an inventory
reserve for estimated excess and obsolete inventory based upon
historical turnover, market conditions and assumptions about future
demand for its products. When applicable, expiration dates of
certain inventory items with a definite life are taken into
consideration.
Inventories consist of the following (in thousands):
|
|
|
|
|
June 30,
2019
(unaudited)
|
|
|
Finished
goods
|
$12,602
|
$11,300
|
|
Raw
materials
|
14,622
|
12,744
|
|
Total
inventory
|
27,224
|
24,044
|
|
Reserve
for excess and obsolete
|
(2,427)
|
(2,268)
|
|
Inventory,
net
|
$24,797
|
$21,776
|
Cost of revenues includes the cost of inventory, shipping and
handling costs, royalties associated with certain products,
transaction banking costs, warehouse labor costs and depreciation
on certain assets.
Leases
Generally, the Company leases certain office space, warehouses,
distribution centers, manufacturing centers, and equipment. A
contract is or contains a lease if the contract conveys the right
to control the use of identified property, plant, or equipment (an
identified asset) for a period of time in exchange for
consideration.
In general, the Company’s leases include one or more options
to renew, with renewal terms that generally vary from one to ten
years. The exercise of lease renewal options is generally at the
Company’s sole discretion. The depreciable life of assets and
leasehold improvements are limited by the expected lease term,
unless there is a transfer of title or purchase option reasonably
certain of exercise.
The Company’s lease agreements do not contain any material
residual value guarantees or material restrictive
covenants.
Leases with an initial term of twelve months or less are
not recorded on the Company’s condensed
consolidated balance sheets, and the Company does not separate
nonlease components from lease components. The
Company’s lease assets and liabilities recognized within its
condensed consolidated balance sheets were as follows (in
thousands):
|
Leases
|
Classification
|
June 30,
2019
(unaudited)
|
|
Assets
|
|
|
|
Operating
lease right-of-use assets
|
Operating
Lease Right-of-Use Assets
|
$5,481
|
|
Finance
lease right-of-use assets
|
Property, plant and equipment, net at cost, net of
Accumulated Depreciation (1)
|
1,283
|
|
Total
leased assets
|
|
$6,764
|
|
Liabilities
|
|
|
|
Current
|
|
|
|
Operating
|
Other
Current Liabilities
|
$772
|
|
Finance
|
Current
Portion of Long-term Debt
|
1,103
|
|
Noncurrent
|
|
|
|
Operating
|
Non-current
Operating Lease Liabilities
|
4,708
|
|
Finance
|
Long-term
Debt, net of current portion
|
778
|
|
Total
lease liabilities
|
|
$7,361
|
|
(1)
|
Finance lease assets are recorded net of accumulated amortization
of approximately $525,000 as of
June 30, 2019.
|
Lease cost is recognized on a straight-line basis over the lease
term (in thousands):
|
|
|
|
|
|
Lease Cost
|
Classification
|
June 30, 2019
(unaudited)
|
June 30, 2018
(unaudited)
|
June 30, 2019
(unaudited)
|
|
|
Operating
lease cost
|
SG&A
Expenses
|
$271
|
$-
|
$542
|
$-
|
|
Finance
lease cost
|
|
|
|
|
|
|
Amortization
of leased assets
|
Depreciation
and Amortization
|
94
|
-
|
190
|
-
|
|
Interest
on lease liabilities
|
Net
Interest Expense
|
34
|
-
|
71
|
-
|
|
Net
lease cost
|
|
$399
|
$-
|
$803
|
$-
|
As of June 30, 2019, annual scheduled lease payments were as
follows (unaudited) (in thousands):
|
|
|
|
|
2019
|
$1,055
|
$1,213
|
|
2020
|
764
|
699
|
|
2021
|
657
|
95
|
|
2022
|
391
|
15
|
|
2023
|
628
|
9
|
|
Thereafter
|
3,490
|
8
|
|
Total
lease payments
|
6,985
|
2,039
|
|
Less
imputed interest
|
1,505
|
158
|
|
Present
value of lease liabilities
|
$5,480
|
$1,881
|
Finance lease right-of-use assets are amortized over their
estimated useful life, as the Company does believe that it is
reasonably certain that options which transfer ownership will be
exercised. In general, for the majority of the Company’s
material leases, the renewal options are not included in the
calculation of its right-of-use assets and lease liabilities, as
the Company does not believe that it is reasonably certain that
these renewal options will be exercised. Periodically, the Company
assesses its leases to determine whether it is reasonably certain
that these options and any renewal options could be reasonably
expected to be exercised.
The majority of the Company’s leases are for real estate and
equipment. In general, the individual lease contracts do not
provide information about the rate implicit in the lease. Because
the Company is not able to determine the rate implicit in its
leases, it instead generally uses its incremental borrowing rate to
determine the present value of lease liabilities. In determining
its incremental borrowing rate, the Company reviewed the terms of
its leases, its senior secured credit facility, swap rates, and
other factors. The weighted-average remaining lease term and
weighted-average discount rate used to calculate the present value
of lease liabilities are as follows:
|
Lease Term and Discount Rate
|
June 30, 2019
(unaudited)
|
|
Weighted-average
remaining lease term (years)
|
|
|
Operating
leases
|
5.6
|
|
Finance
leases
|
1.98
|
|
Weighted-average
discount rate
|
|
|
Operating
leases
|
5.5%
|
|
Finance
leases
|
9.0%
|
Revenue Recognition
Direct Selling
Direct distribution sales are made through the Company’s
network (direct selling segment), which is a web-based global
network of customers and distributors. The Company’s
independent sales force markets a variety of products to an array
of customers, through friend-to-friend marketing and social
networking. The Company considers itself to be an e-commerce
company whereby personal interaction is provided to customers by
its independent sales network. Sales generated from direct
distribution includes health and wellness, beauty product and skin
care, scrap booking and story booking items, packaged food products
and other service-based products.
Revenue is recognized when the Company satisfies its performance
obligations under the contract. The Company recognizes revenue by
transferring the promised products to the customer, with revenue
recognized at shipping point, the point in time the customer
obtains control of the products. The majority of the
Company’s contracts have a single performance obligation and
are short term in nature. Sales taxes in domestic and foreign
jurisdictions are collected from customers and remitted to
governmental authorities, all at the local level, and are accounted
for on a net basis and therefore are excluded from
revenues.
Commercial Coffee - Coffee Roaster
The Company engages in the commercial sale of roasted coffee
through its subsidiary CLR, which is sold under a variety of
private labels through major national sales outlets and to
customers including cruise lines and office coffee service
operators, and under its own Café La Rica brand, Josie’s
Java House Brand, 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 and
providing milling services to H&H.
Revenue is recognized when the title and risk of loss is passed to
the customer under the terms of the shipping arrangement,
typically, FOB shipping point. At this point the customer has a
present obligation to pay, takes physical possession of the
product, takes legal title to the product, bears the risks and
rewards of ownership, and as such, revenue will be recognized at
this point in time. Revenues derived from the sales of green
coffee beans by the Company that it has milled, and it has
determined it is the agent with regard to such green coffee beans
is recorded at net of costs to purchase inventory or recorded to
reflect only the revenue derived from the milling services
provided. Sales taxes in domestic and foreign jurisdictions
are collected from customers and remitted to governmental
authorities, all at the local level, and are accounted for on a net
basis and therefore are excluded from
revenues.
Commercial Hemp
The commercial hemp segment provides end to end extraction and
processing via the Company's proprietary systems that
allow for the conversion of hemp feed stock into hemp oil and hemp
extracts. The primary focus of the segment is to generate
revenue through sales of extraction services and end to end
processing services for the conversion of Hemp and Hemp oil into
sellable ingredients. Additionally, the Company offers
various rental, sales, and service programs of the
Company's extraction and processing
systems.
Segment Revenue
Revenue is recognized when the title and risk of loss is passed to
the customer under the terms of the shipping arrangement,
typically, FOB shipping point. At this point the customer has a
present obligation to pay, takes physical possession of the
product, takes legal title to the product, bears the risks and
rewards of ownership, and as such, revenue will be recognized at
this point in time. Sales taxes in domestic and foreign
jurisdictions are collected from customers and remitted to
governmental authorities, all at the local level, and are accounted
for on a net basis and therefore are excluded from
revenues.
The Company operates in three primary segments: the direct selling
segment where products are offered through a global distribution
network of preferred customers and distributors, the commercial
coffee segment where products are sold directly to businesses and
the Hemp segment.
The following table summarizes revenue disaggregated
by segment (in thousands):
|
|
Three Months Ended
June 30,
(unaudited)
|
Six Months Ended
June 30,
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
selling
|
$32,124
|
$36,846
|
$65,544
|
$72,157
|
|
Commercial coffee:
|
|
|
|
|
|
Processed
green coffee
|
968
|
4,527
|
1,068
|
5,580
|
|
Milling
and processing services
|
1,561
|
-
|
6,387
|
-
|
|
Roasted
coffee and other
|
3,290
|
2,882
|
6,069
|
9,512
|
|
Total commercial coffee
|
5,819
|
7,409
|
13,524
|
15,092
|
|
Commercial
hemp
|
274
|
-
|
341
|
-
|
|
Total
revenue
|
$38,217
|
$44,255
|
$79,409
|
$87,249
|
*
Revenue for the three and six months ended June 30, 2019 has been
restated. See Note
2.
Contract Balances
Timing of revenue recognition may differ from the timing of
invoicing to customers. The Company records contract assets when
performance obligations are satisfied prior to
invoicing.
Contract liabilities are reflected as deferred revenues in current
liabilities on the Company’s condensed consolidated balance
sheets and include deferred revenue and customer deposits. Contract
liabilities relate to payments invoiced or received in advance of
completion of performance obligations, and are recognized as
revenue upon the fulfillment of performance obligations. Contract
liabilities are classified as short-term as all performance
obligations are expected to be satisfied within the next 12
months.
As of June 30, 2019 and December 31, 2018, the balance in deferred
revenues was approximately $2,260,000 and $2,312,000, respectively.
The Company records deferred revenue related to its direct selling
segment which is primarily attributable to the Heritage Makers
product line and represents Heritage Maker’s obligation for
points purchased by customers that have not yet been redeemed for
product. In addition, deferred revenues include future Company
convention and distributor events.
Deferred revenue related to the commercial coffee segment
represents deposits on customer orders that have not yet been
completed and shipped. Revenue is recognized when the title and
risk of loss is passed to the customer under the terms of the
shipping arrangement FOB shipping point. (See Note 1,
above.)
Of the
deferred revenue from the year ended December 31, 2018, the Company
recognized revenue of approximately $341,000 and $732,000 from the
Heritage Makers product line during the three and six months ended
June 30. 2019, respectively. There was no other deferred revenue
recognized in direct selling segment for the six months ended June
30, 2019.
There
were no deferred revenues recognized with the commercial coffees
segment and the commercial hemp for the six months ended June 30,
2019.
Note 5. Acquisitions and Business Combinations
The Company accounts for business combinations under the
acquisition method and allocates the total purchase price for
acquired businesses to the tangible and identified intangible
assets acquired and liabilities assumed, based on their estimated
fair values. When a business combination includes the exchange of
the Company’s common stock, the value of the common stock is
determined using the closing market price as of the date such
shares were tendered to the selling parties. The fair values
assigned to tangible and identified intangible assets acquired and
liabilities assumed are based on management or third-party
estimates and assumptions that utilize established valuation
techniques appropriate for the Company’s industry and each
acquired business. Goodwill is recorded as the excess, if any, of
the aggregate fair value of consideration exchanged for an acquired
business over the fair value (measured as of the acquisition date)
of total net tangible and identified intangible assets acquired. A
liability for contingent consideration, if applicable, is recorded
at fair value as of the acquisition date. In determining the fair
value of such contingent consideration, management estimates the
amount to be paid based on probable outcomes and expectations on
financial performance of the related acquired business. The fair
value of contingent consideration is reassessed quarterly, with any
change in the estimated value charged to operations in the period
of the change. Increases or decreases in the fair value of the
contingent consideration obligations can result from changes in
actual or estimated revenue streams, discount periods, discount
rates and probabilities that contingencies will be
met.
During the six months ended June 30, 2019, the Company entered into
one acquisition, which is detailed below. The acquisition was
conducted in an effort to expand the Company’s operations
into the field of commercial hemp business.
2019 Acquisitions
Khrysos Global, Inc.
On February 12, 2019, the Company and Khrysos Industries, Inc., a
Delaware corporation and wholly owned subsidiary of the Company
(“KII”) entered into an Asset and Equity Purchase
Agreement (the “AEPA”) with, Khrysos Global, Inc., a
Florida corporation (“Seller”), Leigh Dundore
(“LD”), and Dwayne Dundore (the “Representing
Party”) for KII to acquire substantially all the assets of
Seller and all the outstanding equity of INXL Laboratories, Inc., a
Florida corporation (“INXL”) and INX Holdings, Inc., a
Florida corporation (“INXH”). The business of the
Seller, INXL and INXH collectively acquired by us provide
end to end extraction and processing via the company's
proprietary systems that allow for the conversion of hemp feed
stock into hemp oil and hemp extracts. Additionally, KII
offers various rental, sales, and service programs of KII’s
extraction and processing systems.
The consideration payable for the assets of the Seller 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
Seller and LD in such manner as they determine at their
discretion.
At the closing, on February 15, 2019, the
Seller, LD and the Representing Party received an aggregate of
1,794,972 shares of the Company’s common stock which have a
value of $14,000,000 for the purposes of the AEPA or $12,649,000
fair value for the acquisition valuation and $500,000 in cash.
Thereafter, we agree to pay the Seller, LD and the Representing
Party 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, upon which KII intends to build a R&D
facility, greenhouse and allocate a portion for
farming.
Restatement Note - related to the Acquisition of Khrysos Global,
Inc.
In conjunction with the Company’s 2019 annual audit the
Company concluded that certain fixed assets acquired in the
acquisition and the share price valuation for the common stock
issued as consideration were not fairly valued as of the closing
date February 15, 2019 including; a) $1,127,000 related to the
certain fixed assets, and b) $1,351,000 related to a change in the
fair value of common stock issuance resulting in an increase to
goodwill of $2,478,000 acquired and an adjusted aggregate purchase
price if $15,894,000. As such, the Company restated its Quarterly
Reports on Form 10-Q for the quarter ended June 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 preliminary and as
adjusted fair values of the assets acquired and liabilities assumed
during the period ended March 31, 2019 (in thousands):
|
|
Fair
Value as Originally Reported
|
|
Fair Value as Currently Reported
|
|
Current
assets
|
$636
|
$-
|
$636
|
|
Inventory
|
1,264
|
-
|
1,264
|
|
Property, plant and
equipment
|
2,260
|
(1,127)
|
1,133
|
|
Trademarks and
trade name
|
1,876
|
-
|
1,876
|
|
Customer-related
intangible
|
5,629
|
-
|
5,629
|
|
Non-compete
intangible
|
956
|
-
|
956
|
|
Goodwill
|
4,353
|
2,478
|
6,831
|
|
Current
liabilities
|
(1,904)
|
-
|
(1,904)
|
|
Notes
payable
|
(527)
|
-
|
(527)
|
|
Net assets
acquired
|
$14,543
|
$1,351
|
$15,894
|
The preliminary estimated fair value of intangible
assets acquired in the amount of $8,461,000 was determined through
the use of a third-party valuation firm using various income and
cost approach methodologies. Specifically, the intangibles
identified in the acquisition were trademarks and trade name,
customer-related intangible and non-compete agreement. The
trademarks and trade name, customer-related intangible and
non-compete are being amortized over their estimated useful life of
8 years, 7 years and 6 years, respectively. The straight-line
method is being used and is believed to approximate the
time-line within which the economic benefit of the
underlying intangible asset will be realized.
Goodwill acquired as currently reported if $6,831,000 is recognized
as the excess purchase price over the acquisition-date fair value
of net assets acquired. Goodwill is estimated to represent the
synergistic values expected to be realized from the combination of
the two businesses. The goodwill is expected to be deductible for
tax purposes.
The Contingent Consideration Warrants discussed above are subject
to vesting based upon the achievement of various sales milestones
and only if the sellers do not terminate their services. As
such, the warrants were considered equity-based compensation for
future services and not considered contingent consideration in the
calculation of the purchase price.
The costs related to the acquisition are included in legal and
accounting fees and were expensed as incurred.
Revenues included in the consolidated statement of
operations for the three and six months ended June 30, 2019 were
approximately $274,000 and $341,000, respectively.
Note 6. Intangible Assets and Goodwill
Intangible Assets
Intangible assets are comprised of distributor organizations,
trademarks and tradenames, customer relationships and internally
developed software. The Company's acquired intangible
assets, which are subject to amortization over their estimated
useful lives, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
intangible asset may not be recoverable. An impairment loss is
recognized when the carrying amount of an intangible asset exceeds
its fair value.
Intangible assets consist of the following (in
thousands):
|
|
June 30, 2019
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Distributor
organizations
|
$14,559
|
$10,010
|
$4,549
|
$14,559
|
$9,575
|
$4,984
|
|
Trademarks
and trade names
|
9,963
|
2,209
|
7,754
|
7,337
|
1,781
|
5,556
|
|
Customer
relationships
|
16,028
|
6,068
|
9,960
|
10,398
|
5,723
|
4,675
|
|
Internally
developed software
|
720
|
607
|
113
|
720
|
558
|
162
|
|
Non-compete
agreement
|
956
|
-
|
956
|
-
|
-
|
-
|
|
Intangible
assets
|
$42,226
|
$18,894
|
$23,332
|
$33,014
|
$17,637
|
$15,377
|
Amortization expense related to intangible assets was approximately
$586,000 and $857,000 for the three months ended June 30, 2019 and
2018, respectively. Amortization expense related to intangible
assets was approximately $1,256,000 and $1,692,000 for the six
months ended June 30, 2019 and 2018, respectively.
Trade names, which do not have legal, regulatory, contractual,
competitive, economic, or other factors that limit the useful lives
are considered indefinite lived assets and are not amortized but
are tested for impairment on an annual basis or whenever events or
changes in circumstances indicate that the carrying amount of these
assets may not be recoverable. As of June 30, 2019 and December 31,
2018, approximately $1,649,000 in trademarks from business
combinations have been identified as having indefinite
lives.
Goodwill
Goodwill is recorded as the excess, if any, of the aggregate fair
value of consideration exchanged for an acquired business over the
fair value (measured as of the acquisition date) of total net
tangible and identified intangible assets acquired. In accordance
with Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) Topic
350, “Intangibles —
Goodwill and Other”, goodwill and other intangible assets with
indefinite lives are not amortized but are tested for impairment on
an annual basis or whenever events or changes in circumstances
indicate that the carrying amount of these assets may not be
recoverable. The Company conducts annual reviews for goodwill and
indefinite-lived intangible assets in the fourth quarter or
whenever events or changes in circumstances indicate that the
carrying amounts of the assets may not be fully
recoverable.
The Company first assesses qualitative factors to determine whether
it is more likely than not (a likelihood of more than 50%) that
goodwill is impaired. After considering the totality of events and
circumstances, the Company determines whether it is more likely
than not that goodwill is not impaired. If impairment is
indicated, then the Company conducts the two-step impairment
testing process. The first step compares the Company’s fair
value to its net book value. If the fair value is less than the net
book value, the second step of the test compares the implied fair
value of the Company’s goodwill to its carrying amount. If
the carrying amount of goodwill exceeds its implied fair value, the
Company would recognize an impairment loss equal to that excess
amount. The testing is generally performed at the “reporting
unit” level. A reporting unit is the operating segment, or a
business one level below that operating segment (referred to as a
component) if discrete financial information is prepared and
regularly reviewed by management at the component level. The
Company has determined that its reporting units for goodwill
impairment testing are the Company’s reportable segments. As
such, the Company analyzes its goodwill balances separately for the
commercial coffee reporting unit, the direct selling reporting unit
and the commercial hemp reporting unit. The goodwill balance as of
June 30, 2019 and December 31, 2018 is approximately $13,154,000
and $6,323,000, respectively, which includes an adjustment to the
KII acquisition goodwill during the period ended March 31, 2019,
discussed above in Note 5, which increased the goodwill for KII in
the amount of $2,478,000. There were no triggering events
indicating impairment of goodwill or intangible assets during the
six months ended June 30, 2019 and 2018.
Goodwill consists of the following (in thousands):
|
|
|
|
|
Goodwill,
commercial coffee
|
$3,314
|
$3,314
|
|
Goodwill,
direct selling
|
3,009
|
3,009
|
|
Goodwill,
commercial hemp
|
6,831
|
-
|
|
Total
goodwill
|
$13,154
|
$6,323
|
Note 7. Notes Payable and Other Debt
Short-term Debt
On July 18, 2018, the Company entered into lending agreements (the
“Lending Agreements”) with three (3) separate entities
and received loans in the total amount of $1,907,000, net of loan
fees to be paid back over an eight-month period on a monthly
basis. Payments are comprised of principal and accrued interest
with an effective interest rate between 15% and 20%. The
Company’s outstanding balance related to the Lending
Agreements was approximately $504,000 as of December 31, 2018 and
was included in other current liabilities on the Company’s
balance sheet as of December 31, 2018. In March 2019 the loans were
paid in full.
Notes Payable
Promissory
Notes
On
March 18, 2019, the Company entered into a two-year Secured
Promissory Note (the “8% 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. The Company also issued
20,000 shares of the Company’s common stock par value $0.001
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 per
share of $6.00. The 8% Notes pay
interest at a rate of eight percent (8%) per annum and interest is
paid quarterly in arrears with all principal and unpaid interest
due at maturity on March 18, 2021.
The Company recorded debt discounts of approximately $139,000
related to the fair value of warrants issued in the transaction and
$212,000 of transaction issuance costs to be amortized to interest
expense over the life of the Notes. As of June 30, 2019, the
remaining balance of the debt discounts is approximately $309,000.
The Company recorded approximately $42,000 amortization of the debt
discounts during the six months ended June 30, 2019 and is recorded
as interest expense.
Credit
Note
On
December 13, 2018, the Company’s wholly owned subsidiary,
CLR, entered into a Credit Agreement with Mr. Carl Grover pursuant
to which CLR borrowed $5,000,000 from Mr. Grover and in exchange
issued to him a $5,000,000 Credit Note (the “Credit
Note”) secured by its green coffee inventory under a Security
Agreement, dated December 13, 2018, with Mr. Grover and CLR’s
subsidiary, Siles.
The
Credit Note accrues interest at eight percent (8%) per annum. 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 ten percent (10%) 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”).
Also 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% fee on the transaction with Mr. Grover and issued to the
advisor (or it’s designees) a four-year warrant to purchase
50,000 shares of the Company’s common stock, exercisable at
$6.33 per share.
All
fees, warrants and costs paid to Mr. Grover and the advisor and all
direct costs incurred by the Company are recognized as a debt
discount to the funded Credit Note and are amortized to interest
expense using the effective interest method over the term of the
Credit Note. The Company recognized an initial debt discount of
approximately $1,469,000 related to the initial fair value of
warrants issued in the transaction and $175,000 of transaction
issuance costs. As of June 30, 2019, the remaining unamortized debt
discount is approximately $1,293,000. The Company recognized
approximately $321,000 amortization of the debt discount during the
six months ended June 30, 2019 which was included in interest
expense in the Condensed Consolidated Statements of
Operations.
2400 Boswell Mortgage
In March 2013, the Company acquired 2400 Boswell for
approximately $4,600,000. 2400 Boswell is the owner and
lessor of the building occupied by the Company for its corporate
office and warehouse in Chula Vista, California. The purchase was
from an immediate family member of our Chief Executive Officer and
consisted of approximately $248,000 in cash, $334,000 of debt
forgiveness and accrued interest, and a promissory note of
approximately $393,000, payable in equal payments over 5 years with
interest at 5.0%. Additionally, the Company assumed a
long-term mortgage of $3,625,000, payable over 25 years with an
initial interest rate of 5.75%. The interest rate is the prime rate
plus 2.5%. As of June 30, 2019, the interest rate was 8.0%. 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 June 30, 2019, the
balance on the long-term mortgage is approximately $3,180,000 and
the balance on the promissory note is zero.
M2C Purchase Agreement
In March 2007, the Company entered into an agreement to purchase
certain assets of M2C Global, Inc., a Nevada corporation, for
$4,500,000. The agreement required payments totaling
$500,000 in three installments during 2007, followed by monthly
payments in the amount of 10% of the sales related to the acquired
assets until the entire note balance is paid. As of June 30,
2019 and December 31, 2018, the carrying value of the liability was
approximately $1,049,000 and $1,071,000, respectively. The
interest associated with the note for the three and six months
ended June 30, 2019 and 2018 was minimal.
Khrysos Mortgage Notes
In conjunction with the Company’s acquisition of
Khrysos, the Company assumed an interest only mortgage note in the
amount of $350,000, due in September 2021, and bears an interest
rate of 8.0%. In addition, the Company assumed a mortgage note of
approximately $177,000, due in June 2023, and bears an interest
rate of 7.0% per annum. As of June 30, 2019, the remaining
aggregate mortgage balance is approximately
$526,000.
In
February 2019, Khrysos purchased a 45-acre tract of land in
Groveland, Florida, for $750,000, upon which Khrysos intends to
build a R&D facility, greenhouse and allocate a portion for
farming. Khrysos paid approximately $303,000 as a down payment and
assumed a mortgage of $450,000. The entire balance is due in
February 2024 and bears interest at 6.0% per annum. As of June 30,
2019, the remaining mortgage balance is approximately
$446,000.
Khrysos Acquisition Liability Payable
In conjunction with the Company’s acquisition of Khrysos, the
Company agreed to pay the sellers in cash $2,000,000 towards the
AEPA with an initial payment of $500,000 which was paid at closing
in February 2019. Thereafter, the sellers 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. As of June
30, 2019, the Company’s remaining liability of $1,500,000 is
outstanding and is recorded on the balance sheet in accrued
expenses. (See Note 5, above.)
Other
Notes
The Company’s other notes relate to loans for commercial vans
at CLR in the amount of $85,000 as of June 30, 2019 which mature at
various dates through 2023.
Line of Credit - Loan and Security Agreement
On November 16, 2017, CLR entered into a Loan and Security
Agreement (“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. Effective December 29, 2017, CLR entered
into a First Amendment to the Agreement, to include an increase in
the maximum overall borrowing to $6,250,000. The loan amount may
not exceed an amount which is the lesser of (a) $6,250,000 or (b)
the sum of up (i) to 85% of the value of the eligible accounts;
plus, (ii) the lesser of $1,000,000 or 50% of eligible inventory or
50% of (i) above, plus (iii) the lesser of $250,000 or eligible
inventory or 75% of certain specific inventory identified within
the Agreement.
The Agreement contains certain financial and nonfinancial covenants
with which the Company must comply to maintain its borrowing
availability and avoid penalties. As of June 30, 2019, the Company
is in compliance with all financial and nonfinancial
covenants.
The outstanding principal balance of the Agreement will bear
interest based upon a year of 360 days with interest being charged
for each day the principal amount is outstanding including the date
of actual payment. The interest rate is a rate equal to the prime
rate plus 2.50% with a floor of 6.75%. As of June 30, 2019,
the interest rate was 7.5%. In addition, other fees are incurred
for the maintenance of the loan in accordance with the Agreement.
Other fees may be incurred in the event the minimum loan balance of
$2,000,000 is not maintained. The Agreement is effective until
November 16, 2020.
The Company and the Company’s CEO, Stephan Wallach, have
entered into a Corporate Guaranty and Personal Guaranty,
respectively, with Crestmark guaranteeing payments in the event
that the Company’s commercial coffee segment CLR were to
default. In addition, the Company’s President and Chief
Financial Officer, David Briskie, personally entered into a
Guaranty of Validity representing the Company’s
financial statements so long as the indebtedness is owing to
Crestmark, maintaining certain covenants and
guarantees.
The Company’s outstanding line of credit liability related to
the Agreement was approximately $2,002,000 as of June 30, 2019 and
$2,256,000 as of December 31, 2018.
Contingent Acquisition Debt
The Company has contingent acquisition debt associated with its
business combinations. The Company accounts for business
combinations under the acquisition method and allocates the total
purchase price for acquired businesses to the tangible and
identified intangible assets acquired and liabilities assumed,
based on their estimated fair values as of the acquisition date. A
liability for contingent consideration, if applicable, is recorded
at fair value as of the acquisition date and evaluated each period
for changes in the fair value and adjusted as
appropriate.
The Company’s contingent acquisition debt as of June 30, 2019
and December 31, 2018 is $7,593,000 and $8,261,000, respectively,
and is attributable to debt associated with the Company’s
direct selling segment. (See Note 10 below.)
Note 8. Convertible Notes Payable
Total convertible notes payable as of June 30, 2019 and December
31, 2018, net of debt discount outstanding consisted of the amount
set forth in the following table (in thousands):
|
|
June 30,
2019
(unaudited)
|
|
|
8%
Convertible Notes due July and August 2019 (2014 Notes),
principal
|
$750
|
$750
|
|
Debt
discounts
|
(34)
|
(103)
|
|
Carrying
value of 2014 Notes
|
716
|
647
|
|
|
|
|
|
6%
Convertible Notes due February and March 2021 (2019 PIPE Notes),
principal
|
2,890
|
-
|
|
Debt
discounts
|
(532)
|
-
|
|
Carrying
value of 2019 PIPE Notes
|
2,358
|
-
|
|
|
|
|
|
Total
carrying value of convertible notes payable
|
$3,074
|
$647
|
July 2014 Private Placement
Between July 31, 2014 and September 10, 2014 the Company entered
into Note Purchase Agreements (the “2014 Note” or
“2014 Notes”) related to its private placement offering
(“2014 Private Placement”) with seven accredited
investors pursuant to which the Company raised aggregate gross
proceeds of $4,750,000 and sold units consisting of five (5) year
senior secured convertible note in the aggregate principal amount
of $4,750,000 that are convertible into 678,568 shares of our
common stock, at a conversion price of $7.00 per share, and
warrants to purchase 929,346 shares of common stock at an exercise
price of $4.60 per share. The 2014 Notes bear interest at a rate of
eight percent (8%) per annum and interest is paid quarterly in
arrears with all principal and unpaid interest due between July and
September 2019.
The Company has the right to prepay the 2014 Notes at any time
after the one-year anniversary date of the issuance of the 2014
Notes at a rate equal to 110% of the then outstanding principal
balance and any unpaid accrued interest. The 2014 Notes are secured
by Company pledged assets and rank senior to all debt of the
Company other than certain senior debt that has been previously
identified as senior to the convertible
notes. Additionally,
Stephan Wallach, the Company’s Chief Executive Officer, has
also personally guaranteed the repayment of the 2014 Notes, subject
to the terms of a Guaranty Agreement executed by him with the
investors. In addition, Mr. Wallach has agreed not to
sell, transfer or pledge 1.5 million shares of the common stock
that he owns so long as his personal guaranty is in
effect.
On October 23, 2018, the Company entered into an agreement with
Carl Grover to exchange (the “Debt Exchange”), subject
to stockholder approval which was received on December 6, 2018, all
amounts owed under the 2014 Note held by him in the principal
amount of $4,000,000 which matures on July 30, 2019, for 747,664
shares of the Company’s common stock, at a conversion price
of $5.35 per share and a four-year warrant to purchase 631,579
shares of common stock at an exercise price of $4.75 per
share. Upon the closing the Company issued Ascendant
Alternative Strategies, LLC, a FINRA broker dealer (or its
designees), which acted as the Company’s advisor in
connection with a Debt Exchange transaction, 30,000 shares of
common stock in accordance with an advisory agreement and four-year
warrants to purchase 80,000 shares of common stock at an exercise
price of $5.35 per share and four-year warrants to purchase 70,000
shares of common stock at an exercise price of $4.75 per
share.
The Company considered the guidance of ASC 470-20,
Debt: Debt with Conversion and Other
Options and ASC 470-60,
Debt: Debt Troubled Debt
Restructuring by Debtors and concluded that the 2014 Note held by Mr.
Grover should be recognized as a debt modification for an induced
conversion of convertible debt under the guidance of ASC 470-20.
The Company recognized all remaining unamortized discounts of
approximately $679,000 immediately subsequent to October 23, 2018
as interest expense, and the fair value of the warrants and
additional shares issued as discussed above were recorded as a loss
on the Debt Exchange in the amount of $4,706,000 during the year
ended December 31, 2018 with the corresponding entry recorded to
equity.
In 2014, the Company initially recorded debt discounts of
$4,750,000 related to the beneficial conversion feature and related
detachable warrants. The beneficial conversion feature discount and
the detachable warrants discount are amortized to interest expense
over the life of the Notes. The unamortized debt discounts
recognized with the Debt Exchange was approximately $679,000. As of
June 30, 2019 and December 31, 2018 the remaining balance of the
debt discounts is approximately $31,000 and $94,000, respectively.
The Company recorded approximately $63,000 and $238,000
amortization of the debt discounts during the six months ended June
30, 2019 and 2018 and is recorded as interest expense.
With respect to the 2014 Private Placement, the Company paid
approximately $490,000 in expenses including placement
agent fees. The issuance costs are amortized to interest
expense over the term of the 2014 Notes. The unamortized issuance
costs recognized with the Debt Exchange was approximately $63,000.
As of June 30, 2019 and December 31, 2018 the remaining balance of
the issuance costs is approximately $3,000 and $10,000,
respectively. The Company recorded approximately $6,000 and $25,000
of the debt discounts amortization during the six months ended June
30, 2019 and 2018, respectively, and is recorded as interest
expense.
As of June 30, 2019 and December 31, 2018 the principal amount of
$750,000 remains outstanding.
Unamortized debt discounts and issuance costs are included with
convertible notes payable, net of debt discount on the condensed
consolidated balance sheets.
January 2019 Private Placement
Between
February 15, 2019 and May 23, 2019, the Company closed four
tranches of its 2019 January Private Placement debt
offering, pursuant to which the Company offered for sale up to
$10,000,000 in principal amount $10,000,000 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 (30) accredited
investors that had a substantial pre-existing relationship with the
Company pursuant to which the Company received aggregate gross
proceeds of $2,890,000 and issued 2019 PIPE Notes in the aggregate
principal amount of $2,890,000 and an aggregate of 57,800 shares of
common stock. The placement agent received 14,450 shares of common
stock for the closed tranches and can receive up to 50,000 shares
of common stock in the offering. Each 2019 PIPE Note matures 24
months after issuance, bears interest at a rate of six percent (6%)
per annum, and the outstanding principal is convertible into shares
of common stock at any time after the 180th day anniversary of the
issuance of the 2019 PIPE Notes, at a conversion price of $10 per
share (subject to adjustment for stock splits, stock
dividends and reclassification of the common
stock).
Upon issuance of the 2019 PIPE Notes, the Company recognized debt
discounts of approximately $634,000, resulting from the allocated
portion of offering proceeds to the separable common stock
issuance. The debt discount is being amortized to interest expense
over the term of the 2019 PIPE Notes. During the six
months ended June 30, 2019 the Company recorded approximately
$101,000 of amortization related to the debt
discounts.
Note 9. Derivative Liability
The Company recognizes and measures warrants in accordance
with ASC Topic 815, Derivatives and
Hedging. The accounting
guidance sets forth a two-step model to be applied in determining
whether a financial instrument is indexed to an entity’s own
stock, which would qualify such financial instruments for a scope
exception. This scope exception specifies that a contract that
would otherwise meet the definition of a derivative financial
instrument would not be considered as such if the contract is both
(i) indexed to the entity’s own stock and
(ii) classified in the stockholders’ equity section of
the entity’s balance sheet. The Company determined
that certain warrants and embedded conversion features issued in
the Company’s private placements are ineligible for equity
classification due to anti-dilution provisions set forth
therein.
Derivative liabilities are recorded at their estimated fair value
(see Note 10, below) at the issuance date and are revalued at each
subsequent reporting date. The Company will continue to revalue the
derivative liability on each subsequent balance sheet date until
the securities to which the derivative liabilities relate to are
exercised or expire.
Various factors are considered in the pricing models the Company
uses to value the derivative liabilities, including its current
stock price, the remaining life, the volatility of its stock price,
and the risk-free interest rate. Future changes in these factors
may have a significant impact on the computed fair value of the
liability. As such, the Company expects future changes in the fair
values to continue and may vary significantly from period to
period. The warrant and embedded liability and revaluations
have not had a cash impact on working capital, liquidity or
business operations.
Warrants
Effective January 1, 2019, the Company adopted ASU No. 2017-11 (see
above, Recently Adopted
Accounting Pronouncements). The new guidance requires companies to exclude any
down round feature when determining whether a freestanding
equity-linked financial instrument (or embedded conversion option)
is considered indexed to the entity’s own stock when applying
the classification guidance in ASC 815-40. Upon adoption of the new
guidance, existing equity-linked financial instruments (or embedded
conversion options) with down round features must be reassessed as
liability classification may no longer be required. As a result,
the Company determined in regard to its 2018 warrants the
appropriate treatment of these warrants that were initially
classified as derivative liabilities should now be classified as
equity instruments.
The Company determined that the liability associated with the 2018
warrants should be remeasured and adjusted to fair value on the
date of the change in classification with the offset to be recorded
through earnings and then the fair value of the warrants should be
reclassified to equity. The Company recorded the change in the
fair value of the 2018 warrants as of the date of change in
classification on March 11, 2019 to earnings. The fair value of the
2018 warrants as of the date of change in classification, in the
amount of $1,494,000 was reclassified from warrant derivative
liability to additional paid in capital as a result of the change
in classification of the warrants.
Increases
or decreases in the fair value of the derivative liability are
included as a component of total other expense in the accompanying
condensed consolidated statements of operations for the respective
period. The changes to the derivative liability for warrants
resulted in a decrease of $401,000 and a decrease of $192,000 for
the three months ended June 30, 2019 and 2018, respectively. The
changes to the derivative liability for warrants resulted in a
decrease of $1,887,000 and a decrease of $904,000 for the six
months ended June 30, 2019 and 2018, respectively.
The estimated fair value of the outstanding warrant liabilities is
$4,969,000 and $9,216,000 as of June 30, 2019 and December 31,
2018, respectively.
The estimated fair value of the warrants was computed as of June
30, 2019 and December 31, 2018 using the Monte Carlo option pricing
model with the following assumptions:
|
|
|
June 30, 2019
(unaudited)
|
|
|
December 31, 2018
|
|
|
Stock price volatility
|
|
|
100.4%-106.8
|
%
|
|
|
83.78%-136.76%
|
|
|
Risk-free interest rates
|
|
|
1.87%-2.18%
|
|
|
|
2.465%-2.577%
|
|
|
Annual dividend yield
|
|
|
0
|
%
|
|
|
0%
|
|
|
Expected life
|
|
|
0.08-1.29
years
|
|
|
|
0.58-2.76
|
|
In addition, management assessed the probabilities of future
financing assumptions in the valuation models.
Note 10. Fair Value of Financial
Instruments
Fair value measurements are performed in accordance with the
guidance provided by ASC Topic 820, “Fair Value Measurements
and Disclosures.” ASC Topic 820 defines fair value as the price that
would be received from selling an asset or paid to transfer a
liability in an orderly transaction between market participants at
the measurement date. Where available, fair value is based on
observable market prices or parameters or derived from such prices
or parameters. Where observable prices or parameters are not
available, valuation models are applied.
ASC Topic 820 establishes a fair value hierarchy that requires an
entity to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. Assets and
liabilities recorded at fair value in the financial
statements are categorized based upon the hierarchy of levels of
judgment associated with the inputs used to measure their fair
value. Hierarchical levels directly related to the amount of
subjectivity associated with the inputs to fair valuation of these
assets and liabilities, are as follows:
Level 1 – Quoted prices in active markets for identical
assets or liabilities that an entity has the ability to
access.
Level 2 – Observable inputs other than quoted prices included
in Level 1, such as quoted prices for similar assets and
liabilities in active markets; quoted prices for identical or
similar assets and liabilities in markets that are not active; or
other inputs that are observable or can be corroborated by
observable market data.
Level 3 – Unobservable inputs that are supportable by little
or no market activity and that are significant to the fair value of
the asset or liability.
The carrying amounts of the Company’s financial instruments,
including cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities, capital lease obligations and
deferred revenue approximate their fair values based on their
short-term nature. The carrying amount of the Company’s
long-term notes payable approximates its fair value based on
interest rates available to the Company for similar debt
instruments and similar remaining maturities.
The estimated fair value of the contingent consideration related to
the Company's business combinations is recorded using significant
unobservable measures and other fair value inputs and is therefore
classified as a Level 3 financial instrument.
The following table details the fair value measurement within the
fair value hierarchy of the Company’s financial instruments,
which includes the Level 3 liabilities (in thousands):
|
|
Fair Value at June 30,
2019
(unaudited)
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Contingent
acquisition debt, current portion
|
$695
|
$-
|
$-
|
$695
|
|
Contingent
acquisition debt, less current portion
|
6,898
|
-
|
-
|
6,898
|
|
Warrant
derivative liability
|
4,969
|
-
|
-
|
4,969
|
|
Total
liabilities
|
$12,562
|
$-
|
$-
|
$12,562
|
|
|
Fair Value at December 31, 2018
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Contingent
acquisition debt, current portion
|
$795
|
$-
|
$-
|
$795
|
|
Contingent
acquisition debt, less current portion
|
7,466
|
-
|
-
|
7,466
|
|
Warrant
derivative liability
|
9,216
|
-
|
-
|
9,216
|
|
Total
liabilities
|
$17,477
|
$-
|
$-
|
$17,477
|
The following table reflects the activity for the Company’s
warrant derivative liability associated with the Company’s
2017, 2015 and 2014 Private Placements measured at fair value using
Level 3 inputs (in thousands):
|
|
Warrant Derivative Liability
|
|
Balance
at December 31, 2018
|
$9,216
|
|
Issuance
|
-
|
|
Adjustments
to estimated fair value
|
(1,887)
|
|
Adjustments
related to warrant exercises
|
(866)
|
|
Adjustments
related to the reclassification of warrants to equity
|
(1,494)
|
|
Balance
at June 30, 2019 (unaudited)
|
$4,969
|
The following table reflects the activity for the Company’s
contingent acquisition liabilities measured at fair value using
Level 3 inputs (in thousands):
|
|
|
|
Balance
at December 31, 2018
|
$8,261
|
|
Liabilities
acquired
|
-
|
|
Liabilities
settled
|
(235)
|
|
Adjustments
to liabilities included in earnings
|
(433)
|
|
Adjustment
to purchase price
|
-
|
|
Balance
at June 30, 2019 (unaudited)
|
$7,593
|
The fair value of the contingent acquisition liabilities is
evaluated each reporting period using projected revenues, discount
rates, and projected timing of revenues. Projected contingent
payment amounts are discounted back to the current period using a
discount rate. Projected revenues are based on the Company’s
most recent internal operational budgets and long-range strategic
plans. Increases in projected revenues will result in higher fair
value measurements. Increases in discount rates and the time to
payment will result in lower fair value measurements. Increases
(decreases) in any of those inputs in isolation may result in a
significantly lower (higher) fair value measurement. During the
three and six months ended June 30, 2018, the net adjustment to the
fair value of the contingent acquisition debt was a decrease of
$1,246,000 and $1,459,000, respectively. During the three and six
months ended June 30, 2019, the net adjustment to the fair value of
the contingent acquisition debt was a decrease of $433,000
and is included in the
Company’s statements of operations in general and
administrative expense.
Note 11. Stockholders’ Equity
The Company’s Certificate of Incorporation, as amended,
authorizes the issuance of two classes of stock to be designated:
“Common Stock” and “Preferred
Stock”.
The
total number of shares of stock which the Company has authority to
issue is 50,000,000 shares of common stock, par value $0.001 per
share and 5,000,000 shares of preferred stock, par value $0.001 per
share, of which 161,135 shares have been designated as Series A
convertible preferred stock, par value $0.001 per share
(“Series A Convertible Preferred”), 1,052,631 has been
designated as Series B convertible preferred stock (“Series B
Convertible Preferred”), and 700,000 has been designated
as Series C convertible preferred stock (“Series C
Convertible Preferred”).
Common Stock
As of June 30, 2019 and December 31, 2018 there were 29,316,445 and
25,760,708 shares of common stock outstanding,
respectively. The holders of the common stock are
entitled to one vote for each share held at all meetings of
stockholders (and written actions in lieu of
meetings).
Stock Offering
On
February 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 common stock, par value $0.001 per share, at an
offering price of $7.00 per share. Pursuant to the Purchase
Agreement, the Company also issued to the investor a three-year
warrant to purchase 250,000 shares of common stock at an exercise
price of $7.00. The proceeds were $1,750,000. Consulting fees to
the Placement Agent 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 three-year warrants 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.
On June
17, 2019, the Company entered into a Securities Purchase Agreement
(the “Purchase Agreement”) with one accredited investor
that had a substantial pre-existing relationship with the Company
pursuant to which the Company sold 250,000 shares of common stock,
par value $0.001 per share, at an offering price of $5.50 per
share. The proceeds were $1,375,000. The Company did not pay
consulting fees in this transaction.
Between
February 15, 2019 and May 23, 2019, the Company closed its fourth
tranche of its 2019 January Private Placement debt
offering, pursuant to which the Company offered for up to a maximum
of $10,000,000 in principal amount of notes (the “2019 PIPE
Notes”), with each investor receiving in addition to a 2019
PIPE Notes, 2,000 shares of common stock for each $100,000
invested. The Company entered into subscription agreements with
thirty (30) accredited investors that had a substantial
pre-existing relationship with the Company pursuant to which the
Company received aggregate gross proceeds of $2,890,000 and issued
2019 PIPE Notes in the aggregate principal amount of $2,890,000 and
an aggregate of 57,800 shares of common stock. The placement agent
received 14,450 shares of common stock for the closed tranches and
can receive up to 50,000 shares of common stock in the offering.
Each 2019 PIPE Note matures 24 months after issuance, bears
interest at a rate of six percent (6%) per annum, and the
outstanding principal is convertible into shares of common stock at
any time after the 180th day anniversary of the issuance of the
2019 PIPE Note, at a conversion price of $10 per share (subject to
adjustment for stock splits, stock dividends and reclassification
of the common stock).
On
March 18, 2019, the Company issued 8% Notes to two accredited
investors that the Company had a substantial pre-existing
relationship with and from whom the Company raised cash proceeds in
the aggregate of $2,000,000. In addition to the 8% Notes, the
Company issued 20,000 shares of common stock par value $0.001 for
each $1,000,000 invested as well as for each $1,000,000 invested
five-year warrants to purchase 20,000 shares of common stock at a
price per share of $6.00. The 8% Notes
pay interest at a rate of eight percent (8%) per annum and interest
is paid quarterly in arrears with all principal and unpaid interest
due at maturity on March 18, 2021. The Company issued an aggregate
of 40,000 shares of common stock and warrants to purchase an
aggregate of 40,000 shares of common stock with the 8% Notes in the
principal amount of $2,000,000.
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 was 44,599 shares of the Company’s
common stock, par value $0.001. In addition, the exercise price of
the warrants issued at their respective closings is reset pursuant
to the terms of the warrants to exercise prices ranging from $4.06
to $4.44 from the exercise price at issuance of $4.75.
Convertible Preferred Stock
Series A Convertible Preferred Stock
The Company has 161,135 shares of Series A Convertible Preferred
Stock outstanding as of June 30, 2019, and December 31, 2018 and
accrued dividends of approximately $143,000 and $137,000,
respectively. The holders of the Series A Convertible Preferred
Stock are entitled to receive a cumulative dividend at a rate of
8.0% per year, payable annually either in cash or shares of the
Company's common stock at the Company's election. Each share of
Series A Convertible Preferred is convertible into common stock at
a conversion rate of 0.10. The holders of Series A Convertible
Preferred are entitled to receive payments upon liquidation,
dissolution or winding up of the Company before any amount is paid
to the holders of common stock. The holders of Series A Convertible
Preferred have no voting rights, except as required by
law.
Series B Convertible Preferred Stock
On March 30, 2018, the Company completed the Series B Offering,
pursuant to which the Company sold 381,173 shares of Series B
Convertible Preferred Stock at an offering price of $9.50 per share
and received gross proceeds in aggregate of approximately
$3,621,000. The net proceeds to the Company from the Series B
Offering were approximately $3,289,000 after deducting commissions,
closing and issuance costs. Each share of Series B Convertible
Preferred Stock is initially convertible at any time, in whole or
in part, at the option of the holders, at an initial conversion
price of $4.75 per share, into two (2) shares of common stock and
automatically converts into two (2) shares of common stock on its
two-year anniversary of issuance. Holders of the Series B
Convertible Preferred Stock have no voting rights, except as
required by law.
The Company has 129,437 shares of Series B Convertible Preferred
Stock outstanding as of June 30, 2019 and December 31, 2018. The
holders of the Series B Convertible Preferred Stock are entitled to
receive cumulative dividends on the Series B Convertible Preferred
Stock from the date of original issue at a rate of 5.0% per
annum payable quarterly in arrears on or about the last day of
March, June, September and December of each year, beginning June
30, 2018. As of June 30, 2019 and December 31, 2018 accrued
dividends were approximately $24,000 and $11,000,
respectively.
Series C Preferred Stock
Between August 17, 2018 and October 4, 2018, the Company closed
three tranches of its Series C Offering, pursuant to which the
Company sold 697,363 shares of Series C Convertible Preferred Stock
at an offering price of $9.50 per share and agreed to issue
two-year warrants (the “Preferred Warrants”) to
purchase up to 1,394,726 shares of the Company’s common stock
at an exercise price of $4.75 per share to Series C Preferred
holders that voluntarily convert their shares of Series C Preferred
Stock to the Company’s common stock within two-years from the
issuance date. Each share of Series C Convertible 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 two (2) shares of common stock and was
automatically convertible into two (2) shares of common stock on
its two-year anniversary of issuance.
The Company issued the placement agent in connection with the
Series C Offering 116,867 warrants as compensation, exercisable at
$4.75 per share and expire in December 2020. The Company determined
that the warrants should be classified as equity instruments and
used Black-Scholes to estimate the fair value of the warrants
issued to the placement agent of $458,000 as of the issuance date
December 19, 2018.
The Company received aggregate gross proceeds totaling
approximately $6,625,000. The net proceeds to the Company from the
Series C Offering were approximately $6,236,000 after deducting
commissions, closing and issuance costs.
Upon liquidation, dissolution or winding up of the Company, each
holder of Series C Preferred Stock was entitled to receive a
distribution, to be paid in an amount equal to $9.50 for each and
every share of Series C Preferred Stock held by the holders of
Series C Preferred Stock, plus all accrued and unpaid dividends in
preference to any distribution or payments made or any asset
distributed to the holders of common stock, the Series A Preferred
Stock, the Series B Preferred Stock or any other class or series of
stock ranking junior to the Series C Preferred Stock.
The shares of Series C Convertible Preferred Stock issued in the
Series C Offering were sold pursuant to the Company’s
Registration Statement, which was declared effective with the SEC
on December 10, 2018.
Pursuant to the Certificate of Designation, the Company agreed to
pay cumulative dividends on the Series C Convertible Preferred
Stock from the date of original issue at a rate of 6.0% per
annum payable quarterly in arrears on or about the last day of
March, June, September and December of each year, beginning
September 30, 2018. In 2018 a total of approximately $51,000 of
dividends was paid to the holders of the Series C Convertible
Preferred Stock. The Series C Convertible Preferred Stock ranked
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 had no voting rights.
The contingent obligation to issue warrants is considered an
outstanding equity-linked financial instrument and was therefore
recognized as equity classified warrants, initially measured at
relative fair value of approximately $3,727,000, resulting in an
initial discount to the carrying value of the Series C Preferred
Stock.
Due to the reduction of allocated proceeds to the contingently
issuable common stock warrants and Series C Preferred Stock, the
effective conversion price of the Series C Preferred Stock was less
than the Company’s common stock price on each commitment
date, resulting in an aggregate beneficial conversion feature of
approximately $3,276,000, which reduced the carrying value of the
Series C Preferred Stock. Since the conversion option of the Series
C Preferred Stock was immediately exercisable, the beneficial
conversion feature was immediately accreted as a deemed dividend,
resulting in an increase in the carrying value of the C Preferred
Stock of approximately $3,276,000.
The Series C Preferred Stock was automatically redeemable at a
price equal to its original purchase price plus all accrued but
unpaid dividends in the event the average of the daily volume
weighted average price of the Company’s common stock for the
30 days preceding the two-year anniversary date of issuance is less
than $6.00 per share. As redemption was outside of the
Company’s control, the Series C Preferred Stock was
classified in temporary equity at issuance. All of the Series C
Preferred shares were converted to common stock during 2018 and the
Company has issued 1,394,726 warrants. As of June 30, 2019 and
December 31, 2018, no shares of Series C Convertible Preferred
Stock remain outstanding.
Advisory Agreements
The
Company records the fair value of common stock and warrants issued
in conjunction with investor relations advisory service agreements
based on the closing stock price of the Company’s common
stock on the measurement date. The fair value of the stock issued
is recorded through equity and prepaid advisory fees and amortized
over the life of the service agreement.
ProActive Capital Resources Group, LLC
On September 1, 2015, the Company entered into an agreement
with ProActive
Capital Resources
Group, LLC (“PCG”), pursuant to which PCG
agreed to provide investor relations services for six (6) months in
exchange for fees paid in cash of $6,000 per month and 5,000 shares
of restricted common stock to be issued upon successfully meeting
certain criteria in accordance with the agreement. Subsequent
to the September 1, 2015 initial agreement, the agreement was
extended through August 2018 under six-month incremental service
agreements under the same terms with the monthly cash payments of
$6,000 per month and 5,000 shares of restricted common stock for
every six (6) months of service performed.
The stock issuance expense associated with the amortization of
advisory fees is recorded as stock issuance expense and is included
in general and administrative expense on the Company’s
condensed consolidated statements of operations for the six months
ended June 30, 2018 is approximately $13,000. The Company did not
further extend this agreement subsequent to August
2018.
Ignition Capital, LLC
On April 1, 2018, the Company entered into an agreement
with Ignition Capital,
LLC (“Ignition”), pursuant to which
Ignition agreed to provide investor relations services for a period
of twenty-one (21) months in exchange for 50,000 shares of
restricted common stock which were issued in advance of the service
period. The fair value of the shares issued is recorded as
prepaid advisory fees and is included in prepaid expenses and other
current assets on the Company’s condensed consolidated
balance sheets and is amortized on a pro-rata basis over the term
of the agreement. During the three months ended June 30, 2019
and 2018 the Company recorded expense of approximately
$30,000 and $30,000, respectively.
During the six months ended June 30, 2019 and 2018, the
Company recorded expense of approximately $60,000 and $30,000,
respectively, in connection
with amortization of the stock issuance. The stock issuance expense
associated with the amortization of advisory fees is recorded as
equity issuance expense and is included in general and
administrative expense on the Company’s condensed
consolidated statements of operations.
Greentree Financial Group, Inc.
On March 27, 2018, the Company entered into an agreement
with Greentree Financial Group,
Inc. (“Greentree”), pursuant to which
Greentree agreed to provide investor relations services for a
period of twenty-one (21) months in exchange for 75,000 shares of
restricted common stock which were issued in advance of the service
period. The fair value of the shares issued is approximately
$311,000 and is recorded as prepaid advisory fees and is included
in prepaid expenses and other current assets on the Company’s
condensed consolidated balance sheets and is amortized on a
pro-rata basis over the term of the agreement. During the
three months ended June 30, 2019 and 2018 the Company recorded
expense of approximately $45,000 and $44,000, respectively. During the six
months ended June 30, 2019 and 2018, the Company recorded
expense of approximately $89,000 and $44,000, respectively in connection with amortization of the stock
issuance. The stock issuance expense associated with the
amortization of advisory fees is recorded as equity issuance
expense and is included in general and administrative expense on
the Company’s condensed consolidated statements of
operations.
Capital Market Solutions, LLC.
On July
1, 2018, the Company entered into an agreement
with Capital Market
Solutions, LLC. (“Capital Market”),
pursuant to which Capital Market agreed to provide investor
relations services for a period of 18 months in exchange for
100,000 shares of restricted common stock which were issued in
advance of the service period. In addition, the Company agreed
to pay in cash a base fee of $300,000, payable as follows; $50,000
paid in August 2018, and the remaining balance shall be paid
monthly in the amount of $25,000 through January 1, 2019.
Subsequent to the initial agreement, the Company extended the term
for an additional 24 months through December 31, 2021 and agreed to
issue Capital Market an additional 100,000 shares of restricted
common stock which were issued in advance of the service period and
$125,000 of additional fees.
On
January 9, 2019, the Company executed the second amendment to the
agreement with Capital Market, pursuant to which, the aggregate
base fee increased to $525,000, and the Company issued an
additional 75,000 of restricted common stock. In addition, the
Company issued to Capital Market a four-year warrant to purchase
925,000 shares of the Company’s common stock at $6.00 per
share vesting 50% at issuance on January 9, 2019 and 25% on January
9, 2020 and 25% on January 9, 2021. The fair value of the vested
portion of the warrant was approximately $1,927,000 and was
recorded as equity on the Company’s balance sheet as of June
30, 2019. During the three and six
months ended June 30, 2019, the Company recorded expense
of approximately $270,000 and
$1,927,000, respectively, in connection with amortization of equity
issuance expense related to the vesting of the warrant. The equity
issuance expense associated with the amortization of advisory fees
is recorded as equity issuance expense and is included in general
and administrative expense on the Company’s condensed
consolidated statements of operations.
The fair value of the common stock shares issued is recorded as
prepaid advisory fees and is included in prepaid expenses and other
current assets on the Company’s condensed consolidated
balance sheets and is amortized on a pro-rata basis over the term
of the agreement. During the three and six months ended June
30, 2019, the Company recorded expense of
approximately $129,000 and
$257,000, respectively, in connection with amortization of the
stock issuance expense. The stock issuance expense associated with
the amortization of advisory fees is recorded as equity issuance
expense and is included in general and administrative expense on
the Company’s condensed consolidated statements of
operations.
During the three and six months ended June 30, 2019, the
Company recorded expense of approximately $50,000
in connection with the base fee. The
cash fee paid for advisory services is recorded as equity issuance
expense and is included in general and administrative expense on
the Company’s condensed consolidated statements of
operations.
I-Bankers Securities Incorporated
On
April 5, 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 12 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 for debt arrangements and equity offerings in conjunction with
any transactions I-Bankers closes with the Company in accordance
with the agreement. During the three
and six months ended June 30, 2019, the Company recorded
expense of approximately $143,000, in connection with amortization of the
stock issuance expense. The stock issuance expense associated with
the amortization of advisory fees is recorded as equity issuance
expense and is included in general and administrative expense on
the Company’s condensed consolidated statements of
operations.
Warrants
As of June 30, 2019, warrants to purchase 6,903,874 shares
of the Company's common stock at prices ranging from
$2.00 to $10.00
were outstanding. As of June 30, 2019,
6,556,999 warrants are exercisable and expire at various dates
through March 2024
and have a weighted average remaining
term of approximately 2.23 years and
are included in the table below as of June 30,
2019.
The Company uses a combination of option-pricing models to estimate
the fair value of the warrants including the Monte Carlo, Lattice
and Black-Scholes.
A summary of the warrant activity for the six months ended June 30,
2019 is presented in the following table:
|
|
|
|
Balance
at December 31, 2018
|
5,876,980
|
|
Issued
|
1,315,000
|
|
Expired
/ cancelled
|
-
|
|
Exercised
|
(288,106)
|
|
Balance
at June 30, 2019, outstanding
|
6,903,874
|
|
Balance
at June 30, 2019, exercisable
|
6,556,999
|
Stock Options
On May 16, 2012, the Company established the 2012 Stock Option Plan
(“Plan”) authorizing the granting of options for up to
9,000,000 shares of common stock.
The purpose of the Plan is to promote the long-term growth and
profitability of the Company by (i) providing key people and
consultants with incentives to improve stockholder value and to
contribute to the growth and financial success of the Company and
(ii) enabling the Company to attract, retain and reward the best
available persons for positions of substantial responsibility. The
Plan allows for the grant of: (a) incentive stock options; (b)
nonqualified stock options; (c) stock appreciation rights; (d)
restricted stock; and (e) other stock-based and cash-based awards
to eligible individuals qualifying under Section 422 of the
Internal Revenue Code, in any combination (collectively,
“Options”). At June 30, 2019, the Company had
3,732,820 shares of common stock
available for issuance under the Plan.
A summary of the Plan stock option activity for the six months
ended June 30, 2019 is presented in the following
table:
|
|
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contract Life (years)
|
Aggregate
Intrinsic
Value
(in
thousands)
|
|
Outstanding
December 31, 2018
|
2,394,379
|
$4.45
|
6.94
|
$3,049
|
|
Issued
|
2,540,062
|
6.66
|
|
|
|
Canceled /
expired
|
(133,085)
|
4.75
|
|
|
|
Exercised
|
(85,054)
|
4.36
|
|
-
|
|
Outstanding June
30, 2019
|
4,716,302
|
$5.63
|
8.13
|
$2,907
|
|
Exercisable June
30, 2019
|
3,719,801
|
$5.96
|
8.03
|
$1,642
|
The weighted-average fair value per share of the granted options
for the six months ended June 30, 2019 was approximately
$4.26.
Stock-based compensation expense included in the condensed
consolidated statements of operations was $393,000 and $123,000 for
the three months ended June 30, 2019 and 2018, respectively, and
$11,642,000 and $245,000 for the six months ended June 30, 2019 and
2018, respectively.
As of June 30, 2019, there was approximately $1,543,000
of total unrecognized compensation
expense related to unvested stock options granted under the Plan.
The expense is expected to be recognized over a weighted-average
period of 1.44 years.
The Company uses the Black-Scholes to estimate the fair value of
stock options. The use of a valuation model requires the Company to
make certain assumptions with respect to selected model inputs.
Expected volatility is calculated based on the historical
volatility of the Company’s stock price over
the expected term of the option. The expected life is based on
the contractual life of the option and expected employee
exercise and post-vesting employment termination behavior. The
risk-free interest rate is based on U.S. Treasury zero-coupon
issues with a remaining term equal to the expected life assumed at
the date of the grant.
Restricted Stock Units
On August 9, 2017, the Company issued restricted stock units for an
aggregate of 500,000 shares of common stock, to its employees and
consultants. These shares of common stock will be issued upon
vesting of the restricted stock unit (“RSU’s”).
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 June 30, 2019, none of the
RSU’s have vested. There were no grants during the six months
ended June 30, 2019 and 2018.
The Company adopted ASU 2018-07 on January 1, 2019 and the
stock-based compensation expense for non-employee grants is based
on the closing price of our common stock of $5.72 on December 31,
2018, which was the last business day before we adopted ASU
2018-07. See Note 1 above, Recently Adopted Accounting
Pronouncements for further
discussion of the Company’s adoption of ASU
2018-07.
The fair value of each RSU’s issued to employees is based on
the closing stock price on the grant date of $4.53 and is
recognized as stock-based compensation expense over the vesting
term of the award.
|
|
|
|
Balance
at December 31, 2018
|
475,000
|
|
Issued
|
-
|
|
Canceled
|
(50,000)
|
|
Balance
at June 30, 2019
|
425,000
|
Stock-based compensation expense related to the RSU’s
included in the condensed consolidated statements of operations was
$20,000 and $92,000 for the three months ended June 30, 2019 and
2018, respectively, and $115,000 and $207,000 for the six months
ended June 30, 2019 and 2018, respectively.
As of June 30, 2019, total unrecognized stock-based compensation
expense related to restricted stock units to employees and
consultants was approximately $1,383,000, which will be recognized
over a weighted average period of 4.11 years.
Note 12. Segment and Geographical
Information
The
Company is a leading multi-channel lifestyle company offering a
hybrid of the direct selling business model that also offers
e-commerce and the power of social selling. Assembling a
virtual main street of products and services under one corporate
entity, Youngevity offers products from top selling retail
categories: health/nutrition, home/family, food/beverage (including
coffee), spa/beauty, apparel/jewelry, as well as innovative
services. The Company operates in three segments: the direct selling
segment where products are offered through a global distribution
network of preferred customers and distributors, the commercial
coffee segment where roasted and green coffee bean products are
sold directly to businesses, and commercial hemp segment provides
end to end extraction and processing via the Company’s
proprietary systems that allow for the conversion of hemp feed
stock into hemp oil and hemp extracts. The primary focus of
the segment will be to generate revenue through sales of extraction
services and end to end processing services for the conversion of
Hemp and Hemp oil into sellable ingredients. Additionally,
the Company offers various rental, sales, and service programs
of the company's extraction and processing
systems.
The Company’s segments reflect the manner in which the
business is managed and how the Company allocates resources and
assesses performance. The Company’s chief operating decision
maker is the Chief Executive Officer. The Company’s chief
operating decision maker evaluates segment performance primarily
based on revenue and segment operating income. The principal
measures and factors the Company considered in determining the
number of reportable segments were revenue, gross margin
percentage, sales channel, customer type and competitive
risks.
The accounting policies of the segments are consistent with those
described in the summary of significant accounting policies.
Segment revenue excludes intercompany revenue eliminated in the
consolidation. The following tables present certain financial
information for each segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
Direct
selling
|
$32,124
|
$36,846
|
$65,544
|
$72,157
|
|
Commercial
coffee
|
5,819
|
7,409
|
13,524
|
15,092
|
|
Commercial hemp
|
274
|
-
|
341
|
-
|
|
Total
revenues
|
$38,217
|
$44,255
|
$79,409
|
$87,249
|
|
Gross
profit (loss)
|
|
|
|
|
|
Direct
selling
|
$22,240
|
$25,087
|
$44,995
|
$49,822
|
|
Commercial
coffee
|
3,489
|
295
|
7,556
|
572
|
|
Commercial hemp
|
(49)
|
-
|
(22)
|
-
|
|
Total
gross profit
|
$25,680
|
$25,382
|
$52,529
|
$50,394
|
|
Operating
income (loss)
|
|
|
|
|
|
Direct
selling
|
$(785)
|
$1,376
|
$(13,093)
|
$2,157
|
|
Commercial
coffee
|
1,842
|
(723)
|
2,726
|
(1,480)
|
|
Commercial hemp
|
(911)
|
-
|
(1,428)
|
-
|
|
Total
operating income (loss)
|
$146
|
$653
|
$(11,795)
|
$677
|
|
Net
income (loss)
|
|
|
|
|
|
Direct
selling
|
$(1,250)
|
$723
|
$(14,627)
|
$132
|
|
Commercial
coffee
|
1,906
|
(1,337)
|
3,539
|
(3,054)
|
|
Commercial hemp
|
(945)
|
-
|
(1,461)
|
-
|
|
Total
net loss
|
$(289)
|
$(614)
|
$(12,549)
|
$(2,922)
|
|
Capital
expenditures
|
|
|
|
|
|
Direct
selling
|
$63
|
$28
|
$80
|
$115
|
|
Commercial
coffee
|
843
|
51
|
3,415
|
730
|
|
Commercial hemp
|
99
|
-
|
1,482
|
-
|
|
Total
capital expenditures
|
$1,005
|
$79
|
$4,977
|
$845
|
|
Capital
expenditures acquired through acquisitions
|
|
|
|
|
|
Direct
selling
|
$-
|
$-
|
$-
|
$-
|
|
Commercial
coffee
|
-
|
-
|
-
|
-
|
|
Commercial hemp
|
-
|
-
|
1,133
|
-
|
|
Total
capital expenditures acquired through
acquisitions
|
$-
|
$-
|
$1,133
|
$-
|
|
|
|
|
|
June 30,
2019
(unaudited)
|
|
|
Total
assets
|
|
|
|
Direct selling
|
$40,315
|
$38,947
|
|
Commercial coffee
|
48,552
|
37,026
|
|
Commercial hemp
|
22,447
|
-
|
|
Total assets
|
$ 111,314
|
$75,973
|
* Segment results and total assets as of and for the
three and six months ended June 30, 2019 has been restated. See
Note 2.
Total tangible assets, net located outside the United States were
approximately $8.0 million and $6.2 million as of June 30, 2019 and
December 31, 2018, respectively.
The Company conducts its operations primarily in the United States.
For the three months ended June 30, 2019 and 2018
approximately 15% and 14%, respectively of the
Company’s sales were derived from sales outside the United
States. For both the six months ended June 30, 2019
and 2018 approximately 14%, of the Company’s
sales were derived from sales outside the United
States.
The following table displays revenues attributable to the
geographic location of the customer (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
United
States
|
$32,635
|
$37,980
|
$68,417
|
$75,373
|
|
International
|
5,582
|
6,275
|
10,992
|
11,876
|
|
Total
revenues
|
$38,217
|
$44,255
|
$79,409
|
$87,249
|
*
Revenue for the three and six months ended June 30, 2019 has been
restated. See Note 2.
Note
13. Subsequent Events
None.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Restatement of previously reported unaudited condensed consolidated
financial statements
This “Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations” has been
amended and restated to give effect to the restatement of our
unaudited condensed consolidated financial statements as more fully
described in “Note 2. Restatement of previously reported
unaudited condensed consolidated financial statements” in
“Item 1. Financial Statements.”
FORWARD LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward-looking
statements. The words “expects,”
“anticipates,” “believes,”
“intends,” “plans” and similar expressions
identify forward-looking statements. In addition, any statements
which refer to expectations, projections or other characterizations
of future events or circumstances are forward-looking statements.
We undertake no obligation to publicly disclose any revisions to
these forward-looking statements to reflect events or circumstances
occurring subsequent to filing this Form 10-Q with the Securities
and Exchange Commission. These forward-looking statements are
subject to risks and uncertainties, including, without limitation,
those risks and uncertainties discussed in Part I, Item 1A,
“Risk Factors” and in Part II, Item 7,
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in our annual report on
Form 10-K filed with the Securities and Exchange Commission on
April 15, 2019 and herein as reported under Part II Other
Information, Item 1A. Risk Factors. In addition, new risks emerge
from time to time and it is not possible for management to predict
all such risk factors or to assess the impact of such risk factors
on our business. Accordingly, our future results may differ
materially from historical results or from those discussed or
implied by these forward-looking statements. Given these risks and
uncertainties, the reader should not place undue reliance on these
forward-looking statements.
In the following text, the terms “we,”
“our,” and “us” may refer, as the context
requires, to Youngevity International, Inc. or collectively to
Youngevity International, Inc. and its subsidiaries.
Overview
We
operate in three segments: (i) the direct selling segment where
products are offered through a global distribution network of
preferred customers and distributors, (ii) the commercial coffee
segment where products are sold directly to businesses, processed
green coffee beans are processed and milling services are provided
for unprocessed green coffee beans, and (iii) the commercial hemp
segment provides end to end extraction and processing via our
proprietary systems that allow for the conversion of hemp feed
stock into hemp oil and hemp extracts.
|
●
|
Domestic direct selling network is operated
through the following (i) domestic subsidiaries: AL Global
Corporation, 2400 Boswell LLC, MK Collaborative LLC, and Youngevity
Global LLC and (ii) foreign subsidiaries: Youngevity Australia Pty.
Ltd., Youngevity NZ, Ltd., Youngevity Mexico S.A. de CV, Youngevity
Israel, Ltd., Youngevity Russia, LLC, Youngevity Colombia S.A.S,
Youngevity International Singapore Pte. Ltd., Mialisia Canada, Inc.
and Legacy for Life Limited (Hong Kong). We also operate through
the BellaVita Group LLC, with operations in Taiwan, Hong Kong,
Singapore, Indonesia, Malaysia and Japan. We also operate subsidiary branches of Youngevity
Global LLC in the Philippines and
Taiwan.
|
|
●
|
Commercial coffee business is
operated through CLR and its wholly owned subsidiary, Siles
Plantation Family Group S.A. (“Siles”).
|
|
●
|
Commercial
hemp business is operated through our wholly owned subsidiary,
Khrysos Industries, Inc., a Delaware corporation. Khrysos
Industries, Inc. (“KII”) acquired the assets of Khrysos
Global Inc. a Florida corporation in February 2019 and the
wholly-owned subsidiaries of Khrysos Global Inc., INXL
Laboratories, Inc., a Florida corporation and INX Holdings, Inc., a
Florida corporation.
|
We
conduct our operations primarily in the United States. For both the
three months ended June 30, 2019 and 2018 approximately
15% of our sales were derived from sales outside the
United States. For both the six months ended June 30,
2019 and 2018 approximately 14%, respectively, of our
sales were derived from sales outside the United
States.
Direct
Selling Segment
In
the direct selling segment, we sell health and wellness products on
a global basis and offer a wide range of products through an
international direct selling network of independent distributors.
Our multiple independent selling forces sell a variety of products
through friend-to-friend marketing and social
networking. In the direct selling segment, we sell
health and wellness, beauty product and skin care, scrap booking
and story booking items, packaged food products and other
service-based products on a global basis and more recently our Hemp
FX™ hemp-derived cannabinoid product line and offer a wide
range of products through an international direct selling network.
Our direct sales are made through our network, which is a web-based
global network of customers and distributors. Our independent sales
force markets a variety of products to an array of customers,
through friend-to-friend marketing and social networking. We
consider our company to be an e-commerce company whereby personal
interaction is provided to customers by our independent sales
network. Initially, our focus was solely on the sale of products in
the health, beauty and home care market through our marketing
network; however, we have since expanded our selling efforts to
include a variety of other products in other markets. Our direct
selling segment offers more than 5,600 products to support a
healthy lifestyle including:
|
Nutritional
supplements
|
Gourmet
coffee
|
|
Weight
management
|
Skincare and
cosmetics
|
|
Health and
wellness
|
Packaged
foods
|
|
Lifestyle products
(spa, bath, home and garden)
|
Pet
care
|
|
Digital products
including scrap and memory books
|
Telecare health
services
|
|
Apparel and fashion
accessories
|
Business
lending
|
Since
2012 we have expanded our operations through a series of
acquisitions of the assets and equity of twenty-four (24) direct
selling companies including their product lines and sales forces.
We have also substantially expanded our distributor base by merging
the assets that we have acquired under our web-based independent
distributor network, as well as providing our distributors with
additional new products to add to their product
offerings.
Commercial Coffee Segment
We own a traditional coffee roasting business,
CLR, that sells roasted and unroasted coffee and produces coffee
under its own Café La Rica brand, Josie’s Java House
brand, Javalution brands and Café Cachita. CLR produces coffee
under a variety of private labels through major national sales
outlets and major customers including cruise lines and office
coffee service operators. In April 2017, CLR reached an agreement
with Major League Baseball's Miami Marlins to feature CLR’s
Café La Rica Gourmet Espresso coffee as the "Official Cafecito
of the Miami Marlins" at Marlins Park in Miami, Florida. The
current agreement with the Miami Marlins continues through the 2019
baseball season with an option to renew for the 2020 season.
In January 2019, CLR acquired the Café Cachita Brand of
espresso and in February we announced the expansion of our recently
acquired Café Cachita Brand of espresso into over 500 retail
stores throughout Southeastern Grocers. The new distribution
footprint now includes all Winn Dixie, Bi-Lo, Fresco Y Mas, Save
Mart and Harvey stores. In June 2019, we announced all-store
distribution for CLR’s Javalution™ Hemp Infused Coffee
Brand, scheduled to ship in the fourth quarter with the
distribution footprint including 400 Winn Dixie stores, 96 Bi-Lo
stores, 25 Fresco Y Mas stores, and 50 Harvey
stores.
During
fiscal 2014 CLR acquired the Siles Plantation Family Group, a
coffee plantation and dry-processing facility located in Matagalpa,
Nicaragua, an ideal coffee growing region that is historically
known for high quality coffee production. The dry-processing
facility is approximately 26 acres and the plantation is
approximately 500 acres and produces 100 percent Arabica coffee
beans that are shade grown, Rainforest Alliance Certified™
and Fair Trade Certified™. CLR is also in the process of
expanding its capabilities in Nicaragua by constructing a large
processing mill. The plantation, the dry-processing facilities and
existing U.S. based coffee roaster facilities allow CLR to control
the coffee production process from field to
cup.
Commercial Hemp Segment
In the commercial hemp segment, we are engaged in
the CBD hemp extraction technology and equipment business. We
develop, manufacture and sell equipment and related services to
clients which enable them to extract CBD oils from hemp
stock. In addition, through INX Laboratories, Inc., a wholly
owned subsidiary of KII, we own a laboratory testing facility that
provides us with capabilities in regard to formulation, quality
control, and testing standards with its CBD products. KII is now
producing tinctures, balms, bath bombs, creams, ointments, in
various potencies, as well as Javalution™ Hemp Infused Coffee
Brand CBD coffee for CLR. KII has also entered into various supply
contracts with clients to provide extraction services and
end-to-end processing to produce water soluble isolate, distillate,
and water-soluble distillate hemp derived products. These supply
agreements include a five-year supply contract with revenues
forecasted at $60 million through 2024 (based on current market
conditions and, among other things, our ability to secure buyers
for the produced product and the supplier's ability to supply the
biomass for extraction and processing), and a one-year supply
agreement expected to generate $19 million in revenues (based on
current market conditions). KII also offers clients turnkey
manufacturing solutions in extraction services and end-to-end
processing systems.
Recent Events
New Acquisitions During the six months ended June 30,
2019
New Acquisitions - Khrysos Global, Inc.
(See Note 2 and Note 5, to the condensed consolidated financial
statements)
On February 12, 2019, we and Khrysos Industries, Inc., a Delaware
corporation and our wholly owned subsidiary (“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 of
Seller and all the outstanding equity of INXL Laboratories, Inc., a
Florida corporation (“INXL”) and INX Holdings, Inc., a
Florida corporation (“INXH”). The business of the
Seller, INXL and INXH acquired by us provides end to end
extraction and processing via company's proprietary
systems that allow for the conversion of hemp feed stock into hemp
oil and hemp extracts. Additionally, the company
offers various rental, sales, and service programs of the
company's extraction and processing
systems.
The consideration payable for the assets of the Seller 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
Seller and LD in such manner as they determine at their
discretion.
At closing, Seller, LD and the Representing Party received an
aggregate of 1,794,972 shares of our common stock which have a
value of $14,000,000 for the purposes of the AEPA or
$12,649,000 fair value for the acquisition valuation
and $500,000 in cash. Thereafter, we agreed to pay the Seller, LD
and the Representing Party an aggregate of: $500,000 in cash thirty
(30) days following the date of closing; $250,000 in cash ninety
(90) days following the date of closing; $250,000 in cash one
hundred and eighty (180) days following the date of closing;
$250,000 in cash two hundred and seventy (270) days following the
date of closing; and $250,000 in cash one (1) year following
the date of closing.
In addition, we agreed to issue to Representing Party, subject to
the approval of the holders of at least a majority of the issued
and outstanding shares of our common stock and the approval of The
Nasdaq Stock Market (collectively, the “Contingent
Consideration Warrants”) consisting of six (6) six-year
warrants, to purchase 500,000 shares of common stock each, for an
aggregate of 3,000,000 shares of common stock at an exercise price
of $10 per share exercisable upon reaching certain levels of
cumulative revenue or cumulative net income before taxes by the
business during the any of the years ending December 31, 2019,
2020, 2021, 2022, 2023 or 2024.
The AEPA contains customary representations, warranties and
covenants of Youngevity, KII, the Seller, LD and the Representing
Party. Subject to certain customary limitations, the Seller, LD and
the Representing Party have agreed to indemnify us and KII against
certain losses related to, among other things, breaches of the
Seller’s, LD’s and the Representing Party’s
representations and warranties, certain specified liabilities and
the failure to perform covenants or obligations under the
AEPA.
Related Party Transaction
Carl Grover is the sole beneficial owner of in excess of five
percent (5%) of our outstanding common shares. On July 31,
2019, Mr. Grover acquired 600,242 shares of our common stock, $.001
par value, upon the partial exercise at $4.60 per share of a July
31, 2014 warrant to purchase 782,608 shares of common stock held by
him. In connection with such exercise, we received $2,761,113 from
Mr. Grover, issued to Mr. Grover 50,000 shares of restricted common
stock as an inducement fee and agreed to extend the expiration date
of the July 31, 2014 warrant held by him to December 15, 2020 with
respect to 182,366 shares of common stock remaining for exercise
thereunder.
Overview of Significant Events
At-the-Market Equity Offering Program
On January 7, 2019, we entered into an At-the-Market Offering
Agreement (the “ATM Agreement”) with The Benchmark
Company, LLC (“Benchmark”), as sales agent, pursuant to
which we may sell from time to time, at its option, shares of our
common stock, par value $0.001 per share, through Benchmark, as
sales agent (the “Sales Agent”), for the sale of up to
$60,000,000 of shares of our common stock. We are not obligated to
make any sales of common stock under the ATM Agreement and we
cannot provide any assurances that it will issue any shares
pursuant to the ATM Agreement. We will pay the Sales Agent 3.0%
commission of the gross sales proceeds. During
the six months ended June 30, 2019, the Company sold a total of
1,000 shares of common stock under the ATM Agreement and received
$6,612 at a purchase price of $6.6118 per share pursuant to the ATM
Agreement.
Cross-Marketing Agreement
On
January 10, 2019, we entered into an exclusive cross-marketing
agreement with Icelandic Glacial™ an Iceland based spring
water drinking water company and is now available for customers to
purchase.
Mill Construction Agreement
On
January 15, 2019, CLR entered into the CLR Siles Mill Construction
Agreement (the “Mill Construction Agreement”) with
H&H and H&H Export, Alain Piedra Hernandez
(“Hernandez”) and Marisol Del Carmen Siles Orozco
(“Orozco”), together with H&H, H&H Export,
Hernandez and Orozco, collectively referred to as the Nicaraguan
Partner, pursuant to which the Nicaraguan Partner agreed to
transfer a 45 acre tract of land in Matagalpa, Nicaragua (the
“Property”) to be owned 50% by the Nicaraguan Partner
and 50% by CLR. In consideration for the land acquisition the
Company issued to H&H Export, 153,846 shares of common stock.
In addition, the Nicaraguan Partner and CLR agreed to contribute
$4,700,000 each toward construction of a processing plant, office,
and storage facilities (“Mill”) on the property for
processing coffee in Nicaragua. As of June 30, 2019, the Company
had made deposits of $3,350,000 towards the Mill, which is included
in construction in process in property and equipment, net on the
Company’s consolidated balance sheet.
Amendment to Operating and Profit-Sharing Agreement
On
January 15, 2019, CLR entered into an amendment to the March 2014
operating and profit-sharing agreement with the owners of H&H. CLR engaged Hernandez and
Orozco, the owners of H&H as employees to manage Siles. In
addition, CLR and H&H, Hernandez and Orozco have agreed to
restructure their profit-sharing agreement in regard to profits
from green coffee sales and processing that increases the
CLR’s profit participation by an additional 25%. Under the
new terms of the agreement with respect to profit generated from
green coffee sales and processing from La Pita, a leased mill, or
the new mill, now will provide for a split of profits of 75% to CLR
and 25% to the Nicaraguan Partner, after certain conditions are
met. We issued 295,910 shares of our common stock to H&H Export
to pay for certain working capital, construction and other
payables. In addition, H&H Export has sold to CLR its espresso
brand Café Cachita in consideration of the issuance of 100,000
shares of our common stock. Hernandez and Orozco are employees of
CLR. The shares of common stock issued were valued at $7.50 per
share.
Stock Offering
On
February 6, 2019, we entered into a Securities Purchase Agreement
(the “Purchase Agreement”) with one accredited investor
that had a substantial pre-existing relationship with us pursuant
to which we sold 250,000 shares of our common stock, par value
$0.001 per share, at an offering price of $7.00 per share. Pursuant
to the Purchase Agreement, we also issued to the investor a
three-year warrant to purchase 250,000 shares of common stock at an
exercise price of $7.00. The proceeds to us were $1,750,000.
Consulting fees for arranging the Purchase Agreement include the
issuance of 5,000 shares of restricted shares of our common stock,
par value $0.001 per share, and 100,000 3-year warrants priced at
$10.00. No cash commissions were paid.
On June
17, 2019, the Company entered into a Securities Purchase Agreement
(the “Purchase Agreement”) with one accredited investor
that had a substantial pre-existing relationship with the Company
pursuant to which the Company sold 250,000 shares of common stock,
par value $0.001 per share, at an offering price of $5.50 per
share. The proceeds were $1,375,000. The Company did not pay
consulting fees in this transaction.
Convertible Notes
Between
February 15, 2019 and May 23, 2019, we closed four tranches of our
2019 January Private Placement debt offering, pursuant
to which we offered for up to a maximum of $10,000,000 in principal
amount of notes (the “2019 PIPE Notes”), with each
investor receiving 2,000 shares of common stock for each $100,000
invested. We entered into subscription agreements with thirty (30)
accredited investors that had a substantial pre-existing
relationship with us pursuant to which we received aggregate gross
proceeds of $2,890,000 and issued 2019 PIPE Notes in the aggregate
principal amount of $2,890,000 and an aggregate of 57,800 shares of
common stock. The placement agent received 14,450 shares of common
stock for the closed tranches and can receive up to 50,000 shares
of common stock in the offering. Each 2019 PIPE Note matures 24
months after issuance, bears interest at a rate of six percent (6%)
per annum, and the outstanding principal is convertible into shares
of common stock at any time after the 180th day anniversary of the
issuance of the 2019 PIPE Notes, at a conversion price of $10 per
share (subject to adjustment for stock splits, stock dividends and
reclassification of the common stock).
Promissory Notes
On
March 18, 2019, we entered into a two-year Secured Promissory Note
(the “8% Note or Notes”) with two
accredited investors that we had a substantial pre-existing
relationship with and from whom we raised cash proceeds in the
aggregate of $2,000,000. In consideration of the 8%
Notes, we issued 20,000 shares of our common stock par value $0.001
for each $1,000,000 invested as well as for each $1,000,000
invested five-year warrants to purchase 20,000 shares of our
common stock at a price per share of $6.00. The 8% Notes pay interest at a rate
of eight percent (8%) per annum and interest is paid quarterly in
arrears with all principal and unpaid interest due at maturity on
March 18, 2021.
Results of Operations
Three months ended June 30, 2019 compared to three months ended
June 30, 2018
Revenues
For the
three months ended June 30, 2019, our revenues decreased 13.6% to
$38,217,000 as compared to $44,255,000 for the three months ended
June 30, 2018. During the three months ended June 30, 2019, we
derived approximately 84.1% of our revenue from our direct selling
segment and approximately 15.2% of our revenue from our commercial
coffee segment and approximately 0.7% from our hemp
segment.
For the
three months ended June 30, 2019, direct selling segment
revenues decreased by $4,722,000 or 12.8% to $32,124,000 as
compared to $36,846,000 for the three months ended June 30, 2018.
This decrease was attributable to a decrease in the number of
ordering distributors and customer, partially offset by an increase
in average order amount per distributor and customer.
For the
three months ended June 30, 2019, commercial coffee segment
revenues decreased by $1,590,000 or 21.5% to $5,819,000 as compared
to $7,409,000 for the three months ended June 30, 2018. This
decrease was primarily related to our green coffee business of
$3,559,000, attributable to the change in recognition of
H&H Export revenue in 2019 to milling and processing services
related to the green coffee business. The decrease in sales from
green coffee was offset by revenues from milling and processing
services of approximately $1,561,000 and an
increase in roasted coffee business of
$408,000.
Our new
commercial hemp segment, the acquisition of which closed on
February 15, 2019, recorded approximately $274,000 in revenues for
the three months ending June 30, 2019.
The following table summarizes our revenue in thousands by
segment:
|
|
Three
Months Ended June
30,
|
|
|
|
|
|
|
|
|
|
|
|
Direct
selling
|
$32,124
|
$36,846
|
(12.8)%
|
|
As a % of Revenue
|
84.1%
|
83.3%
|
0.8%
|
|
Commercial
coffee:
|
|
|
|
|
Processed
green coffee
|
968
|
4,527
|
(78.6)%
|
|
As a % of Segment Revenue
|
16.6%
|
61.1%
|
(44.5)%
|
|
Milling
and processing services
|
1,561
|
-
|
N/A
|
|
As a % of Segment Revenue
|
26.8%
|
-%
|
N/A
|
|
Roasted
coffee and other
|
3,290
|
2,882
|
14.2%
|
|
As a % of Segment Revenue
|
56.5%
|
38.9%
|
17.6%
|
|
Total commercial coffee
|
5,819
|
7,409
|
(21.5)%
|
|
As a % of Revenue
|
15.2%
|
16.7%
|
(1.5)%
|
|
Commercial
hemp
|
274
|
-
|
N/A
|
|
As a % of Revenue
|
0.7%
|
-%
|
N/A
|
|
Total
Revenues
|
$38,217
|
$44,255
|
(13.6)%
|
(1)
See
Note 2 to the unaudited condensed consolidated financial
statements.
(2)
Percentages denoted
as N/A do not contain prior period comparatives
Cost of Revenues
For the three months ended June 30, 2019, overall cost of revenues
decreased 33.6% to approximately $12,537,000 as compared to
$18,873,000 for the three months ended June 30, 2018.
The direct selling segment cost of revenues decreased 15.9% to
approximately $9,884,000 when compared to $11,759,000 for the same
period last year, primarily due to the decrease in
revenues.
The commercial coffee segment cost of revenues decreased 67.2% to
approximately $2,330,000 when compared to $7,114,000 for the same
period last year. This was primarily attributable to the shift in
revenue from processed green
coffee sales to milling and processing services year on year. As
revenue for milling services does not contain a cost of goods sold
component, related to processed green coffee, this shift in
revenues to milling and processing services lowers our cost of
revenue. Cost of
revenues from the sale of
processed green coffee was a credit of
approximately $864,000 or 120.9% of commercial coffee segment revenues for the three
months ended June 30, 2019. This was primarily due to pricing true
ups related to fluctuations in market coffee pricing on current
period final invoicing related to prior period sales recorded,
which can have a negative effect on margins.
During the three months ended June 30, 2018, cost of revenues on
processed green coffee sales were $4,127,000 or 54.9% of commercial
coffee segment revenues. Cost of revenue for roasted coffee
increased 6.9% to $3,194,000 for the three months ended June 30,
2019.
The commercial hemp segment cost of revenues was
$323,000.
Cost of revenues includes the cost of inventory including green
coffee, shipping and handling costs incurred in connection with
shipments to customers, direct labor and benefits costs, royalties
associated with certain products, transaction merchant fees and
depreciation on certain assets.
Gross Profit (Loss)
For the three months ended June 30, 2019, gross profit decreased
1.2% to approximately $25,680,000 as compared to $25,382,000 for
the three months ended June 30, 2018. Overall gross profit as a
percentage of revenues increased to 67.2%, compared to 57.4% in the
same period last year.
Gross profit in the direct selling segment decreased by 11.3% to
$22,240,000 from $25,087,000 in the same period last year primarily
as a result of the decrease in revenues discussed above. Gross
profit as a percentage of revenues in the direct selling segment
increased by approximately 1.1% to 69.2% for the three months ended
June 30, 2019, compared to 68.1% in the same period last
year.
Gross profit in the commercial coffee segment increased to
$3,489,000 compared to $295,000 in the same period last year. Gross
profit as a percentage of revenues in the commercial coffee segment
increased to 60.0% for the three months ended June 30, 2019,
compared to 4.0% in the same period last year. The increase in
gross profit in the commercial coffee segment was primarily due to
the overall increase in the processing and milling of unprocessed
green coffee at our mill that in turn drove higher gross profits
from the combination of processed green coffee sales and revenues
on milling and processing services during the three months ended
June 30, 2019. Gross profit from the sales of processed green
coffee was $1,832,000 or 31.5% of total revenues in the commercial
coffee segment. Gross profits from milling and processing services
was $1,561,000 or 26.8% of
total revenues in the commercial coffee segment. Gross profit from
our roaster business increased $201,000 to approximately $96,000 or
1.6% of total revenues in the commercial coffee segment, compared
to a loss of approximately $105,000 during the three months ended
June 30, 2018.
Gross profit in the commercial hemp segment, the
acquisition of which closed on February 15, 2019, recorded a loss
of approximately $49,000.
Below is a table of gross profit (loss) by segment (in thousands)
and gross profit (loss) as a percentage of segment
revenues:
|
|
Three
Months Ended June
30,
|
|
|
|
|
|
|
|
|
|
|
|
Direct
selling
|
$22,240
|
$25,087
|
(11.3)%
|
|
Gross Profit % of Segment
Revenues
|
69.2%
|
68.1%
|
1.1%
|
|
Commercial
coffee:
|
|
|
|
|
Processed
green coffee
|
1,832
|
400
|
358.0%
|
|
Gross Profit % of Segment Revenues
|
31.5%
|
5.4%
|
26.1%
|
|
Milling
and processing services
|
1,561
|
-
|
N/A
|
|
Gross Profit % of Segment Revenues
|
26.8%
|
-%
|
N/A
|
|
Roasted
coffee and other
|
96
|
(105)
|
191.4%
|
|
Gross Loss % of Segment Revenues
|
1.6%
|
(1.4)%
|
3.1%
|
|
Total commercial coffee
|
3,489
|
295
|
1,082.7%
|
|
Gross Profit % of Segment
Revenues
|
60.0%
|
4.0%
|
56.0%
|
|
Commercial
hemp
|
(49)
|
-
|
N/A
|
|
Gross Loss % of Segment
Revenues
|
(17.9)%
|
-%
|
N/A
|
|
Total
|
$25,680
|
$25,382
|
1.2%
|
Gross Profit % of Revenues
|
67.2%
|
57.4%
|
9.8%
|
(1)
See
Note 2 to the unaudited condensed consolidated financial
statements.
(2)
Percentages denoted
as N/A do not contain prior period comparatives
Operating Expenses
For the three months ended June 30, 2019, our operating expenses
increased 3.3% to $25,534,000 as compared to $24,729,000 for the
three months ended June 30, 2018.
For the three months ended June 30, 2019, the distributor
compensation paid to our independent distributors in the direct
selling segment decreased 12.1% to $14,497,000 from $16,487,000 for
the three months ended June 30, 2018. This decrease was primarily
attributable to the decrease in revenues. Distributor compensation
as a percentage of direct selling revenues increased to 45.1% for
the three months ended June 30, 2019 as compared to 44.7% for the
three months ended June 30, 2018.
For the three months ended June 30, 2019, total sales and marketing
expense decreased 9.4% to $2,786,000 from $3,076,000 for the three
months ended June 30, 2018.
In the direct selling segment, sales and marketing expense
decreased by 12.6% to $2,490,000 in the current quarter from
$2,849,000 for the same period last year. In the commercial coffee
segment, sales and marketing expense increased by $39,000 to
$266,000 in the current quarter compared to the same period last
year, primarily due to increased advertising costs and compensation
expense. Sales and marketing expense were $30,000 in the commercial
hemp segment.
For the three months ended June 30, 2019, total general and administrative expense increased 59.7%
to $8,251,000 from $5,166,000 for the three months ended June 30,
2018.
In the direct selling segment, general and administrative expense
increased by 38.8% to $6,071,000 in the current quarter from
$4,375,000 for the same period last year. This increase was
primarily due to an increase in accounting, computer expense and
non-cash equity-based compensation expense. In addition, the
contingent liability revaluation adjustment in the current quarter
was a reduction in expense of $433,000 compared to a reduction in
expense of $1,246,000 for the same period last year. In the
commercial coffee segment, general and administrative costs
increased by $557,000 or 70.4% to $1,348,000 in the current quarter
compared to $791,000 in the same period last year. This was
primarily due to an increase in wages, warehouse storage costs and
profit-sharing expense of $193,000, compared to a profit-sharing
benefit of $249,000 in the same period last year. General and
administrative expense was $832,000 in the commercial hemp segment,
mostly related to wages, supplies and general office
costs.
Operating Income
For the three months ended June 30, 2019, the Company reported
operating income of $146,000 as compared to $653,000 for the three
months ended June 30, 2018.
Total Other Expense
For the three months ended June 30, 2019, total other expense
decreased by $696,000 to $661,000 as compared to other expense of
$1,357,000 for the three months ended June 30, 2018. Total other
expense includes net interest expense, the change in the fair value
of derivative liabilities and extinguishment loss on
debt.
Net interest expense decreased by $487,000 for the three months
ended June 30, 2019 to $1,062,000, compared to $1,549,000 for the
three months ended June 30, 2018.
Change in fair value of derivative liabilities increased by
$209,000 for the three months ended June 30, 2019 to $401,000 in
other income compared to $192,000 for the three months ended June
30, 2018. Various factors are considered in the pricing models
we use to value the warrants including our current stock price, the
remaining life of the warrants, the volatility of our stock price,
and the risk-free interest rate. Future changes in these factors
may have a significant impact on the computed fair value of the
Company’s derivative liabilities. As such, we expect future
changes in the fair value of the warrants and may vary
significantly from period to period (see Notes 8 & 9, to the
condensed consolidated financial statements).
Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carry-forwards. Deferred tax assets and liabilities are
measured using statutory tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities from a change in tax rates is recognized in
income in the period that includes the effective date of the
change. We have determined through consideration of all positive
and negative evidences that the deferred tax assets are not more
likely than not to be realized. A valuation allowance remains on
the U.S., state and foreign tax attributes that are likely to
expire before realization. We have approximately $146,000 in AMT
refundable credits, and we expect that $73,000 will be refunded in
2019. As such, we do not have a valuation allowance relating to the
refundable AMT credit carryforward. We have recognized an income
tax benefit of $226,000 which is our estimated federal, state and foreign
income tax expense for the three months ended June 30, 2019. The
difference between the effective tax rate and the federal statutory
rate of 21% is due to the permanent differences, change in
valuation allowance, state
taxes (net of federal benefit), and foreign tax rate
differential.
Net Loss
For the three months ended June 30, 2019, we reported a net loss of
$289,000 as compared to net loss of $614,000 for the three months
ended June 30, 2018. The primary reason for the decrease in net
loss when compared to the prior period was due to the decrease in
total other expense of $696,000 and the increase in income tax
benefit of $136,000, off-set by the decrease in operating income of
$507,000 discussed above. .
Six months ended June 30, 2019 compared to six months ended June
30, 2018
Revenues
For the
six months ended June 30, 2019, our revenues decreased 9.0% to
$79,409,000 as compared to $87,249,000 for the six months ended
June 30, 2018. During the six months ended June 30, 2019, we
derived approximately 82.5% of our revenue from our direct selling
sales and approximately 17% of our revenue from our commercial
coffee sales and approximately 0.4% from our hemp
segment.
For the
six months ended June 30, 2019, direct selling segment
revenues decreased by $6,613,000 or 9.2% to $65,544,000 as compared
to $72,157,000 for the six months ended June 30, 2018. This decrease was attributed to a decrease
of $7,034,000 in revenues from
existing business, partially offset by revenues from new acquisitions of $421,000. The
decrease in existing business was primarily due to a decline
in the number of ordering distributors and customers, partially
offset by an increase in average order amount per distributor and
customer.
For the
six months ended June 30, 2019, commercial coffee segment revenues
decreased by $1,568,000 or 10.4% to $13,524,000 as compared to
$15,092,000 for the six months ended June 30, 2018. This decrease
was primarily related decreased sales recorded for our processed
green coffee business of $8,444,000, attributable to the change in
recognizing H&H Export revenue in 2019 at net to milling and
processing services related to the green coffee business. This
decrease was offset by revenues recorded for milling and processing
services of approximately $6,387,000 and an increase in
roasted coffee business of $489,000.
Our new
commercial hemp segment recorded $341,000 in revenues from sales
made by KII.
The following table summarizes our revenue in thousands by
segment:
|
|
Six
Months Ended June
30,
|
|
|
|
|
|
|
|
|
|
|
|
Direct
selling
|
$65,544
|
$72,157
|
(9.2)%
|
|
As a % of Revenue
|
82.5%
|
82.7%
|
(0.2)%
|
|
Commercial
coffee:
|
|
|
|
|
Processed
green coffee
|
1,068
|
9,512
|
(88.8)%
|
|
As a % of Segment Revenue
|
7.9%
|
63.0%
|
(55.1)%
|
|
Milling
and processing services
|
6,387
|
-
|
N/A
|
|
As a % of Segment Revenue
|
47.2%
|
-%
|
N/A
|
|
Roasted
coffee and other
|
6,069
|
5,580
|
8.8%
|
|
As a % of Segment Revenue
|
44.9%
|
37.0%
|
7.9%
|
|
Total commercial coffee
|
13,524
|
15,092
|
(10.4)%
|
|
As a % of Revenue
|
17.0%
|
17.3%
|
(0.3)%
|
|
Commercial
hemp
|
341
|
-
|
N/A
|
|
As a % of Revenue
|
0.4%
|
-%
|
N/A
|
|
Total
Revenues
|
$79,409
|
$87,249
|
(9.0)%
|
(1)
See
Note 2 to the unaudited condensed consolidated financial
statements.
(2)
Percentages denoted
as N/A do not contain prior period comparatives
Cost of Revenues
For the six months ended June 30, 2019, overall cost of revenues
decreased approximately 27.1% to $26,880,000 as compared to
$36,855,000 for the six months ended June 30, 2018.
The direct selling segment cost of revenues decreased 8.0% to
$20,549,000 when compared to $22,335,000 for the same period last
year, primarily due to the decrease in revenues discussed
above.
The commercial coffee segment cost of revenues
decreased 58.9% to $5,968,000 when compared to $14,520,000 for the
same period last year. This was primarily attributable to the shift
in revenue from processed green
coffee processed sales to
milling and processing services year on year. As revenue for
milling services does not contain a cost of goods sold component,
related to unprocessed green coffee, this shift in revenues to
milling and processing services lowers our cost of revenue. Cost of
revenues from the sale of
processed green coffee was a credit of
$257,000 or 102.9% of commercial coffee segment revenues for the
six months ended June 30, 2019. During the six months ended June
30, 2018, cost of revenues on processed green coffee sales were
$8,936,000 or 93.9% of commercial coffee segment revenues. Cost of
revenue for roasted coffee increased 11.5% to $6,225,000 for the
six months ended June 30, 2019.
The commercial hemp segment cost of revenues was
$363,000.
Cost of revenues includes the cost of inventory including green
coffee, shipping and handling costs incurred in connection with
shipments to customers, direct labor and benefits costs, royalties
associated with certain products, transaction merchant fees and
depreciation on certain assets.
Gross Profit
For the six months ended June 30, 2019, gross profit increased
approximately 4.2% to $52,529,000 as compared to $50,394,000 for
the six months ended June 30, 2018. Overall gross profit as a
percentage of revenues increased to 66.1%, compared to 57.8% in the
same period last year, primarily due to the increased revenues in
the lower margin commercial coffee segment.
Gross profit in the direct selling segment decreased by 9.7% to
$44,995,000 from $49,822,000 in the prior period primarily as a
result of the decrease in revenues discussed above. Gross profit as
a percentage of revenues in the direct selling segment decreased by
approximately 0.4% to 68.6% for the six months ended June 30, 2019,
compared to 69% in the same period last year.
Gross profit in the commercial hemp segment was a loss
of $22,000 related to the February 15, 2019 acquisition of
Khrysos.
Below is a table of gross profit (loss) by segment (in thousands)
and gross profit as a percentage of segment revenues:
|
|
Six
Months Ended June
30,
|
|
|
|
|
|
|
|
|
|
|
|
Direct
selling
|
$ 44,995
|
$ 49,822
|
(9.7)%
|
|
Gross Profit % of Segment Revenues
|
68.6%
|
69%
|
(0.4)%
|
|
Commercial
coffee:
|
|
|
|
|
Processed
green coffee
|
1,325
|
576
|
130.0%
|
|
Gross Profit % of Segment Revenues
|
9.8%
|
3.8%
|
6.0%
|
|
Milling
and processing services
|
6,387
|
-
|
N/A
|
|
Gross Profit % of Segment Revenues
|
47.2%
|
-%
|
N/A
|
|
Roasted
coffee and other
|
(156)
|
(4)
|
3800.0%
|
|
Gross Loss % of Segment Revenues
|
(1.2)%
|
0.0%
|
(1.1)%
|
|
Total
commercial coffee
|
7,556
|
572
|
1221.0%
|
|
Gross Profit % of Segment Revenues
|
55.9%
|
3.8%
|
52.1%
|
|
Commercial
hemp
|
(22)
|
-
|
N/A
|
|
Gross Loss % of Segment Revenues
|
(6.5)%
|
0%
|
N/A
|
|
Total
|
$ 52,529
|
$ 50,394
|
4.2%
|
|
Gross Profit % of Revenues
|
66.1%
|
57.8%
|
8.4%
|
(1)
See
Note 2 to the unaudited condensed consolidated financial
statements.
(2)
Percentages denoted
as N/A do not contain prior period comparatives
Operating Expenses
For
the six months ended June 30, 2019, our operating expenses
increased 29.4% to $64,324,000 as compared to $49,717,000 for the
six months ended June 30, 2018. This increase included an increase
of $12,892,000 in non-cash equity-based compensation expense
related to stock options issued in the first quarter of the current
year. Excluding the increase in equity-based compensation expense,
the increase in our operating expense would have been
3.4%.
For
the six months ended June 30, 2019, the distributor compensation
paid to our independent distributors in the direct selling segment
decreased 8.4% to $29,387,000 from $32,065,000 for the six months
ended June 30, 2018. This decrease was primarily attributable to
the decrease in revenues. Distributor compensation as a percentage
of direct selling revenues increased to 44.8% for the six months
ended June 30, 2019 as compared to 44.4% for the six months ended
June 30, 2018.
For
the six months ended June 30, 2019, total sales and marketing
expense increased 3.5% to $6,805,000 from $6,575,000 for the six
months ended June 30, 2018. This increase included an increase of
$471,000 in equity-based compensation expense in the first quarter
of the current year. Excluding the increase in equity-based
compensation expense, sales and marketing expense would have
decreased by 3.7%.
In
the direct selling segment, sales and marketing expense increased
by 1.0% to $6,204,000 for the six months ended June 30, 2019,
compared to $6,141,000 for the same period last year. This increase
included an increase of $471,000 in equity-based compensation
expense. Excluding the increase in equity-based compensation
expense, sales and marketing expense would have decreased by 6.6%.
In the commercial coffee segment, sales and marketing costs
increased by $123,000 to $557,000 in the current year compared to
the same period last year, primarily due to increased advertising
costs and compensation expense. Sales and marketing expense was
$44,000 in the commercial hemp segment for the six months ended
June 30, 2019.
For the six months ended June 30, 2019,
total general and
administrative expense increased 154.0% to $28,132,000 from
$11,077,000 for the six months ended June 30, 2018. This
increase included an increase of $12,421,000 in equity-based
compensation expense in the first quarter of the current year.
Excluding the increase in equity-based compensation expense, the
increase in general and administration expense would have been
41.8%.
In the direct selling segment, general and
administrative expense increased by 138.2% to $22,530,000 in the
current year from $9,460,000 for the same period last year. This
increase included an increase of $10,995,000 in equity-based
compensation expense in the first quarter of the current year.
Excluding the increase in equity-based compensation expense,
general and administrative expense would have increased by 21.9%.
This increase was primarily due to an increase in accounting and
computer consulting fees. In addition, the contingent liability
revaluation adjustment in the current period resulted in a
reduction in expense of $433,000 compared to a reduction in expense
of $1,459,000 for the same period last year. In the commercial
coffee segment, general and administrative costs increased by
$2,623,000 or 162.2% to $4,240,000 in the current year compared to
$1,617,000 in the same period last year. This increase included an
increase of $1,425,000 in equity-based compensation expense.
Excluding the increase in stock-based compensation expense, general
and administration expense in the commercial coffee segment would
have increased by 74.1%. This was primarily due to an increase in
wages, incentives, warehouse storage costs and profit-sharing
expense of $436,000, compared
to a profit-sharing benefit of $472,000 in the same period last
year. General and administrative expense was $1,362,000 in the
commercial hemp segment, and was mostly related to wages, supplies
and general office costs.
Operating Income (Loss)
For the six months ended June 30, 2019, the Company reported an
operating loss of $11,795,000 as compared to an
operating income of $677,000 for the six months ended June 30,
2018. This was primarily due to the increase of $12,966,000 in
non-cash equity-based compensation expense discussed
above. Excluding the increase in equity-based
compensation expense, the Company would have reported an operating
income of $1,171,000 for the six months ended June 30,
2019.
Total Other Expense
For the six months ended June 30, 2019, total other expense
decreased by $2,757,000 to $682,000 as compared to other expense of
$3,439,000 for the six months ended June 30, 2018. Total other
expense includes net interest expense, the change in the fair value
of derivative liabilities and extinguishment loss on
debt.
Net interest expense decreased by $692,000 for the six months ended
June 30, 2019 to $2,569,000, compared to $3,261,000 for the six
months ended June 30, 2018.
Change in fair value of derivative liabilities increased by
$983,000 for the six months ended June 30, 2019 to $1,887,000 in
other income compared to $904,000 for the six months ended June 30,
2018. Various factors are considered in the pricing models we
use to value the warrants including our current stock price, the
remaining life of the warrants, the volatility of our stock price,
and the risk-free interest rate. Future changes in these factors
may have a significant impact on the computed fair value of the
Company’s derivative liabilities. As such, we expect future
changes in the fair value of the warrants and may vary
significantly from period to period (see Notes 8 & 9, to the
condensed consolidated financial statements).
We recorded a non-cash extinguishment loss on debt of $1,082,000
for the six months ended June 30, 2018 as a result of the
triggering of the automatic conversion of the 2017 Notes associated
with our July 2017 Private Placement to common stock. This loss
represented the difference between the carrying value of the 2017
Notes and embedded conversion feature and the fair value of the
shares that were issued. The fair value of the shares issued were
based on the stock price on the date of the conversion. There was
no loss on debt extinguishment for the six months ended June 30,
2019.
Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carry-forwards. Deferred tax assets and liabilities are
measured using statutory tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities from a change in tax rates is recognized in
income in the period that includes the effective date of the
change. We have determined through consideration of all positive
and negative evidences that the deferred tax assets are not more
likely than not to be realized. A valuation allowance remains on
the U.S., state and foreign tax attributes that are likely to
expire before realization. We have approximately $146,000 in AMT
refundable credits, and we expect that $73,000 will be refunded in
2019. As such, we do not have a valuation allowance relating to the
refundable AMT credit carryforward. We have recognized an income
tax expense of $72,000 which is our estimated federal, state and foreign
income tax expense for the six months ended June 30, 2019. The
difference between the effective tax rate and the federal statutory
rate of 21% is due to the permanent differences, change in
valuation allowance, state
taxes (net of federal benefit), and foreign tax rate
differential.
Net Loss
For the six months ended June 30, 2019, the Company reported an
increase in net loss of $9,627,000 to a net loss of $12,549,000 as
compared to net loss of $2,922,000 for the six months ended June
30, 2018. The primary reason for the increase in net loss when
compared to the prior period was due to the increase in operating
loss of $12,472,000, offset by the decrease in other expense of
$2,757,000 and decrease in income tax expense of $88,000. The
primary reason for the increase in operating loss was the increase
of $12,966,000 in stock and equity-based compensation
expense.
Adjusted EBITDA
EBITDA (earnings before interest, income taxes, depreciation and
amortization) as adjusted to remove the effect of
equity-based compensation expense and the non-cash loss on
extinguishment of debt and the change in the fair value of the
derivatives or "Adjusted EBITDA," increased to $2,362,000
for the three months ended June 30, 2019 compared to $2,203,000 in
2018 and increased to $4,769,000 for the six months ended June 30,
2019 compared to $3,723,000 in 2018.
Management believes that Adjusted EBITDA, when viewed with our
results under GAAP and the accompanying reconciliations, provides
useful information about our period-over-period growth. Adjusted
EBITDA is presented because management believes it provides
additional information with respect to the performance of our
fundamental business activities and is also frequently used by
securities analysts, investors and other interested parties in the
evaluation of comparable companies. We also rely on Adjusted EBITDA
as a primary measure to review and assess the operating performance
of our company and our management team.
Adjusted EBITDA is a non-GAAP financial measure. We calculate
adjusted EBITDA by taking net income, and adding back the expenses
related to interest, income taxes, depreciation,
amortization, equity-based compensation expense and
the change in the fair value of the warrant derivative, as each of
those elements are calculated in accordance with
GAAP. Adjusted EBITDA should not be construed as a
substitute for net income (loss) (as determined in accordance with
GAAP) for the purpose of analyzing our operating performance or
financial position, as Adjusted EBITDA is not defined by
GAAP.
A reconciliation of our adjusted EBITDA to net loss for the
three and six months ended June 30, 2019 and 2018 is included in
the table below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
$(289)
|
$(614)
|
$(12,549)
|
$(2,922)
|
|
Add/Subtract:
|
|
|
|
|
|
Interest,
net
|
1,062
|
1,549
|
2,569
|
3,261
|
|
Income taxes
(benefit) provision
|
(226)
|
(90)
|
72
|
160
|
|
Depreciation
|
602
|
470
|
1,077
|
902
|
|
Amortization
|
586
|
865
|
1,256
|
1,692
|
|
EBITDA
|
1,735
|
2,180
|
(7,575)
|
3,093
|
|
Add/Subtract:
|
|
|
|
|
|
Equity-basedcompensation
|
1,028
|
215
|
14,231
|
452
|
|
Loss on
extinguishment of debt
|
-
|
-
|
-
|
1,082
|
|
Change in the fair
value of warrant derivative
|
(401)
|
(192)
|
(1,887)
|
(904)
|
|
Adjusted
EBITDA
|
$2,362
|
$2,203
|
$4,769
|
$3,723
|
(1) EBITDA and Adjusted EBITDA for the
three and six months ended has been restated as a result of the
restatement of the net loss to each respective period. See Note 2 to the unaudited condensed consolidated
financial statements.
Liquidity and Capital Resources
Sources of Liquidity
At June 30, 2019 we had cash and cash equivalents of approximately
$2,088,000 as compared to cash and cash equivalents of $2,879,000
as of December 31, 2018.
Cash Flows
Cash used
in operating activities.
Net cash used in operating activities for the six months ended June
30, 2019 was $5,381,000 as compared to net cash used in
operating activities of $1,676,000 for the six months ended June
30, 2018. Net cash used in operating activities consisted of a net
loss of $12,549,000 and $8,190,000 in changes in operating assets
and liabilities, offset by net non-cash operating expenses of
$15,358,000.
Net non-cash operating expenses included $2,333,000 in depreciation
and amortization, $11,757,000 in stock-based compensation expense,
$534,000 in amortization of debt discounts and issuance costs,
$2,541,000 in equity issuance costs, $159,000 in
increase in inventory reserves, $281,000 in stock issuance cost
related to true-up shares, and $73,000 in deferred taxes, offset by
$1,887,000 related to the change in fair value of warrant
derivative liability and $433,000 related to the change in fair
value of contingent liability.
Changes in operating assets and liabilities were attributable to
decreases in working capital, primarily related to changes in
accounts receivable of $5,965,000, inventory of
$1,916,000, prepaid expenses and other current assets of $844,000,
accounts payable of $1,065,000, deferred revenues of
$52,000, and income taxes receivable of $157,000. Increases in
working capital primarily related to changes in accrued distributor
compensation of $451,000 and accrued expenses and other liabilities
of $1,358,000.
Cash used in investing activities. Net cash used in
investing activities for the six months ended June 30, 2019 was
$3,694,000 as compared to net cash used in investing activities of
$210,000 for the six months ended June 30, 2018. Net cash used in
investing activities included $2,150,000 in payments made towards
the construction of a large mill in Nicaragua, $500,000 in cash
paid related to the acquisition of Khrysos, offset by cash acquired
of $75,000 and $288,000 for the purchase of land for Khrysos. The
remaining expenditures consisted of primarily leasehold
improvements and other purchases of property and
equipment.
Cash provided by financing activities. Net cash provided by financing activities was
$8,244,000 for the six months ended June 30, 2019 as compared to
net cash provided by financing activities of $1,684,000 for the six
months ended June 30, 2018.
Net cash provided by financing activities consisted of net proceeds
of $7,809,000 from issuance of equity and convertible notes,
$1,742,000 from the exercise of stock options and warrants and
$6,000 from at the market issuance of shares, offset by net
payments on line of credit of $254,000, $68,000 in
payments to reduce notes payable, $235,000 in payments related to
contingent acquisition debt, $734,000 in payments related to
capital lease financing obligations and $22,000 in dividends
paid.
Future Liquidity Needs
The accompanying condensed consolidated financial statements have
been prepared and presented on a basis assuming we will continue as
a going concern. Net cash used in operating activities was
$5,381,000 for the six months ended June 30, 2019 compared to net
cash used in operating activities of $1,676,000 for the six months
ended June 30, 2018. We do not currently believe that our existing
cash resources are sufficient to meet our anticipated needs over
the next twelve months from the date hereof. Based on our current
cash levels and our current rate of cash requirements, we will need
to raise additional capital and will need to further reduce our
expenses from current levels. These factors raise substantial doubt
about our ability to continue as a going concern.
During
the six months ended June 30, 2019, our operations did not generate
sufficient cash to meet our operating needs and we supplemented the
revenue generated from operations with cash proceeds of debt and
equity offerings. We raised additional capital through equity and
convertible notes offerings during the current period. We also
entered into an At-the-Market Offering
Agreement (the “ATM Agreement”) with The Benchmark
Company, LLC (“Benchmark”), as sales agent, pursuant to
which we may sell from time to time, at its option, shares of its
common stock, par value $0.001 per share, through Benchmark, as
sales agent (the “Sales Agent”), for the sale of up to
$60,000,000 of shares of our common stock.
However, despite such actions, we do not believe
that our existing cash resources are
sufficient to meet our anticipated needs over the next twelve
months from the date hereof. We are also considering
additional alternatives, including, but not limited to equity
financings and debt financings. Depending on market conditions, we
cannot be sure that additional capital will be available when
needed or that, if available, it will be obtained on terms
favorable to us or to our stockholders.
We
anticipate our bottom line, excluding non-cash expenses, will
continue to improve and we intend to make additional cost
reductions in non-essential expenses.
Failure
to raise additional funds from the issuance of equity securities
and failure to implement cost reductions could adversely affect our
ability to operate as a going concern. There can be no assurance
that any cost reductions, implemented will correct our going
concern issue. The financial statements do not include
any adjustments that might be necessary from the outcome of this
uncertainty.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements as of June 30,
2019.
Contractual Obligations
There were no material changes from those disclosed in our most
recent annual report.
Critical Accounting Policies
The unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America, which require us to make
estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the unaudited condensed
consolidated financial statements and revenues and expenses during
the periods reported. Actual results could differ from those
estimates. Information with respect to our critical accounting
policies which we believe could have the most significant effect on
our reported results and require subjective or complex judgments by
management is contained in Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of Operations, of
our Annual Report on Form 10-K for the year ended December 31,
2018.
Recent Accounting Pronouncements
Recent accounting pronouncements are disclosed in Note 1 to the
accompanying condensed consolidated financial statements of this
Quarterly Report on Form 10-Q/A.