Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 1. Basis of Presentation and Description of
Business
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 years ended December 31,
2018 and 2017 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. In the following text, the terms “we,”
“our,” and “us” may refer, as the context
requires, to the Company or collectively to the Company and its
subsidiaries. The Company's two segments are listed
below:
●
Commercial coffee business is operated through CLR and its wholly
owned subsidiary, Siles Plantation Family Group S.A.
(“Siles”).
●
The Company’s domestic direct selling
network is operated through the following (i) domestic
subsidiaries: AL Global Corporation, 2400 Boswell LLC, MK
Collaborative LLC, and Youngevity Global LLC and (ii) foreign
subsidiaries: Youngevity Australia Pty. Ltd., Youngevity NZ,
Ltd., Youngevity Mexico S.A. de CV, Youngevity Israel, Ltd.,
Youngevity Russia, LLC, Youngevity Colombia S.A.S, Youngevity
International Singapore Pte. Ltd., Mialisia Canada, Inc. and Legacy
for Life Limited (Hong Kong). The Company also operates through the
BellaVita Group LLC, with operations in Taiwan, Hong Kong,
Singapore, Indonesia, Malaysia and Japan. We also operate subsidiary branches of Youngevity
Global LLC in the Philippines and Taiwan.
Reverse Stock Split
On
June 5, 2017, the Company filed a certificate to amend its Articles
of Incorporation to effect a reverse split on a one-for-twenty
basis ( “Reverse Split”), whereby, every twenty shares
of the Company’s common stock, par value $0.001 per share
were exchanged for one share of its common stock. The Reverse Split
became effective on June 7, 2017. The common stock began trading on
a reverse split basis at the market opening on June 8, 2017. All
common stock share and per share amounts have been adjusted to
reflect retrospective application of the Reverse
Split.
NASDAQ Listing
Effective June 21, 2017, the common stock began trading on the
NASDAQ Stock Market LLC’s NASDAQ Capital Market, under the
symbol “YGYI”. Prior to the Company’s uplisting
to the NASDAQ, the Company’s common stock had been traded on
the OTCQX market.
Summary of Significant Accounting Policies
A summary of the Company’s significant accounting policies
consistently applied in the preparation of the accompanying
consolidated financial statements follows:
Basis of Presentation
The Company consolidates all majority owned subsidiaries,
investments in entities in which the Company has controlling
influence and variable interest entities where it has been
determined to be the primary beneficiary. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Segment Information
The Company has two reportable segments: direct selling and
commercial coffee. 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 a coffee roasting and
distribution company specializing in gourmet coffee. The
determination that the Company has two reportable segments is based
upon the guidance set forth in Accounting Standards Codification
(“ASC”) Topic 280, “Segment
Reporting.” During
the year ended December 31, 2018, the Company derived approximately
85% of its revenue from its direct selling segment and
approximately 15% of its revenue from its commercial coffee
segment. During the year ended December 31, 2017, the
Company derived approximately 86% of its revenue from its direct
selling segment and approximately 14% of its revenue from its
commercial coffee segment.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
(“GAAP”) requires the Company to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expense for each reporting period. Estimates are
used in accounting for, among other things, allowances for doubtful
accounts, deferred taxes and related valuation allowances,
fair value of derivative liabilities, uncertain tax positions, loss
contingencies, fair value of options granted under the
Company’s stock-based compensation plan, fair value of assets
and liabilities acquired in business combinations, capital leases,
asset impairments, estimates of future cash flows used to evaluate
impairments, useful lives of property, equipment and intangible
assets, value of contingent acquisition debt, inventory
obsolescence, and sales returns.
Actual results may differ from previously estimated amounts and
such differences may be material to the consolidated financial
statements. Estimates and assumptions are reviewed
periodically, and the effects of revisions are reflected
prospectively in the period they occur.
Liquidity and Going Concern
The
accompanying consolidated financial statements have been prepared
and presented on a basis assuming the Company will continue as a
going concern. The Company has sustained significant net losses
during the year ended December 31, 2018 of approximately
$20,070,000 and $12,677,000 for the year ended December 31, 2017.
Net cash used in operating activities was approximately $12,352,000
for the year ended December 31, 2018 compared to net cash used in
operating activities of approximately $2,773,000 for the year ended
December 31, 2017. 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 also believes with the recent increase in the
Company’s trading volume of its common stock and increase in
stock price, it should be able to raise additional funds through
equity financings and/or debt restructuring.
On December 13, 2018, CLR, entered into a Credit Agreement with one
lender (the “Credit Agreement”) pursuant to which CLR
borrowed $5,000,000 secured by its green coffee inventory under a
Security Agreement, dated December 13, 2018 (the “Security
Agreement”), with Carl Grover and CLR’s subsidiary,
Siles Family Plantation Group S.A. (“Siles”), as
guarantor, and Siles executed a separate Guaranty Agreement
(“Guaranty”). In addition, Stephan Wallach and Michelle
Wallach, pledged 1,500,000 shares of the Company’s common
stock held by them to secure the Credit Note under a Security
Agreement, dated December 13, 2018 with Mr. Grover. The Credit
Agreement requires us to make quarterly installments of interest.
The $5,000,000 is payable in December 2020. (See Note 5,
below.)
Between August 31, 2018 and October 5, 2018, the Company entered
into Securities Purchase Agreements (the “Purchase
Agreements”) with nine (9) investors with whom the Company
had a substantial pre-existing relationship (the
“Investors”) pursuant to which the Company sold, in the
private placement, (the “August 2018 Private
Placement”) an aggregate of 630,526 shares of common stock
and the Company issued the Investors an aggregate of 150,000
additional shares of common stock as an advisory fee and received gross proceeds in the
aggregate of approximately $2,995,000. The net proceeds to the
Company from the August 2018 Private Placement were approximately
$2,962,000 after deducting closing and issuance
costs.
Between August 17, 2018 and October 4, 2018, the Company entered
into Securities Purchase Agreements (the “Preferred Purchase
Agreements”) with eleven (11) investors, pursuant to which
the Company sold in a private placement (the “Preferred
Offering”) an aggregate of 697,363 shares of Series C
convertible preferred stock and received gross proceeds
in the aggregate of approximately $6,625,000. The net proceeds to
the Company from the Preferred Offering were
approximately $6,236,000 after deducting commissions, closing and
issuance costs.
On July 18, 2018, the Company entered into lending agreements (the
“Lending Agreements”) with three separate entities and
received loans in the aggregate 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 is approximately $504,000 as of December 31, 2018 and is
included in other current liabilities on the Company’s
balance sheet as of December 31, 2018.
On March 30, 2018, the Company completed its best efforts offering
of Series B Convertible Preferred Stock (“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 the 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.
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. (See Note 13 below.)
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.
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.
Derivative Financial Instruments
The Company does not use derivative instruments to hedge exposures
to cash flow, market or foreign currency.
The Company reviews the terms of convertible debt and equity
instruments it issues to determine whether there are derivative
instruments, including an embedded conversion option that is
required to be bifurcated and accounted for separately as a
derivative financial instrument. In circumstances where a host
instrument contains more than one embedded derivative instrument,
including a conversion option, that is required to be bifurcated,
the bifurcated derivative instruments are accounted for as a
single, compound derivative instrument. Also, in connection with
the sale of convertible debt and equity instruments, the Company
may issue freestanding warrants that may, depending on their terms,
be accounted for as derivative instrument liabilities, rather than
as equity.
Derivative instruments are initially recorded at fair value and are
then revalued at each reporting date with changes in the fair value
reported as non-operating income or expense. When the convertible
debt or equity instruments contain embedded derivative instruments
that are to be bifurcated and accounted for as liabilities, the
total proceeds allocated to the convertible host instruments are
first allocated to the fair value of all the bifurcated derivative
instruments. The remaining proceeds, if any, are then allocated to
the convertible instruments themselves, usually resulting in those
instruments being recorded at a discount from their face
value.
The discount from the face value of the convertible debt, together
with the stated interest on the instrument, is amortized over the
life of the instrument through periodic charges to interest
expense, using the effective interest method.
Accounts Receivable
Accounts
receivable are recorded net of an allowance for doubtful accounts.
Accounts receivable are considered delinquent when the due date on
the invoice has passed. The Company records its allowance for
doubtful accounts based upon its assessment of various factors
including past experience, the age of the accounts receivable
balances, the credit quality of its customers, current economic
conditions and other factors that may affect customers’
ability to pay. Accounts receivable are written off against the
allowance for doubtful accounts when all collection efforts by the
Company have been unsuccessful. As of December 31, 2018 and 2017,
the Company’s allowance for doubtful accounts associated with
CLR outstanding receivables is $235,000 and $10,000,
respectively.
Inventory and Cost of Revenues
Inventory is stated at the lower of cost or net realizable value,
net of a valuation allowance. Cost is determined using the
first-in, first-out method. The Company records an inventory
reserve for estimated excess and obsolete inventory based upon
historical turnover, market conditions and assumptions about future
demand for its products. When applicable, expiration dates of
certain inventory items with a definite life are taken into
consideration.
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
Finished
goods
|
$11,300
|
$10,994
|
|
Raw
materials
|
12,744
|
12,143
|
|
Total
inventory
|
24,044
|
23,137
|
|
Reserve
for excess and obsolete
|
(2,268)
|
(1,064)
|
|
Inventory,
net
|
$21,776
|
$22,073
|
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.
Advance
During the year ended December 31, 2018 the Company’s
commercial coffee segment advanced $5,000,000 to H&H Coffee
Group Export Corp. to provide capital in support of the 5-year
contract for the sale and processing of 41 million pounds of green
on an annual basis. On March 31, 2019, this advance was converted
to a $5,000,000 Note Receivable and bears interest at 9% per annum
and is due and payable by H&H Coffee Group Export Corp. at the
end of the harvest season, but no later than October 31 for any
harvest year. The loan is secured by cash held by H&H Coffee
Group Export Corp.’s hedging account with INTL FC Stone,
trade receivables, green coffee inventory owned by H&H Coffee
Group Export Corp. and all green coffee contracts. (See Note 4,
below.)
Deferred Issuance Costs
Deferred issuance costs include warrant issuance costs and debt
discounts of approximately $1,717,000 and $4,040,000, as of
December 31, 2018 and 2017, respectively, which are associated
with our 2017, 2015 and 2014 Private Placement transactions and our
Credit Agreement with Carl Grover. Issuance costs are included net
of convertible notes payable and notes payable on the Company's
consolidated balance sheets. Deferred issuance costs are
amortized over the life of the notes to interest expense. (See
Notes 5 and 6, below.)
Plantation Costs
The
Company’s commercial coffee segment includes the results of
Siles, which is a 500-acre coffee plantation and a dry-processing
facility located on 26 acres located in Matagalpa, Nicaragua. Siles
is a wholly-owned subsidiary of CLR, and the results of
CLR include the depreciation and amortization of capitalized
costs, development and maintenance and harvesting costs of
Siles. In accordance with GAAP plantation maintenance and
harvesting costs for commercially producing coffee farms are
charged against earnings when sold. Deferred harvest costs
accumulate throughout the year and are expensed over the remainder
of the year as the coffee is sold. The difference between actual
harvest costs incurred and the amount of harvest costs recognized
as expense is recorded as either an increase or decrease in
deferred harvest costs, which is reported as an asset and included
with prepaid expenses and other current assets in the consolidated
balance sheets. Once the harvest is complete, the harvest costs are
then recognized as the inventory value. Deferred costs associated
with the harvest as of December 31, 2018 and 2017 are approximately
$400,000 and are included in prepaid expenses and other current
assets on the Company’s balance sheets.
Property and Equipment
Property and equipment are recorded at historical cost.
Depreciation is provided in amounts sufficient to relate the cost
of depreciable assets to operations over the estimated useful lives
of the related assets. The straight-line method of depreciation and
amortization is followed for financial statement purposes.
Leasehold improvements are amortized over the shorter of the life
of the respective lease or the useful life of the improvements.
Estimated service lives range from 3 to 39 years. When such assets
are sold or otherwise disposed of, the cost and accumulated
depreciation are removed from the accounts, and any resulting gain
or loss is reflected in operations in the period of disposal. The
cost of normal maintenance and repairs is charged to expense as
incurred. Significant expenditures that increase the useful life of
an asset are capitalized and depreciated over the estimated useful
life of the asset.
Coffee trees, land improvements and equipment specifically related
to the plantations are stated at cost, net of accumulated
depreciation. Depreciation of coffee trees and other equipment
is reported on a straight-line basis over the estimated useful
lives of the assets (25 years for coffee trees, between 5 and 15
years for equipment and land improvements).
Property and equipment are considered long-lived assets and are
evaluated for impairment whenever events or changes in
circumstances indicate their net book value may not be recoverable.
Management has determined that no impairment of its property and
equipment occurred as of December 31, 2018 or 2017.
Property and equipment consist of the following (in
thousands):
|
|
|
|
|
|
|
|
Building
|
$3,879
|
$3,879
|
|
Leasehold
improvements
|
3,024
|
2,779
|
|
Land
|
2,544
|
2,544
|
|
Land
improvements
|
606
|
606
|
|
Producing
coffee trees
|
553
|
553
|
|
Manufacturing
equipment
|
5,825
|
5,022
|
|
Furniture
and other equipment
|
1,885
|
1,707
|
|
Computer
software
|
1,420
|
1,322
|
|
Computer
equipment
|
2,665
|
767
|
|
Vehicles
|
222
|
225
|
|
Construction
in process
|
1.966
|
1,986
|
|
|
24.589
|
21,390
|
|
Accumulated
depreciation
|
(9,484)
|
(7,683)
|
|
Total
property and equipment
|
$15,105
|
$13,707
|
Depreciation expense totaled approximately $1,819,000 and
$1,556,000 for the years ended December 31, 2018 and 2017,
respectively.
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.
Intangible Assets
Intangible assets are comprised of distributor organizations,
trademarks and tradenames, customer relationships and internally
developed software. The Company's acquired intangible
assets, which are subject to amortization over their estimated
useful lives, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
intangible asset may not be recoverable. An impairment loss is
recognized when the carrying amount of an intangible asset exceeds
its fair value.
Intangible assets consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributor
organizations
|
$14,559
|
$9,575
|
$4,984
|
$16,204
|
$8,363
|
$7,841
|
|
Trademarks
and tradenames
|
7,337
|
1,781
|
5,556
|
7,779
|
1,229
|
6,550
|
|
Customer
relationships
|
10,398
|
5,723
|
4,675
|
10,966
|
4,711
|
6,255
|
|
Internally
developed software
|
720
|
558
|
162
|
720
|
458
|
262
|
|
Intangible
assets
|
$33,014
|
$17,637
|
$15,377
|
$35,669
|
$14,761
|
$20,908
|
Amortization expense related to intangible assets was approximately
$2,879,000 and $2,782,000 for the years ended December 31, 2018 and
2017, respectively.
As of December 31, 2018, future expected amortization expense
related to definite lived
intangible assets is as follows (in thousands):
|
Years ending December 31,
|
|
2019
|
$2,250
|
|
2020
|
2,085
|
|
2021
|
2,008
|
|
2022
|
1,984
|
|
2023
|
1,917
|
|
Thereafter
|
3,484
|
|
Total
|
$13,728
|
As of December 31, 2018, the weighted-average remaining
amortization period for intangibles assets was approximately 4.97
years.
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 December 31, 2018 and 2017,
approximately $1,649,000 in trademarks from business combinations
have been identified as having indefinite lives. During the year
ended December 31, 2017, the Company considered the guidance of ASC
350 and concluded that certain intangible assets with indefinite
lives should be changed to a definite life. As a result, the
Company changed the classification of approximately $618,000
trademark/tradename intangible assets to a definite lived
intangible asset.
During the year ended December 31, 2018, the Company also determined that the underlying
intangible assets associated with its BeautiControl and Future
Global Vision, Inc., acquisitions were impaired and recorded a loss
on impairment of intangible assets of approximately $3,175,000 (see
Note 2, below). No impairment occurred for its definite and
indefinite lived intangible assets for the year ended December 31,
2017.
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 analyzed its goodwill balances separately for the
commercial coffee reporting unit and the direct selling reporting
unit. The goodwill balance as of December 31, 2018 and 2017 was
$6,323,000.
The Company has determined that no impairment of its goodwill
occurred for the years ended December 31, 2018 and
2017.
Goodwill activity for the years ended December 31, 2018 and 2017 by
reportable segment consists of the following (in
thousands):
|
|
|
|
|
|
Balance
at December 31, 2016
|
$3,009
|
$3,314
|
$6,323
|
|
Goodwill
recognized
|
-
|
-
|
-
|
|
Goodwill
impaired
|
-
|
-
|
-
|
|
Balance
at December 31, 2017
|
$3,009
|
$3,314
|
$6,323
|
|
Goodwill
recognized
|
-
|
-
|
-
|
|
Goodwill
impaired
|
-
|
-
|
-
|
|
Balance
at December 31, 2018
|
$3,009
|
$3,314
|
$6,323
|
Revenue Recognition
The Company recognizes revenue from product sales under the
following five steps are completed: i) Identify the contract with
the customer; ii) Identify the performance obligations in the
contract; iii) Determine the transaction price; iv) Allocate the
transaction price to the performance obligations in the contract;
and v) Recognize revenue when (or as) each performance obligation
is satisfied (see Note 3, 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. Our distributors are required to pay a
one-time enrollment fee and receive a welcome kit specific to that
country or region that consists of forms, policy and procedures,
selling aids, access to our distributor website and a genealogy
position with no down line distributors.
The Company has
determined that most contracts will be completed in less than one
year. For those transactions where all performance obligations will
be satisfied within one year or less, the Company is applying the
practical expedient outlined in ASC 606-10-32-18. This practical
expedient allows the Company not to adjust promised consideration
for the effects of a significant financing component if the Company
expects at contract inception the period between when the Company
transfers the promised good or service to a customer and when the
customer pays for that good or service will be one year or less.
For those transactions that are expected to be completed after one
year, the Company has assessed that there are no significant
financing components because any difference between the promised
consideration and the cash selling price of the good or service is
for reasons other than the provision of
financing.
Deferred Revenues and Costs
As of December 31, 2018 and 2017, the balance in deferred revenues
was approximately $2,312,000 and $3,386,000, respectively. Deferred
revenue related to the Company’s direct selling segment is
attributable to the Heritage Makers product line and for future
Company convention and distributor events. In addition, the Company
recognizes deferred revenue from the commercial coffee
segment.
Deferred revenues related to Heritage Makers were approximately
$2,153,000 and $1,882,000, as of December 31, 2018, and 2017,
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 December 31, 2018 and 2017, the balance in
deferred costs was approximately $364,000 and $433,000,
respectively, and was included in prepaid expenses and current
assets.
Deferred revenues related to CLR as of December 31, 2018 was zero
and as of December 31, 2017 was approximately $1,291,000 and
represented deposits on customer orders that have not yet been
completed and shipped.
Deferred revenues related to pre-enrollment in upcoming conventions
and distributor events of approximately $159,000 and $213,000
as of December 31, 2018 and 2017, 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.
Product Return Policy
All products, except food products and commercial coffee products
are subject to a full refund within the first 30 days of receipt by
the customer, subject to an advance return authorization procedure.
Returned product must be in unopened resalable condition. Product
returns as a percentage of our net sales have been approximately 2%
of our monthly net sales over the last two years. As of December
31, 2018 and 2017 the Company has an allowance of $125,000 and
$75,000, respectively, related to product returns. Commercial
coffee products are returnable only if defective.
Shipping and Handling
Shipping and handling costs associated with inbound freight and
freight to customers, including independent distributors, are
included in cost of sales. Shipping and handling fees charged to
customers are included in sales. Shipping expense was approximately
$8,801,000 and $9,101,000 for the years ended December 31, 2018 and
2017, respectively.
Distributor Compensation
In the direct selling segment, the Company utilizes a network of
independent distributors, each of whom has signed an agreement with
the Company, enabling them to purchase products at wholesale
prices, market products to customers, enroll new distributors for
their down-line and earn compensation on product purchases made by
those down-line distributors and customers.
The payments made under the compensation plans are the only form of
compensation paid to the distributors. Each product has a point
value, which may or may not correlate to the wholesale selling
price of a product. A distributor must qualify each month to
participate in the compensation plan by making a specified amount
of product purchases, achieving specified point levels. Once
qualified, the distributor will receive payments based on a
percentage of the point value of products sold by the
distributor’s down-line. The payment percentage varies
depending on the qualification level of the distributor and the
number of levels of down-line distributors. There are also
additional incentives paid upon achieving predefined activity and
or down-line point value levels. There can be multiple levels of
independent distributors earning incentives from the sales efforts
of a single distributor. Due to the multi-layer independent sales
approach, distributor incentives are a significant component of the
Company’s cost structure. The Company accrues all distributor
compensation expense in the month earned and pays the compensation
the following month.
Basic and Diluted Net Loss Per Share
Basic loss per share is computed by dividing net loss attributable
to common stockholders by the weighted-average number of common
shares outstanding during the period. Diluted loss per share is
computed by dividing net loss attributable to common stockholders
by the sum of the weighted-average number of common shares
outstanding during the period and the weighted-average number of
dilutive common share equivalents outstanding during the period,
using the treasury stock method. Dilutive common share equivalents
are comprised of stock options, restricted stock, warrants,
convertible preferred stock and common stock associated with the
Company's convertible notes based on the average stock price for
each period using the treasury stock method. Potentially dilutive
shares are excluded from the computation of diluted net loss per
share when their effect is anti-dilutive. In periods where a net
loss is presented, all potentially dilutive securities are
anti-dilutive and are excluded from the computation of diluted net
loss per share.
Potentially dilutive securities for the year ended December 31,
2018 were 9,128,489. For the year ended December 31, 2017,
potentially dilutive securities were 6,565,529.
The
calculation of diluted loss per share requires that, to the extent
the average market price of the underlying shares for the reporting
period exceeds the exercise price of the warrants and the presumed
exercise of such securities are dilutive to loss per share for the
period, an adjustment to net loss used in the calculation is
required to remove the change in fair value of the warrants, net of
tax from the numerator for the period. Likewise, an adjustment to
the denominator is required to reflect the related dilutive shares,
if any, under the treasury stock method. During the year ended
December 31, 2017, the Company recorded net of tax gain of $667,000
on the valuation of the Warrant Derivative Liability which has a
dilutive impact on loss per share.
|
|
|
|
|
|
|
|
Loss per Share - Basic
|
|
|
|
Numerator
for basic loss per share
|
$(23,497,000)
|
$(12,689,000)
|
|
Denominator
for basic loss per share
|
21,589,226
|
19,672,445
|
|
Loss
per common share – basic
|
$(1.09)
|
$(0.65)
|
|
|
|
|
|
Loss per Share - Diluted
|
|
|
|
Numerator
for basic loss per share
|
$(23,497,000)
|
$(12,689,000)
|
|
Adjust:
Fair value of dilutive warrants outstanding
|
-
|
(667,000)
|
|
Numerator
for diluted loss per share
|
$(23,497,000)
|
$(13,356,000)
|
|
|
|
|
|
Denominator
for basic loss per share
|
21,589,226
|
19,672,445
|
|
Plus:
Incremental shares underlying “in the money” warrants
outstanding
|
-
|
79,447
|
|
Denominator
for diluted loss per share
|
21,589,226
|
19,751,892
|
|
Loss
per common share - diluted
|
$(1.09)
|
$(0.68)
|
Foreign Currency Translation
The financial position and results of operations of the
Company’s foreign subsidiaries are measured using each
foreign subsidiary’s local currency as the functional
currency. Revenues and expenses of such subsidiaries have been
translated into U.S. dollars at average exchange rates prevailing
during the period. Assets and liabilities have been translated at
the rates of exchange on the balance sheet date. The resulting
translation gain and loss adjustments are recorded directly as a
separate component of stockholders’ equity, unless there is a
sale or complete liquidation of the underlying foreign
investments. Translation gains or losses resulting from
transactions in currencies other than the respective entities
functional currency are included in the determination of income and
are not considered significant to the Company for the years ended
December 31, 2018 and 2017.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net gains and losses
affecting stockholders’ equity that, under generally accepted
accounting principles are excluded from net income (loss). For the
Company, the only items are the cumulative foreign currency
translation and net income (loss).
Income Taxes
The Company accounts for income taxes in accordance with ASC
Topic 740, "Income Taxes,"
under the asset and liability method
which includes the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that
have been included in the consolidated financial statements. Under
this approach, deferred taxes are recorded for the future tax
consequences expected to occur when the reported amounts of assets
and liabilities are recovered or paid. The provision for income
taxes represents income taxes paid or payable for the current year
plus the change in deferred taxes during the year. Deferred taxes
result from differences between the financial statement and tax
basis of assets and liabilities and are adjusted for changes in tax
rates and tax laws when changes are enacted. The effects of future
changes in income tax laws or rates are not
anticipated.
The Company is subject to income taxes in the United States and
certain foreign jurisdictions. The calculation of the
Company’s tax provision involves the application of complex
tax laws and requires significant judgment and estimates. The
Company evaluates the realizability of its deferred tax assets for
each jurisdiction in which it operates at each reporting date and
establishes a valuation allowance when it is more likely than not
that all or a portion of its deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income of the same
character and in the same jurisdiction. The Company considers all
available positive and negative evidence in making this assessment,
including, but not limited to, the scheduled reversal of deferred
tax liabilities, projected future taxable income, and tax planning
strategies. In circumstances where there is sufficient negative
evidence indicating that deferred tax assets are not more likely
than not realizable, the Company will establish a valuation
allowance.
The Company applies ASC Topic 740 “Accounting for
Uncertainty in Income Taxes” recognized in its financial statements. ASC 740
requires that all tax positions be evaluated using a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to
be taken in a tax return. Differences between tax positions taken
in a tax return and amounts recognized in the financial statements
are recorded as adjustments to income taxes payable or receivable,
or adjustments to deferred taxes, or both. The Company believes
that its accruals for uncertain tax positions are adequate for all
open audit years based on its assessment of many factors including
past experience and interpretation of tax law. To the extent that
new information becomes available, which causes the Company to
change its judgment about the adequacy of its accruals for
uncertain tax positions, such changes will impact income tax
expense in the period such determination is made. The
Company’s policy is to include interest and penalties related
to unrecognized income tax benefits as a component of income tax
expense.
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.
Other Income (Expense)
The Company records interest income, interest expense, and change
in derivative liabilities, as well as other non-operating
transactions, as other income (expense) on our consolidated
statements of operations.
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 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
February 2018, the FASB issued Accounting Standards Update ASU No.
2018-02, Income Statement -
Reporting Comprehensive Income (Topic 220), Reclassification
of Certain Tax Effects from Accumulated Other Comprehensive Income,
Topic 220. The amendments in this Update allow a reclassification
from accumulated other comprehensive income to retained earnings
for stranded tax effects resulting from the Tax Cuts and Jobs Act
(H.R.1) (the Act). Consequently, the amendments eliminate the
stranded tax effects resulting from the Act and will improve the
usefulness of information reported to financial statement users.
However, because the amendments only relate to the reclassification
of the income tax effects of the Act, the underlying guidance that
requires that the effect of a change in tax laws or rates be
included in income from continuing operations is not affected. The
amendments in this Update also require certain disclosures about
stranded tax effects. Topic 220 is effective for fiscal years, and
interim periods within those years, beginning after December 15,
2018. The Company does not expect this new guidance to have a
material impact on its 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 is currently evaluating the impact that Topic 260 will have
on its consolidated financial statements.
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 consolidated financial
statements.
In February 2016,
FASB established Topic
842, Leases, by issuing ASU No. 2016-02, Leases (Topic 842)
which requires 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 will be classified as finance or operating, with
classification affecting the pattern and classification of expense
recognition in the income statement. The amendments are required to
be 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 expects to elect
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 expects to elect
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 expects that this
standard will not
have a material effect on its
financial statements. 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 expects to recognize additional operating liabilities
ranging from $5,200,000
to $5,900,000, 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.
Recently Adopted Accounting Pronouncements
In June
2018, FASB issued ASU No. 2018-07, Stock Compensation (Topic 718): Improvements
to Non-employee Share-Based Payment
Accounting, which expands the scope of Topic 718 to
include share-based payments granted to non-employees.
Consistent with the requirement for employee share-based payment
awards, non-employee share-based payment awards within the scope of
Topic 718 will be measured at grant-date fair value of the equity
instruments. The Company adopted the
provisions of this guidance on January 1, 2018 and the adoption of
this standard did not have a material impact on the Company’s
consolidated financial statements.
In May 2017, the FASB issued ASU No.
2017-09, Compensation - Stock
Compensation (Topic 718): “Scope Modification
Accounting.” This update
clarifies the changes to terms or conditions of a share-based
payment award that require an entity to apply modification
accounting. The Company adopted Topic 718 effective January 1,
2018. The adoption of this standard did not have a
material impact on the Company’s consolidated financial
statements.
In
March 2016, the FASB issued ASU No. 2016-09, Compensation–Stock Compensation (Topic
718): Improvements to Employee Share-Based Payment
Accounting. The ASU includes various provisions to simplify
the accounting for share-based payments with the goal of reducing
the cost and complexity of accounting for share-based payments. The
amendments may significantly impact net income, earnings per share
and the statement of cash flows as well as present implementation
and administration challenges for companies with significant
share-based payment activities. Topic 718 was effective for the
Company beginning January 1, 2018. The adoption of this standard
did not have a material impact on the Company’s consolidated
financial statements.
In
January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805),
Clarifying the Definition of a Business (ASU 2017-01). Topic 805
clarifies the definition of a business with the objective of
addressing whether transactions involving in-substance nonfinancial
assets, held directly or in a subsidiary, should be accounted for
as acquisitions or disposals of nonfinancial assets or of
businesses. Topic 805 is effective for annual periods beginning
December 15, 2017. Early adoption is permitted for transactions,
including acquisitions or dispositions, which occurred before the
issuance date or effective date of the standard if the transactions
were not reported in financial statements that have been issued or
made available for issuance. The adoption of this standard did not
have a material impact on the Company’s consolidated
financial statements.
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 3,
below)
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments,
to improve financial reporting in regard to how certain
transactions are classified in the statement of cash flows. The ASU
requires that (1) debt extinguishment costs be classified as cash
outflows for financing activities and provides additional
classification guidance for the statement of cash flows, (2) the
classification of cash receipts and payments that have aspects of
more than one class of cash flows to be determined by applying
specific guidance under generally accepted accounting principles,
and (3) each separately identifiable source or use within the cash
receipts and payments be classified on the basis of their nature in
financing, investing or operating activities. Topic 230 is
effective for fiscal years beginning after December 15, 2017, with
early adoption permitted. The adoption of this standard
did not have a material impact on the Company’s consolidated
financial statements.
Note 2. Acquisitions and Business Combinations
During 2018 and 2017, the Company entered into two and five
acquisitions, respectively, which are detailed below. The
acquisitions were conducted in an effort to expand the
Company’s distributor network within the direct selling
segment, enhance and expand its product portfolio, and diversify
its product mix. As a result of the Company’s business
combinations, the Company’s distributors and customers will
have access to the acquired company’s products and acquired
company’s distributors and clients will gain access to
products offered by the Company.
As such, the major purpose for all of the business combinations was
to increase revenue and profitability. The acquisitions were
structured as asset purchases which resulted in the recognition of
certain intangible assets.
The preliminary fair value of intangible assets acquired with the
Company’s acquisitions are determined through the use of a
discounted cash flow methodology. The trademarks and trade name,
customer-related intangible and distributor organization intangible
are being amortized over their estimated useful life of ten (10)
years using the straight-line method which is believed to
approximate the time-line within which the economic benefit of the
underlying intangible asset will be realized.
During the year ended December 31, 2018 the Company adjusted the
preliminary purchase price for one of its 2017 acquisitions which
resulted in an adjustment to the related intangibles and contingent
debt in the amount of $629,000. In addition, during the year ended
December 31, 2018 the Company removed the contingent debt
associated with the Nature’s Pearl acquisition from 2016 due
to a breach of the asset purchase agreement by Nature's Pearl and
amended certain terms of the existing agreement. As a result, the
Company is no longer obligated under the related asset purchase
agreement to make payments. The Company recorded a reduction to the
acquisition debt for Nature’s Pearl in the amount of
approximately $1,246,000 with a corresponding credit to general and
administrative expense in the statements of
operations.
2018 Acquisitions
Doctor’s Wellness Solutions Global LP
(ViaViente)
On
March 1, 2018, the Company
acquired certain assets of Doctor’s Wellness Solutions Global
LP (“ViaViente”).
ViaViente is the distributor of The ViaViente Miracle, a
highly-concentrated, energizing whole fruit puree blend that is
rich in anti-oxidants and naturally-occurring vitamins and
minerals.
The Company is obligated to make monthly payments based on a
percentage of the ViaViente
distributor revenue derived from sales of the Company’s
products and a percentage of royalty revenue derived from sales of
ViaViente’s products until the earlier of the date that is
five (5) years from the closing date or such time as the Company
has paid to ViaViente aggregate cash payments of the ViaViente
distributor revenue and royalty revenue equal to the maximum
aggregate purchase price of $3,000,000. In addition, the Company
entered into an inventory consignment agreement whereby the Company
agreed to pay an additional royalty fee on specific inventory items
up to $750,000. The $750,000 is in addition to the $3,000,000
aggregate purchase price and is included in the estimated fair
value of the contingent debt. The inventory consignment royalty
fees are applied to the maximum aggregate purchase
price.
The contingent consideration’s estimated fair value at the
date of acquisition was $1,375,000 as determined by management
using a discounted cash flow methodology. The acquisition related
costs, such as legal costs and other professional fees were minimal
and expensed as incurred.
The
assets acquired were recorded at estimated fair values as of the
date of the acquisition. During the year ended December 31, 2018,
the Company reviewed the initial valuation of $1,375,000 and
reduced it by $749,000. The contingent liability was also reduced
by $749,000.
The revenue impact from the ViaViente acquisition, included in the
consolidated statements of operations for the year ended December
31, 2018 was approximately $1,542,000.
The pro-forma effect assuming the business combination with
ViaViente discussed above had occurred
at the beginning of the year is not presented as the information
was not available.
Nature Direct
On
February 12, 2018, the Company
acquired certain assets and liabilities of Nature Direct. Nature
Direct, is a manufacturer and distributor of essential-oil based
nontoxic cleaning and care products for personal, home and
professional use.
The Company is obligated to make monthly payments based on a
percentage of the Nature Direct distributor revenue derived from sales of the
Company’s products and a percentage of royalty revenue
derived from sales of the Nature Direct products until the earlier of the date that is
twelve (12) years from the closing date or such time as the Company
has paid to Nature Direct aggregate cash payments of the Nature
Direct distributor revenue and royalty
revenue equal to the maximum aggregate purchase price of
$2,600,000.
The contingent consideration’s estimated fair value at the
date of acquisition was $1,085,000 as determined by management
using a discounted cash flow methodology. The acquisition related
costs, such as legal costs and other professional fees were minimal
and expensed as incurred. The Company received approximately
$90,000 of inventories from Nature Direct and has agreed to pay for
the inventory and assumed liabilities of $50,000. This payment is
applied to the maximum aggregate purchase price.
The
assets acquired were recorded at estimated fair values as of the
date of the acquisition. During the year ended December 31, 2018,
the Company reviewed the initial valuation of $1,085,000 and
reduced it by $560,000. The contingent liability was also reduced
by $560,000.
The revenue impact from the Nature Direct acquisition, included in the consolidated
statements of operations for the year ended December 31, 2018 was
approximately $1,308,000.
The pro-forma effect assuming the business combination with
Nature Direct discussed above had
occurred at the beginning of the year is not presented as the
information was not available.
2017 Acquisitions
BeautiControl
On
December 13, 2017, the Company entered into an agreement with
BeautiControl whereby the Company acquired certain assets of the
BeautiControl cosmetic company. BeautiControl was a direct sales
company specializing in cosmetics and skincare
products.
The Company is obligated to make monthly payments based on a
percentage of the BeautiControl’s distributor revenue derived
from sales of the Company’s products and a percentage of
royalty revenue derived from sales of BeautiControl’s
products until the earlier of the date that is twelve (12) years
from the closing date or such time as the Company has paid to
BeautiControl’s aggregate cash payments of the
BeautiControl’s distributor revenue and royalty revenue equal
to the maximum aggregate purchase price of
$20,000,000.
The contingent consideration’s estimated fair value at the
date of acquisition was $2,625,000 as determined by management
using a discounted cash flow methodology. The acquisition related
costs, such as legal costs and other professional fees were minimal
and expensed as incurred.
The purchase price allocation was as follows (in
thousands):
|
Distributor
organization
|
$1,275
|
|
Customer-related
intangible
|
765
|
|
Trademarks
and trade name
|
585
|
|
Total
purchase price
|
$2,625
|
In determining the fair value of the assets acquired and the
purchase price, initially it was based on a number of products to
be made available to the Company through collaboration with the
seller and ensuring active participation by BeautiControl’s
distributor organization. Delays in the Company’s ability to
access many key products have substantially reduced the potential
to deliver the revenues initially anticipated. As a result of this, when the Company re-assessed
the contingent liability during the year ended December 31, 2018
the Company recorded an adjustment to reduce the contingent
liability by approximately $2,520,000 and a corresponding credit to
the contingent liability revaluation expense included in general
and administrative expense. The Company also determined that the
underlying intangible assets were impaired and recorded an
adjustment to reduce the intangible assets of approximately
$2,550,000 resulting in a corresponding loss on impairment on the
Company’s consolidated statements of operations for the year
ended December 31, 2018, which reduced the corresponding intangible
assets to the following:
|
Distributor
organization
|
$22
|
|
Customer-related
intangible
|
27
|
|
Trademarks
and trade name
|
24
|
|
Total
|
$73
|
The revenue impact from the BeautiControl acquisition, included in the consolidated
statements of operations for the year ended December 31, 2018 was
approximately $123,000. There was no revenue earned as of December
31, 2017 for the BeautiControl acquisition.
The pro-forma effect assuming the business combination with
BeautiControl discussed above had
occurred at the beginning of the year is not presented as the
information was not available.
Future Global Vision, Inc.
Effective
November 6, 2017, the Company acquired certain assets and assumed
certain liabilities of Future Global Vision, Inc., a direct selling
company that offers a unique line of products that include a fuel
additive for vehicles that improves the efficiency of the engine
and reduces fuel consumption. In addition, Future Global Vision,
Inc., offers a line of nutraceutical products designed to provide
health benefits that the whole family can use.
The Company is obligated to make monthly payments based on a
percentage of the Future Global Vision, Inc., distributor revenue derived from sales of the
Company’s products and a percentage of royalty revenue
derived from sales of the Future Global Vision, Inc.,
products until the earlier of the date
that is twelve (12) years from the closing date or such time as the
Company has paid to Future Global Vision, Inc., aggregate cash payments of the Future
Global Vision, Inc., distributor
revenue and royalty revenue equal to the maximum aggregate purchase
price of $1,800,000.
The contingent consideration’s estimated fair value at the
date of acquisition was $875,000 as determined by management using
a discounted cash flow methodology. The acquisition related costs,
such as legal costs and other professional fees were minimal and
expensed as incurred. The Company received approximately $53,000 of
inventories and has agreed to pay for the inventory. This payment
has been applied to the maximum aggregate purchase
price.
The contingent consideration’s estimated fair value at the
date of acquisition was $875,000. The purchase price allocation was
as follows (in thousands):
|
Distributor
organization
|
$425
|
|
Customer-related
intangible
|
250
|
|
Trademarks
and trade name
|
200
|
|
|
$875
|
The
assets acquired were recorded at estimated fair values as of the
date of the acquisition. During the year ended December 31, 2018,
the Company reviewed the initial valuation of $875,000 and
re-assessed the contingent liability. The Company recorded an
adjustment to reduce the contingent liability by approximately
$771,000 and a corresponding credit to the contingent liability
revaluation expense included in general and administrative expense.
The Company also determined that the underlying intangible assets
were impaired and recorded an adjustment to reduce the intangible
assets of approximately $625,000 resulting in a corresponding loss
on impairment on the Company’s consolidated statements of
operations for the year ended December 31, 2018, which reduced the
corresponding intangible assets to the
following:
|
Distributor
organization
|
$113
|
|
Customer-related
intangible
|
75
|
|
Trademarks
and trade name
|
63
|
|
Total
|
$251
|
The revenue impact from the Future Global Vision, Inc.,
acquisition, included in the
consolidated statements of operations for the years ended December
31, 2018 and 2017 was approximately $926,000 and $63,000,
respectively.
The pro-forma effect assuming the business combination with
Future Global Vision, Inc., discussed
above had occurred at the beginning of the year is not presented as
the information was not available.
Sorvana International, LLC
Effective July 1, 2017, the Company acquired certain assets and
assumed certain liabilities of Sorvana International, LLC
(“Sorvana”). Sorvana was the result of the unification
of the two companies FreeLife International, Inc.
“FreeLife”, and L’dara. Sorvana offers a variety
of products with the addition of the FreeLife and L’dara
product lines. Sorvana offers an extensive line of health and
wellness product solutions including healthy weight loss
supplements, energy and performance products and skin care product
lines as well as organic product options. As a result of this
business combination, the Company’s distributors and
customers will have access to Sorvana’s unique line of
products and Sorvana’s distributors and clients will gain
access to products offered by the Company.
The Company is obligated to make monthly payments based on a
percentage of the Sorvana distributor revenue derived from sales of
the Company’s products and a percentage of royalty revenue
derived from sales of Sorvana’s products until the earlier of
the date that is twelve (12) years from the closing date or such
time as the Company has paid to Sorvana aggregate cash payments of
the Sorvana distributor revenue and royalty revenue equal to the
maximum aggregate purchase price of $14,000,000.
The Company received approximately $700,000 of inventories and has
agreed to pay for the inventory. This payment is applied to the
maximum aggregate purchase price. In addition, the Company assumed
certain liabilities payable in the approximate amount of $68,000
which has been not applied to the maximum aggregate purchase
price.
The contingent consideration’s estimated fair value at the
date of acquisition was $4,247,000 as determined by management
using a discounted cash flow methodology. The acquisition related
costs, such as legal costs and other professional fees were minimal
and expensed as incurred.
The assets acquired were recorded at estimated fair values as of
the date of the acquisition. During the years ended December 31,
2018 and 2017, the Company reviewed the initial valuation of
$4,247,000 and reduced it by
$629,000 and $1,105,000, respectively, based on information that
existed as of the acquisition date but was not known to the Company
at that time. The contingent liability was also reduced by $629,000
and $1,105,000, during the years ended December 31, 2018 and 2017,
respectively.
The revenue impact from the Sorvana acquisition, included in the
consolidated statements of operations for the years ended December
31, 2018 and 2017 was approximately $6,232,000 and $3,891,000,
respectively.
The pro-forma effect assuming the business combination with Sorvana
discussed above had occurred at the beginning of the year is not
presented as the information was not available.
BellaVita Group, LLC
Effective
March 1, 2017, the Company acquired certain assets of BellaVita
Group, LLC (“BellaVita”) a direct sales company and
producer of health and beauty products with locations and customers
primarily in the Asian market.
The Company is obligated to make monthly payments based on a
percentage of the BellaVita distributor revenue derived from sales
of the Company’s products and a percentage of royalty revenue
derived from sales of BellaVita products until the earlier of the
date that is twelve (12) years from the closing date or such time
as the Company has paid to BellaVita aggregate cash payments of the
BellaVita distributor revenue and royalty revenue equal to the
maximum aggregate purchase price of $3,000,000.
The Company assumed certain liabilities payable in the approximate
amount of $100,000 and applied the payment to the maximum aggregate
purchase price.
The contingent consideration’s estimated fair value at the
date of acquisition was $1,650,000 as determined by management
using a discounted cash flow methodology. The acquisition related
costs, such as legal costs and other professional fees were minimal
and expensed as incurred.
The assets acquired were recorded at estimated fair values as of
the date of the acquisition. During the year ended December 31,
2017, the Company determined that the initial estimated fair value
of the assets acquired should be increased by $156,000 from
$1,650,000 to $1,806,000 based on information that existed as of
the acquisition date but was not known to the Company at that time.
The contingent liability was also increased by $156,000 during the
year ended December 31, 2017.
The revenue impact from the BellaVita acquisition, included in the
consolidated statements of operations for the years ended December
31, 2018 and 2017 was approximately $2,879,000 and $2,390,000,
respectively.
The pro-forma effect assuming the business combination with
BellaVita discussed above had occurred at the beginning of the year
is not presented as the information was not available.
Ricolife, LLC
Effective
March 1, 2017, the Company acquired certain assets of Ricolife, LLC
(“Ricolife”) a direct sales company and producer of
teas with health benefits contained within its tea
formulas.
The Company is obligated to make monthly payments based on a
percentage of the Ricolife distributor revenue derived from sales
of the Company’s products and a percentage of royalty revenue
derived from sales of Ricolife products until the earlier of the
date that is twelve (12) years from the closing date or such time
as the Company has paid to Ricolife aggregate cash payments of the
Ricolife distributor revenue and royalty revenue equal to the
maximum aggregate purchase price of $1,700,000.
The contingent consideration’s estimated fair value at the
date of acquisition was $845,000 as determined by management using
a discounted cash flow methodology. The acquisition related costs,
such as legal costs and other professional fees were minimal and
expensed as incurred. The Company assumed certain liabilities
payable in the approximate amount of $75,000 and applied the
payment to the maximum aggregate purchase price.
The assets acquired were recorded at estimated fair values as of
the date of the acquisition. During the year ended December 31,
2017, the Company determined that the initial estimated fair value
of the assets acquired should be reduced by $372,000 from $845,000
to $473,000 based on information that existed as of the acquisition
date but was not known to the Company at that time. The contingent
liability was also reduced by $372,000 during the year ended
December 31, 2017.
The revenue impact from the Ricolife acquisition, included in the
consolidated statements of operations for the years ended December
31, 2018 and 2017 was approximately $789,000 and $896,000,
respectively.
The pro-forma effect assuming the business combination with
Ricolife discussed above had occurred at the beginning of the year
is not presented as the information was not available.
Note 3. Revenues
Adoption of ASC Topic 606, Revenue from Contracts with
Customers
Following the expiration of the Company’s EGC status on
December 31, 2018 the Company adopted ASC Topic 606,
Revenue from
Contracts with Customer (“Topic 606”) as of January 1, 2018
using the modified retrospective method applied to those contracts
which were not completed as of January 1, 2018. Results for
reporting periods beginning after January 1, 2018 are presented
under Topic 606, while prior period amounts are not adjusted and
continue to be reported in accordance with the Company’s
historic accounting under ASC Topic 605, Revenue
Recognition.
There was no impact to retained earnings as of January 1, 2018, or
to revenue for the year ended December 31, 2018, after adopting
Topic 606, as revenue recognition and timing of revenue did not
change as a result of implementing Topic 606.
Revenue Recognition
Direct Selling
Direct distribution sales are made through the Company’s
network (direct selling segment), which is a web-based global
network of customers and distributors. The Company’s
independent sales force markets a variety of products to an array
of customers, through friend-to-friend marketing and social
networking. The Company considers itself to be an e-commerce
company whereby personal interaction is provided to customers by
its independent sales network. Sales generated from direct
distribution includes; health and wellness, beauty product and skin
care, scrap booking and story booking items, packaged food products
and other service-based products.
Revenue is recognized when the Company satisfies its performance
obligations under the contract. The Company recognizes revenue by
transferring the promised products to the customer, with revenue
recognized at shipping point, the point in time the customer
obtains control of the products. The majority of the
Company’s contracts have a single performance obligation and
are short term in nature. Sales taxes in domestic and foreign
jurisdictions are collected from customers and remitted to
governmental authorities, all at the local level, and are accounted
for on a net basis and therefore are excluded from
revenues.
Commercial Coffee - Coffee Roaster
The Company engages in the commercial sale of roasted coffee
through its subsidiary CLR, which is sold under a variety of
private labels through major national sales outlets and to
customers including cruise lines and office coffee service
operators, and under its own Café La Rica brand, Josie’s
Java House Brand and Javalution brands as well as through its
distributor network within the direct selling segment.
Revenue is recognized when the title and risk of loss is passed to
the customer under the terms of the shipping arrangement,
typically, FOB shipping point. At this point the customer has a
present obligation to pay, takes physical possession of the
product, takes legal title to the product, bears the risks and
rewards of ownership, and as such, revenue will be recognized at
this point in time. Sales taxes in domestic and foreign
jurisdictions are collected from customers and remitted to
governmental authorities, all at the local level, and are accounted
for on a net basis and therefore are excluded from
revenues.
Commercial Coffee - Green Coffee
The commercial coffee segment includes the sale of green coffee
beans, which is sourced from the Nicaraguan
rainforest.
Revenue is recognized when the title and risk of loss is passed to
the customer under the terms of the shipping arrangement,
typically, FOB shipping point. At this point the customer has a
present obligation to pay, takes physical possession of the
product, takes legal title to the product, bears the risks and
rewards of ownership, and as such, revenue will be recognized at
this point in time. 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 two primary segments: the direct selling
segment where products are offered through a global distribution
network of preferred customers and distributors and the commercial
coffee segment where products are sold directly to businesses. The
following table summarizes revenue disaggregated by direct selling
and the coffee segment (in thousands):
|
|
For the years ended
December 31,
|
|
|
|
|
|
Direct
Selling Segment
|
$138,855
|
$142,450
|
|
Commercial
Coffee - coffee roaster
|
11,309
|
10,261
|
|
Commercial
Coffee - green coffee
|
12,281
|
12,985
|
|
Total
|
$162,445
|
$165,696
|
Contract Balances
Timing of revenue recognition may differ from the timing of
invoicing to customers. The Company records contract assets when
performance obligations are satisfied prior to
invoicing.
Contract liabilities are reflected as deferred revenues in current
liabilities on the Company’s consolidated balance sheets and
includes deferred revenue and customer deposits. Contract
liabilities relate to payments invoiced or received in advance of
completion of performance obligations, and are recognized as
revenue upon the fulfillment of performance obligations. Contract
Liabilities are classified as short-term as all performance
obligations are expected to be satisfied within the next 12
months.
As of December 31, 2018 and 2017, the balance in deferred revenues
was approximately $2,312,000 and $3,386,000, 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, 2017, the Company
recognized revenue of approximately $895,000 from the Heritage
Makers product line, $213,000 from the Company’s convention
and distributor events, and $1,200,000 related to customer deposits
from CLR during the year ended December 31. 2018.
As part of the adoption of the ASC Topic 606, the Company elected
to use the practical expedient to account for shipping and handling
activities as fulfillment costs, which are recorded in cost of
sales.
Note 4. Agreements with Variable Interest Entities and Related
Party Transactions
The Company consolidates all variable interest entities in which it
holds a variable interest and is the primary beneficiary of the
entity. Generally, a variable interest entity (“VIE”)
is a legal entity with one or more of the following
characteristics: (a) the total at risk equity investment is not
sufficient to permit the entity to finance its activities without
additional subordinated financial support from other parties; (b)
as a group the holders of the equity investment at risk lack any
one of the following characteristics: (i) the power, through voting
or similar rights, to direct the activities of the entity that most
significantly impact its economic performance, (ii) the obligation
to absorb the expected losses of the entity, or (iii) the right to
receive the expected residual returns of the entity; or (c) some
equity investors have voting rights that are not proportional to
their economic interests, and substantially all of the entity's
activities either involve, or are conducted on behalf of, an
investor that has disproportionately few voting rights. The primary
beneficiary of a VIE is required to consolidate the VIE and is the
entity that has (a) the power to direct the activities of the VIE
that most significantly impact the VIE's economic performance, and
(b) the obligation to absorb losses of the VIE or the right to
receive benefits from the VIE that could potentially be significant
to the VIE.
In determining whether it is the primary beneficiary of a VIE, the
Company considers qualitative and quantitative factors, including,
but not limited to: which activities most significantly impact the
VIE's economic performance and which party has the power to direct
such activities; the amount and characteristics of Company's
interests and other involvements in the VIE; the obligation or
likelihood for the Company or other investors to provide financial
support to the VIE; and the similarity with and significance to the
business activities of Company and the other investors. Significant
judgments related to these determinations include estimates about
the current and future fair values and performance of these VIEs
and general market conditions.
FDI Realty, LLC
FDI
Realty, LLC (“FDI Realty”) is the owner and lessor of
the building previously partially occupied by the Company for its
sales and marketing office in Windham, NH until December 2015. A
former officer of the Company is the single member of FDI
Realty.
At December 31, 2017 the Company believed they held a variable
interest in FDI Realty, for which the Company was not deemed to be
the primary beneficiary. The Company concluded, based on its
qualitative consideration of the terminated lease agreement, and
the role of the single member of FDI Realty, that the single member
is the primary beneficiary of FDI Realty. In making these
determinations, the Company considered that the single member
conducts and manages the business of FDI Realty, is authorized to
borrow funds on behalf of FDI Realty, is the sole person authorized
and responsible for conducting the business of FDI Realty and is
obligated to fund the obligations of FDI Realty. The Company
believed they were a co-guarantor of FDI Realty’s mortgages
on the building, however, as of December 31, 2017, the Company
determined that the fair value of the guarantees was not
significant and therefore did not record a related
liability.
During the year-ended December 31, 2018, the Company determined
that based on the current circumstances as it relates to certain
agreements existing among the Company and FDI Realty, including but
not limited to an Amended and Restated Equity Purchase Agreement
(“AREPA”) which was executed on October 25, 2011 and
FDI Realty’s failure to meet its obligations under the AREPA,
the Company no longer holds a variable interest in FDI
Realty.
Other Relationship Transactions
Hernandez, Hernandez, Export Y Company and H&H Coffee Group
Export Corp.
The Company’s commercial coffee segment, CLR, is associated
with Hernandez, Hernandez, Export Y Company
(“H&H”), a Nicaragua company, through sourcing
arrangements to procure Nicaraguan grown green coffee beans. In
March 2014, as part of the Siles acquisition, CLR engaged the
owners of H&H as employees to manage Siles. The Company made
purchases of approximately $9,891,000 and $10,394,000 from this
supplier for the years ended December 31, 2018 and 2017,
respectively.
In addition, CLR sold approximately $3,938,000 and $6,349,000 for
the years ended December 31, 2018 and 2017, respectively, of green
coffee beans to H&H Export, a Florida based company which is
affiliated with H&H.
In March 2017, the Company entered a settlement agreement and
release with H&H Export pursuant to which it was agreed that
$150,000 owed to H&H Export, for services that had been
rendered would be settled by the issuance of common stock. In May
2017, the Company issued to H&H Export, 27,500 shares of common
stock in accordance with this agreement.
In May 2017, the Company entered a settlement agreement with Alain
Piedra Hernandez, one of the owners of H&H and the operating
manager of Siles, who was issued a non-qualified stock option for
the purchase of 75,000 shares of the Company’s common stock
at a price of $2.00 with an expiration date of three years, in lieu
of an obligation due from the Company to H&H as relates to a
Sourcing and Supply Agreement with H&H. During the period ended
September 30, 2017 the Company replaced the non-qualified stock
option and issued a warrant agreement with the same terms. There
was no financial impact related to the cancellation of the option
and the issuance of the warrant. As of December 31, 2018, the
warrant remains outstanding.
During
the year ended December 31, 2018, CLR advanced $5,000,000 to
H&H Export to provide services in support of the 5-year
contract for the sale and processing of 41 million pounds of green
on an annual basis. The services include providing hedging and
financing opportunities to producers and delivering harvested
coffee to the Company’s mills. On March 31, 2019, this
advance was converted to a $5,000,000 loan agreement and bears
interest at 9% per annum and is due and payable by H&H Export
at the end of the 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.
During
the year ended December 31, 2018, the Company paid $900,000 towards
construction of a mill, which is included in construction in
process and equipment, net on the Company's consolidated balance
sheet, (See Note 13, below.)
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 $151,000
and $182,000 from WVNP Inc., for the years ended December 31, 2018
and 2017, respectively. In addition, Mr. Renton is a
distributor of the Company and was paid distributor commissions for
the years ended December 31, 2018 and 2017 of approximately
$363,000 and $398,000, respectively.
Carl Grover
Mr. Grover is the sole beneficial owner of in excess of five
percent (5%) of the Company’s outstanding common shares and
beneficial owner of 2,938,133 shares of common stock. Mr. Grover
owns a 2014 Warrant exercisable for 782,608 shares of common stock,
a 2015 Warrant exercisable for 200,000 shares of common stock, 2017
Warrants exercisable for 735,030 shares of common stock, and a 2018
Warrant exercisable for 631,579 shares of common stock, a 2018
Warrant exercisable for 250,000 shares of common stock and a second
2018 Warrant exercisable for 250,000 shares of common stock. He
also owns 2,345,862 shares of common stock which includes 1,122,233
shares from the conversion of his 2017 Notes to common stock,
428,571 shares from the conversion of his 2015 Note to common
stock, 747,664 shares issued from the conversion of his 2014 Notes
to common stock and 47,394 shares of common stock. (See Notes 6,
below.)
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”). We issued to Mr.
Grover a four-year warrant to purchase 250,000 shares of our common
stock, exercisable at $6.82 per share, and a four-year warrant to
purchase 250,000 shares of our common stock, exercisable at $7.82
per share, pursuant to a Warrant Purchase Agreement, dated December
13, 2018, with Mr. Grover. (See Notes 5 below.)
Paul Sallwasser
Mr. Paul Sallwasser is a member of the board
directors and prior to joining
the Company’s Board of Directors he acquired a note (the
“2014 Note”) issued in the Company’s private
placement consummated in 2014 (the “2014 Private
Placement”) in the principal amount of $75,000 convertible
into 10,714 shares of common stock and a warrant (the “2014
Warrant”) issued in the 2014 Private Placement exercisable
for 14,673 shares of common stock. Prior to joining the
Company’s Board of Directors, Mr. Sallwasser acquired in the
2017 Private Placement a 2017 Note in the principal amount of
$38,000 convertible into 8,177 shares of common stock and a warrant
(the “2017 Warrant”) issued, in the 2017 Private
Placement, to purchase 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. He
also owns 67,393 shares of common stock and options to purchase an
aggregate of 116,655 shares of common stock, of which options to
purchase an aggregate of 55,000 shares of common stock have vested
and are immediately exercisable.
2400 Boswell LLC
In March 2013, the Company acquired 2400 Boswell for approximately
$4,600,000. 2400 Boswell is the owner and lessor of the building
occupied by the Company for its corporate office and warehouse in
Chula Vista, California. The purchase was from an immediate family
member of the Company’s Chief Executive Officer and consisted
of approximately $248,000 in cash, approximately $334,000 of debt
forgiveness and accrued interest, and a promissory note of
approximately $393,000, payable in equal payments over 5 years and
bears interest at 5.0%. Additionally, the Company
assumed a long-term mortgage of $3,625,000, payable over 25 years
with an initial interest rate of 5.75%. The interest rate is the
prime rate plus 2.5%. The current interest rate as of December 31,
2018 was 7.75%. The lender will adjust the interest
rate on the first calendar day of each change period. The Company
and its Chief Executive Officer are both co-guarantors of the
mortgage. As of December 31, 2018, the balance on the long-term
mortgage is approximately $3,217,000 and the balance on the
promissory note is zero.
Note 5. 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 is approximately $504,000 as of December 31, 2018 and is
included in other current liabilities on the Company’s
balance sheet as of December 31, 2018.
Notes Payable
On December 13, 2018, the Company’s wholly owned subsidiary,
CLR, entered into a Credit Agreement with Mr. Carl Grover pursuant
to which CLR borrowed $5,000,000 from Mr. Grover and in exchange
issued to him a $5,000,000 Credit Note secured by its green coffee
inventory under a Security Agreement, dated December 13, 2018, with
Mr. Grover and CLR’s subsidiary, Siles. In connection with the Credit Agreement,
the Company issued to Mr. Grover a four-year warrant to purchase
250,000 shares of its common stock, exercisable at $6.82 per share
(“Warrant 1”), and a four-year warrant to purchase
250,000 shares of its common stock, exercisable at $7.82 per share
(“Warrant 2”), pursuant to a Warrant Purchase
Agreement, dated December 13, 2018, with Mr. Grover. The Company
also entered into an Advisory Agreement with Ascendant Alternative
Strategies, LLC (“Ascendant”), a third party not
affiliated with Mr. Grover, in connection with the Credit
Agreement, pursuant to which it agreed to pay to Ascendant a 3% fee
on the transaction with Mr. Grover and issued to Ascendant (or
it’s designees) a four-year warrant to purchase 50,000 shares
of its common stock, exercisable at $6.33 per
share.
Upon the occurrence of an event of default, the unpaid balance of
the principal amount of this Credit Note together with all accrued
but unpaid interest, may become, or may be declared to be, due and
payable in the manner, upon the conditions and with the effect
provided in the Credit Agreement. The Company determined that the
contingent call (put) option meets the definition of a derivative
(i.e., has an underlying, a notional amount, requires no initial
investment, and can be net settled). Therefore, it must be
separately measured at fair value with changes in fair value
impacting current earnings.
Management has assessed the probability of a trigger event (i.e.,
the occurrence an event of default, such amounts are declared due
and payable or made automatically due and payable, in each case, in
accordance with the terms of this Note) to be de minimis during the
term of the Credit Note. As such, the fair value of the contingent
put feature would have a de minimis value (i.e., there is no need
to separately measure the contingent put feature, as assigning a
probability of zero percent or near zero percent to the occurrence
of an event of default would result in de minimis fair value for
the feature). Management will reassess the probability of a trigger
event at each reporting period during the term of the Credit Note.
As of December 31, 2018, the Company determined that the event of
default is null.
The Company recorded debt discounts of approximately $1,469,000
related to the fair value of warrants issued in the transaction and
$175,000 of transaction issuance costs to be amortized to interest
expense over the life of the Credit Agreement. As of December 31,
2018, the remaining balance of the debt discounts is approximately
$1,614,000. The Company recorded approximately $30,000 amortization
of the debt discounts during the year ended December 31, 2018 and
is recorded as interest expense.
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 December 31, 2018 the interest rate was 7.75%. The
lender will adjust the interest rate on the first calendar day of
each change period. The Company and its Chief Executive Officer are
both co-guarantors of the mortgage. As of December 31, 2018, the
balance on the long-term mortgage is approximately $3,217,000 and
the balance on the promissory note is zero.
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 December
31, 2018 and 2017, the carrying value of the liability was
approximately $1,071,000 and $1,113,000, respectively. The
interest associated with the note for the years ended December 31,
2018 and 2017 was minimal.
The Company’s other notes relate to loans for commercial vans
at CLR in the amount of $96,000 as of December 31, 2018 which
expire at various dates through 2023.
The
following summarizes the maturities of notes payable, including
convertible notes payable (see Note 6 below) (in
thousands):
|
Years
ending December 31,
|
|
|
2019
|
$891
|
|
2020
|
5,148
|
|
2021
|
167
|
|
2022
|
172
|
|
2023
|
165
|
|
Thereafter
|
3,591
|
|
Total
|
$10,134
|
Capital Lease
The
Company leases certain manufacturing and operating equipment under
non-cancelable capital leases. The total outstanding balance under
the capital leases as of December 31, 2018 excluding
interest is as follows (in thousands):
|
Years ending
December 31,
|
|
|
2019
|
$ 1,311
|
|
2020
|
797
|
|
2021
|
378
|
|
2022
|
10
|
|
2023
|
6
|
|
Total
|
2,502
|
|
Amount representing
interest
|
(227)
|
|
Present value of
minimum lease payments
|
2,275
|
|
|
(1,168)
|
|
Long term
portion
|
$1,107
|
Depreciation expense related to the capitalized lease obligations
was approximately $221,000 and $110,000 for the years ended
December 31, 2018 and 2017, respectively.
Line of Credit - Loan and Security Agreement
CLR had a factoring agreement (“Factoring Agreement”)
with Crestmark Bank (“Crestmark”) related to accounts
receivable resulting from sales of certain CLR products. On
November 16, 2017, CLR entered into a new Loan and Security
Agreement (“Agreement”) with Crestmark which amended
and restated the original Factoring Agreement dated February 12,
2010 with Crestmark and subsequent agreement amendments thereto.
CLR is provided with a line of credit related to accounts
receivables resulting from sales of certain products that includes
borrowings to be advanced against acceptable eligible inventory
related to CLR. Effective December 29, 2017, CLR entered into a
First Amendment to the Agreement, to include an increase in the
maximum overall borrowing to $6,250,000. The loan amount may not
exceed an amount which is the lesser of (a) $6,250,000 or (b) the
sum of up (i) to 85% of the value of the eligible accounts; plus,
(ii) the lesser of $1,000,000 or 50% of eligible inventory or 50%
of (i) above, plus (iii) the lesser of $250,000 or eligible
inventory or 75% of certain specific inventory identified within
the Agreement.
The Agreement contains certain financial and nonfinancial covenants
with which the Company must comply to maintain its borrowing
availability and avoid penalties.
The outstanding principal balance of the Agreement
will bear interest based upon a year of 360 days with interest
being charged for each day the principal amount is outstanding
including the date of actual payment. The interest rate is a rate
equal to the prime rate plus 2.50% with a floor of 6.75%.
As of December 31, 2018, the interest
rate was 8.0%. In addition, other fees are incurred
for the maintenance of the loan in accordance with the Agreement.
Other fees may be incurred in the event the minimum loan balance of
$2,000,000 is not maintained. The Agreement is effective until
November 16, 2020.
The Company and the Company’s CEO, Stephan Wallach, have
entered into a Corporate Guaranty and Personal Guaranty,
respectively, with Crestmark guaranteeing payments in the event
that the Company’s commercial coffee segment CLR were to
default. In addition, the Company’s President and Chief
Financial Officer, David Briskie, personally entered into a
Guaranty of Validity representing the Company’s financial
statements so long as the indebtedness is owing to Crestmark,
maintaining certain covenants and guarantees.
The Company’s outstanding line of credit liability related to
the Agreement was approximately $2,256,000 and $3,808,000 as of
December 31, 2018 and 2017, respectively.
Contingent Acquisition Debt
The Company has contingent acquisition debt associated with its
business combinations. The Company accounts for business
combinations under the acquisition method and allocates the total
purchase price for acquired businesses to the tangible and
identified intangible assets acquired and liabilities assumed,
based on their estimated fair values as of the acquisition date. A
liability for contingent consideration, if applicable, is recorded
at fair value as of the acquisition date and evaluated each period
for changes in the fair value and adjusted as appropriate. (See
Note 7 below.)
The Company’s contingent acquisition debt as of December 31,
2018 and 2017 is $8,261,000 and $14,404,000, respectively, and is
attributable to debt associated with the Company’s direct
selling segment.
Note 6. Convertible Notes Payable
The Company’s total convertible notes payable as of December
31, 2018 and 2017, net of debt discount outstanding consisted of
the amount set forth in the following table (in
thousands):
|
|
|
|
|
8%
Convertible Notes due July and August 2019 (2014 Notes),
principal
|
$750
|
$4,750
|
|
Debt
discounts
|
(103)
|
(1,659)
|
Carrying
value of 2014 Notes
|
647
|
3,091
|
|
|
|
|
|
8%
Convertible Notes due October and November 2018 (2015 Notes),
principal
|
-
|
3,000
|
|
Debt
discounts
|
-
|
(172)
|
Carrying
value of 2015 Notes
|
-
|
2,828
|
|
|
|
|
|
8%
Convertible Notes due July and August 2020 (2017 Notes),
principal
|
-
|
7,254
|
|
Fair
value of bifurcated embedded conversion option of 2017
Notes
|
-
|
200
|
|
Debt
discounts
|
-
|
(2,209)
|
Carrying
value of 2017 Notes
|
-
|
5,245
|
|
|
|
|
|
Total
carrying value of convertible notes payable
|
$647
|
$11,164
|
Unamortized debt discounts and issuance costs are included with
convertible notes payable, net of debt discount on the consolidated
balance sheets.
July 2014 Private Placement – 2014 Notes
Between July 31, 2014 and September 10, 2014 the Company entered
into Note Purchase Agreements (the “Note” or
“Notes”) related to its private placement offering
(“2014 Private Placement”) with seven accredited
investors pursuant to which the Company raised aggregate gross
proceeds of $4,750,000 and sold units consisting of five (5) year
senior secured convertible Notes in the aggregate principal amount
of $4,750,000 that are convertible into 678,568 shares of our
common stock, at a conversion price of $7.00 per share, and
warrants to purchase 929,346 shares of common stock at an exercise
price of $4.60 per share. The Notes bear interest at a rate of
eight percent (8%) per annum and interest is paid quarterly in
arrears with all principal and unpaid interest due between July and
September 2019.
The Company has the right to prepay the Notes at any time after the
one-year anniversary date of the issuance of the Notes at a rate
equal to 110% of the then outstanding principal balance and any
unpaid accrued interest. The Notes are secured by Company pledged
assets and rank senior to all debt of the Company other than
certain senior debt that has been previously identified as senior
to the convertible notes. Additionally, Stephan Wallach, the Company’s
Chief Executive Officer, has also personally guaranteed the
repayment of the Notes, subject to the terms of a Guaranty
Agreement executed by him with the investors. In
addition, Mr. Wallach has agreed not to sell, transfer or pledge
1.5 million shares of the common stock that he owns so long as his
personal guaranty is in effect.
On October 23, 2018, the Company entered into an agreement with
Carl Grover to exchange (the “Debt Exchange”), subject
to stockholder approval which was received on December 6, 2018, all
amounts owed under the 2014 Note held by him in the principal
amount of $4,000,000 which matures on July 30, 2019, for 747,664
shares of the Company’s common stock, at a conversion price
of $5.35 per share and a four-year warrant to purchase 631,579
shares of common stock at an exercise price of $4.75 per
share. Upon the closing the
Company issued Ascendant Alternative Strategies, LLC, a
FINRA broker dealer (or its designees), which acted as the
Company’s advisor in connection with a Debt Exchange
transaction, 30,000 shares of common stock in accordance with an
advisory agreement and four-year warrants to purchase 80,000 shares
of common stock at an exercise price of $5.35 per share and
four-year warrants to purchase 70,000 shares of common stock at an
exercise price of $4.75 per share.
The Company considered the guidance of ASC 470-20, Debt:
Debt with
Conversion and Other Options and ASC 470-60, Debt: Debt Troubled Debt
Restructuring by Debtors and
concluded that the 2014 Note held by Mr. Grover should be
recognized as a debt modification for an induced conversion of
convertible debt under the guidance of ASC 470-20. The Company
recognized all remaining unamortized discounts of approximately
$679,000 immediately subsequent to October 23, 2018 as interest
expense, and the fair value of the warrants and additional shares
issued as discussed above were recorded as a loss on the Debt
Exchange in the amount of $4,706,000 during the year ended December
31, 2018 with the corresponding entry recorded to
equity.
In 2014, the Company initially recorded debt discounts of
$4,750,000 related to the beneficial conversion feature and related
detachable warrants. The beneficial conversion feature discount and
the detachable warrants discount are amortized to interest expense
over the life of the Notes. The unamortized debt discounts
recognized with the Debt Exchange was approximately $679,000. As of
December 31, 2018 and 2017 the remaining balance of the debt
discounts is approximately $94,000 and $1,504,000, respectively.
The Company recorded approximately $795,000 amortization of the
debt discounts during the years ended December 31, 2018 and 2017,
and is recorded as interest expense.
With respect to the 2014 Private Placement, the Company paid
approximately $490,000 in expenses including placement
agent fees. The issuance costs are amortized to interest
expense over the term of the Notes. The unamortized issuance costs
recognized with the Debt Exchange was approximately $63,000. As of
December 31, 2018 and 2017 the remaining balance of the issuance
costs is approximately $10,000 and $155,000, respectively. The
Company recorded approximately $82,000 and $98,000 of the debt
discounts amortization during the years ended December 31, 2018 and
2017, respectively, and is recorded as interest
expense.
As of December 31, 2018 and 2017 the principal amount of $750,000
and $4,750,000, respectively, remains outstanding.
November 2015 Private Placement – 2015 Notes
Between October 13, 2015 and November 25, 2015 the Company entered
into Note Purchase Agreements (the “Note” or
“Notes”) related to its private placement offering
(“November 2015 Private Placement”) with three (3)
accredited investors pursuant to which the Company raised cash
proceeds of $3,188,000 in the offering and converted $4,000,000 of
debt from the Company’s January 2015 Private Placement to
this offering in consideration of the sale of aggregate units
consisting of three-year senior secured convertible Notes in the
aggregate principal amount of $7,188,000, convertible into
1,026,784 shares of common stock, at a conversion price of $7.00
per share, subject to adjustment as provided therein; and five-year
Warrants exercisable to purchase 479,166 shares of the
Company’s common stock at a price per share of $9.00. The
Notes paid 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 October 12, 2018.
During 2017, in connection with the July 2017
Private Placement, three (3) investors from the November 2015
Private Placement, converted their 2015 Notes in the
aggregate amount of $4,200,000 including principal and accrued
interest thereon into new convertible notes for an equal principal
amount in the 2017 Private Placement as discussed below. The
Company accounted for the conversion of the notes as an
extinguishment in accordance with ASC 470-20 and ASC
470-50.
The Company recorded a non-cash extinguishment loss on debt of
$308,000 during the year ended December 31, 2017 as a result of the
conversion of $4,200,000 in notes including accrued interest to the
three investors from the November 2015 Private Placement through
issuance of a new July 2017 Note. This loss represents the
difference between the reacquisition value of the new debt to the
holders of the notes and the carrying amount of the holders’
extinguished debt.
The Company recorded at issuance debt discounts associated with the
2015 Notes of $309,000 related to the beneficial conversion feature
and the detachable warrants. The beneficial conversion feature
discount and the detachable warrants discount are amortized to
interest expense over the life of the Notes. During the year ended
December 31, 2017 the Company allocated approximately $75,000 for
the remaining proportionate share of the unamortized debt discounts
to the extinguished portion of the debt.
As of December 31, 2018 and 2017 the remaining balances of the debt
discounts is zero and $36,000 respectively. The Company recorded
approximately $36,000 and $78,000 of the debt discounts
amortization during the years ended December 31, 2018 and 2017,
respectively and is recorded as interest expense.
With respect to the aggregate offering, the Company paid $786,000
in expenses including placement agent fees. The issuance costs
are amortized to interest expense over the term of the Notes.
During the year ended December 31, 2017 the Company allocated
approximately $190,000 for the remaining proportionate share of the
unamortized issuance costs to the extinguished portion of the
debt.
As of December 31, 2018 and 2017 the remaining balances of the
issuance cost is zero and $92,000, respectively.
The Company recorded approximately
$92,000 and $199,000 of the issuance costs amortization during the
years ended December 31, 2018 and 2017, respectively and is
recorded as interest expense.
In addition, the Company issued warrants to the placement agent in
connection with the Notes which were valued at approximately
$384,000. These warrants were not protected against down-round
financing and accordingly, were classified as equity instruments
and the corresponding deferred issuance costs are amortized over
the term of the Notes. During the year ended December 31, 2017 the
Company allocated approximately $93,000 for the remaining
proportionate share of the unamortized issuance costs to the
extinguished portion of the debt.
As of December 31, 2018 and 2017, the remaining balance of the
warrant issuance cost is zero and $45,000, respectively. The
Company recorded approximately $45,000 and $97,000 of the warrant
issuance costs amortization during the years ended December 31,
2018 and 2017, respectively, and is recorded as interest
expense.
On October 19, 2018, Carl Grover, an investor in the
Company’s 2015 Private Placements, exercised his right to
convert all amounts owed under the note issued to him in the 2015
Private Placement in the principal amount of $3,000,000 which
matured on October 12, 2018, into 428,571 shares of common stock
(at a conversion rate of $7.00 per share), in accordance with its
stated terms. As of December 31, 2018, the 2015 Notes are fully
converted, and no principal remains outstanding. The principal
balance as of December 31, 2017 was $3,000,000.
July 2017 Private Placement – 2017 Notes
Between July and August 2017, the Company entered into Note
Purchase Agreements with
accredited investors in the 2017 Private Placement pursuant to
which the Company raised aggregate gross cash proceeds of
approximately $3,054,000 in the offering and converted $4,200,000
of debt from the 2015 Notes, including principal and accrued
interest to the 2017 Private Placement for an aggregate principal amount of approximately
$7,254,000. The Company's use of the proceeds from the 2017
Private Placement was for working capital purposes.
The 2017 Notes automatically converted to common stock prior to the
maturity date, as a result of the Company completing a common
stock, preferred stock or other equity-linked securities with
aggregate gross proceeds of no less than $3,000,000 for the purpose
of raising capital.
The
2017 Notes maturity date was July 28, 2020 and bore interest at a
rate of eight percent (8%) per annum. The Company had the right to
prepay the 2017 Notes at any time after the one-year anniversary
date of the issuance of the 2017 Notes at a rate equal to 110% of
the then outstanding principal balance and accrued interest. The
2017 Notes provided for full ratchet price protection on the
conversion price for a period of nine months after their issuance
and subject to adjustments. For twelve (12) months following the
closing, the investors in the 2017 Private Placement had the right
to participate in any future equity financings, subject to certain
conditions.
The
Company paid a placement fee of $321,000, issued the placement
agent three-year warrants to purchase 179,131 shares of the
Company’s common stock at an exercise price of $5.56 per
share, and issued the placement agent 22,680 shares of the
Company’s common stock.
The
Company recorded debt discounts associated with the 2017 Notes of
$330,000 related to the bifurcated embedded conversion feature. The
embedded conversion feature was being amortized to interest expense
over the term of the 2017 Notes. During the years ended December
31, 2018 and 2017, the Company recorded approximately $28,000 and
$46,000, respectively, of amortization related to the debt discount
cost.
Upon issuance of the 2017 Notes, the Company recognized issuance
costs of approximately $1,601,000, resulting from the allocated
portion of offering proceeds to the separable warrant liabilities.
The issuance costs were being amortized to interest expense over
the term of the 2017 Notes. During the years ended December
31, 2018 and 2017, the Company recorded approximately $136,000 and
$222,000, respectively, of amortization related to the warrant
issuance cost.
With respect to the aggregate offering, the Company paid $634,000
in issuance costs. The issuance costs were being amortized to
interest expense over the term of the 2017 Notes. During the
years ended December 31, 2018 and 2017, the Company recorded approximately $53,000 and
$88,000, respectively, of amortization related to the issuance
costs.
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 and received aggregate gross proceeds
of $3,621,000, which triggered the automatic conversion of the 2017
Notes to common stock. The 2017 Notes consisted of three-year
senior secured convertible notes in the aggregate principal amount
of approximately $7,254,000, which converted into 1,577,033 shares
of common stock, at a conversion price of $4.60 per share, and
three-year warrants exercisable to purchase 970,581 shares of the
Company’s common stock at a price per share of $5.56 (the
“2017 Warrants”). The 2017 Warrants were not impacted
by the automatic conversion of the 2017 Notes.
The
Company accounted for the automatic conversion of the 2017 Notes as
an extinguishment in accordance with ASC 470-20 and ASC 470-50, and
as such the related debt discounts, issuance costs and bifurcated
embedded conversion feature were adjusted as part of accounting for
the conversion. The Company recorded a
non-cash extinguishment loss on debt of $1,082,000 during the year
ended December 31, 2018 as a result of the conversion of the 2017
Notes. This loss represents 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 was based on the stock price on the date of the
conversion.
As of December 31, 2018, the 2017 Notes are fully converted, and no
principal remains outstanding. The principal balance as of December
31, 2017 was approximately $7,254,000.
Note 7. Derivative Liability
The Company recognizes and measures the warrants and the
embedded conversion features issued in conjunction with the
Company’s August 2018, July 2017, November 2015 and July 2014
Private Placements in accordance with ASC Topic
815, Derivatives and
Hedging. The accounting
guidance sets forth a two-step model to be applied in determining
whether a financial instrument is indexed to an entity’s own
stock, which would qualify such financial instruments for a scope
exception. This scope exception specifies that a contract that
would otherwise meet the definition of a derivative financial
instrument would not be considered as such if the contract is both
(i) indexed to the entity’s own stock and
(ii) classified in the stockholders’ equity section of
the entity’s balance sheet. The Company determined
that certain warrants and embedded conversion features issued in
the Company’s private placements are ineligible for equity
classification due to anti-dilution provisions set forth
therein.
Derivative liabilities are recorded at their estimated fair value
(see Note 8, below) at the issuance date and are revalued at each
subsequent reporting date. The Company will continue to revalue the
derivative liability on each subsequent balance sheet date until
the securities to which the derivative liabilities relate are
exercised or expire.
Various factors are considered in the pricing models the Company
uses to value the derivative liabilities, including its current
stock price, the remaining life, the volatility of its stock price,
and the risk-free interest rate. Future changes in these factors
may have a significant impact on the computed fair value of the
liability. As such, the Company expects future changes in the fair
values to continue and may vary significantly from period to
period. The warrant and embedded liability and revaluations
have not had a cash impact on working capital, liquidity or
business operations.
Warrants
Between August and October of 2018, the Company issued 630,526
three-year warrants to investors in the August 2018 Private
Placement. The exercise price of the warrants is protected against
down-round financing throughout the term of the warrant. Pursuant
to ASC Topic 815, the fair value of the warrants of approximately
$1,689,000 was recorded as a derivative liability on the issuance
dates. The estimated fair values of the warrants were
computed at issuance using a Monte Carlo pricing
model, with the following assumptions: stock price volatility
range of 61.42% - 65.79%, risk-free rate 2.70% - 2.99%, annual
dividend yield 0% and expected life 3.0 years.
In January 2018, the Company approved an amendment (the
“Warrant Amendment”) to its warrant agreements issued
to the placement agent, pursuant to which warrants were issued to
purchase 179,131 shares of the Company’s common stock as
compensation associated with the Company’s July 2017 Private
Placement. (See Note 6 above.) The Warrant Amendment amended the
transfer provisions of the warrants and removed the down-round
price protection provision. As a result of this change in terms,
the Company considered the guidance of ASC 815-40-35-8 in regard to
the appropriate treatment related to the modification of these
warrants that were initially classified as derivative liabilities.
In accordance with the guidance, the warrants should now be
classified as equity instruments.
The Company determined that the liability associated with the
warrants should be remeasured and adjusted to fair value on the
date of the modification with the offset to be recorded through
earnings and then the fair value of the warrants should be
reclassified to equity. The Company recorded the change in the
fair value of the July 2017 warrants as of the date of modification
to earnings. The fair value of the modified warrants as of the date
of modification, in the amount of $284,000 was reclassified from
warrant derivative liability to additional paid in capital as a
result of the change in classification of the warrants. The Company
did not reverse any previous gains or losses associated with the
warrant derivative liability during the period that the
warrant was classified as a liability.
In July and August of 2017, the Company issued 1,149,712 three-year
warrants to investors and the placement agent in the 2017 Private
Placement. The exercise price of the warrants is protected against
down-round financing throughout the term of the warrant. Pursuant
to ASC Topic 815, the fair value of the warrants of approximately
$2,334,000 was recorded as a derivative liability on the issuance
dates. The estimated fair values of the warrants were computed
at issuance using a Monte Carlo option pricing model, with the
following assumptions: stock price volatility 63.32%, risk-free
rate 1.51%, annual dividend yield 0% and expected life 3.0
years.
The estimated fair value of the outstanding warrant liabilities was
$9,216,000 and $3,365,000 as of December 31, 2018 and 2017,
respectively.
Increases or decreases in the fair value of the derivative
liability are included as a component of total other expense in the
accompanying consolidated statements of operations for the
respective period. The changes to the derivative liability for
warrants resulted in an increase of $4,645,000 and a decrease of
$2,025,000 for the years ended December 31, 2018 and 2017,
respectively.
The estimated fair value of the warrants was computed as of
December 31, 2018 and 2017 using the Monte Carlo option pricing
models, using the following assumptions:
|
|
|
|
|
|
|
Stock price volatility
|
|
|
83.78%-136.76
|
%
|
|
|
61.06
|
%
|
|
Risk-free interest rates
|
|
|
2.465%-2.577
|
%
|
|
|
1.96
|
%
|
|
Annual dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Expected life
|
|
|
0.58-2.76 years
|
|
|
|
1.58-2.78 years
|
|
In addition, management assessed the probabilities of future
financing assumptions in the valuation models.
Embedded Conversion Derivatives
Upon issuance of the 2017 Notes, the Company recorded an embedded
conversion option which was classified as a derivative of
$330,000.
The estimated fair value of the embedded conversion option was
$200,000 as of December 31, 2017 and was a component of Convertible
Notes Payable, net on the Company’s balance
sheet.
Increases
or decreases in fair value of the
embedded conversion option derivative are included as a
component of total other expense in the accompanying consolidated
statements of operations for the respective period. The change
resulted in a decrease of $130,000 for the year ended December 31,
2017.
On
March 30, 2018, the Company completed the Series B Offering and
raised in excess of $3,000,000 of aggregate gross proceeds which
triggered an automatic conversion of the 2017 Notes to common
stock. As a result, the related embedded conversion option was
extinguished with the 2017 Notes. (See Note 6 above.) The Company
did not revalue the embedded conversion liability associated with
the 2017 Notes as of March 30, 2018 as the change in the fair value
was insignificant.
The Company estimated the fair value of the embedded conversion
option, as of the issuance date and as of each balance sheet date
using the Monte Carlo option pricing model using the following
assumptions:
|
Inputs
|
|
|
December 31,
2017
|
|
Initial
Valuation
|
|
Stock
price
|
|
|
$4.13
|
|
$4.63-$4.73
|
|
Conversion
price
|
|
|
$4.60
|
|
$4.60
|
|
Stock
price volatility
|
|
|
60.98%-61.31%
|
|
63.07%-63.32%
|
|
Risk-free
rate
|
|
|
1.9%
|
|
0.92%-0.94%
|
|
Expected
life
|
|
|
2.57-2.63
|
|
3.0
|
Note 8. 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.
In connection with the Company’s Private Placements, the
Company issued warrants to purchase shares of its common stock and
recorded embedded conversion features which are accounted for as
derivative liabilities. (See Note 7 above.) The estimated fair
value of the derivatives 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 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
|
|
|
Fair Value at December 31, 2017
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Contingent
acquisition debt, current portion
|
$587
|
$-
|
$-
|
$587
|
|
Contingent
acquisition debt, less current portion
|
13,817
|
-
|
-
|
13,817
|
|
Warrant
derivative liability
|
3,365
|
-
|
-
|
3,365
|
|
Embedded
conversion option derivative
|
200
|
-
|
-
|
200
|
|
Total
liabilities
|
$17,969
|
$-
|
$-
|
$17,969
|
The following table reflects the activity for the Company’s
warrant derivative liability associated with the Company’s
2018, 2017, 2015 and 2014 Private Placements measured at fair value
using Level 3 inputs (in thousands):
|
|
Warrant Derivative Liability
|
|
Balance
at December 31, 2016
|
$3,345
|
|
Issuance
|
2,334
|
Adjustments to estimated fair value
|
(1,895)
|
Adjustment
related to the extinguishment loss on exchange of warrants, 2015
Notes (Note 7)
|
(419)
|
Balance
at December 31, 2017
|
3,365
|
|
Issuance
|
1,689
|
|
Adjustments
to estimated fair value
|
4,645
|
|
Adjustment
related to warrant exercises
|
(199)
|
|
Adjustment
related to the modification of warrants (Note 7)
|
(284)
|
|
Balance
at December 31, 2018
|
$9,216
|
The following table reflects the activity for the Company’s
embedded conversion feature derivative liability associated with
the Company’s 2017 Private Placement Notes measured at fair
value using Level 3 inputs (in thousands):
|
|
Embedded Conversion Feature Derivative Liability
|
|
Balance
at December 31, 2016
|
$-
|
|
Issuance
|
330
|
|
Adjustment to estimated fair value
|
(130)
|
|
Balance
at December 31, 2017
|
200
|
|
Adjustment
related to the conversion of the 2017 Notes
|
(200)
|
|
Balance
at December 31, 2018
|
$-
|
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, 2016
|
$8,001
|
|
Liabilities
acquired
|
9,657
|
|
Liabilities
settled
|
(462)
|
|
Adjustments
to liabilities included in earnings
|
(1,664)
|
|
Expenses
allocated to profit sharing agreement
|
(195)
|
|
Adjustment
to purchase price
|
(933)
|
|
Balance
at December 31, 2017
|
14,404
|
|
Liabilities
acquired
|
2,460
|
|
Liabilities
settled
|
(165)
|
|
Adjustments
to liabilities included in earnings
|
(6,600)
|
Adjustment
to purchase price
|
(1,838)
|
|
Balance
at December 31, 2018
|
$8,261
|
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
years ended December 31, 2018 and 2017, the net adjustment to the
fair value of the contingent acquisition debt was a decrease of
$6,600,000 and $1,664,000, respectively, and is included in the
Company’s statements of operations in general and
administrative expense. During the year ended December 31,
2018 the Company recorded a decrease of $1,246,000 as a result of
the removal of the contingent debt associated with its Nature's
Pearl acquisition from 2016 whereby the Company was no longer
obligated under the related asset purchase agreement to make
payments. (See Note 2 above.)
The weighted-average of the discount rates used was 18.42% and
18.4% as of December 31, 2018 and 2017, respectively. The projected
year of payment ranges from 2019 to 2030.
Note 9. 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”.
Common stock
On May 31, 2017, the Board of Directors of the Company authorized a
reverse stock split of the Company’s common stock in order to
meet certain criteria in preparation for the Company’s
uplisting on the NASDAQ Capital Market in June 2017.
On June 5, 2017, the Company filed a certificate of amendment to
the Company’s Articles of Incorporation with the Secretary of
State of the State of Delaware to effect a one-for-twenty reverse
stock split of the Company’s issued and outstanding common
stock. As a result of the Reverse Split, every twenty shares of the
Company issued and outstanding common stock were automatically
combined and reclassified into one share of the Company’s
common stock. The Reverse Split affected all issued and outstanding
shares of common stock, as well as common stock underlying stock
options, restricted stock units and warrants outstanding, and
common stock equivalents issuable under convertible notes and
preferred shares. No fractional shares were issued in connection
with the Reverse Split. Stockholders who would otherwise hold a
fractional share of common stock will receive cash payment for the
fractional share.
The Reverse Split became effective on June 7, 2017. All disclosures
of shares and per share data in these consolidated financial
statements and related notes have been retroactively adjusted to
reflect the Reverse Split for all periods presented.
In addition to the Reverse Split, the certificate of amendment to
the certificate of incorporation also reduced the total number of
authorized shares of common stock from 600,000,000 to
50,000,000. 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”).
As of December 31, 2018, and December 31, 2017 there were
25,760,708 and 19,723,285 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).
Repurchase of common stock
On December 11, 2012, the Company has an authorized share
repurchase program to repurchase up to 750,000 of the Company's
issued and outstanding shares of common stock from time to time on
the open market or via private transactions through block
trades. A total of 196,594 shares have been repurchased
to-date as of December 31, 2018 at a weighted-average cost of $5.30
per share. There were no repurchases during the years ended
December 31, 2018 and 2017. The remaining number of shares
authorized for repurchase under the plan as of December 31, 2018 is
553,406.
Shelf Registration Statement
On May
18, 2018, the Company filed a shelf registration statement on Form
S-3 with the SEC to register shares of the Company’s common
stock for sale of up to $75,000,000 giving the Company the
opportunity to raise funding when considered appropriate at prices
and on terms to be determined at the time of any such offerings. On
May 29, 2018, the SEC declared this registration statement
effective.
Convertible Preferred Stock
Series A Preferred Stock
The Company has 161,135 shares of Series A Convertible Preferred
Stock outstanding as of December 31, 2018, and December 31, 2017
and accrued dividends of approximately $137,000 and $124,000,
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 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. Each share of Series B Convertible Preferred Stock is
initially convertible at any time, in whole or in part, at the
option of the holders, at an initial conversion price of $4.75 per
share, into two (2) shares of common stock and automatically
converts into two (2) shares of common stock on its two-year
anniversary of issuance.
The Company issued the placement agent in connection with the
Series B Offering 38,117 warrants as compensation, exercisable at
$5.70 per share and expire in February 2023. The Company determined
that the warrants should be classified as equity instruments and
used Black-Scholes to estimate the fair value of the warrants
issued to the placement agent of $75,000 as of the issuance date
March 30, 2018. As of December 31, 2018, 6,098 of the warrants
issued to the placement agent remain outstanding.
The Company received gross proceeds in aggregate of $3,621,000. The
net proceeds to the Company from the Series B Offering were
$3,289,000 after deducting commissions, closing and issuance
costs.
The Company has 129,437 shares of Series B Convertible Preferred
Stock outstanding as of December 31, 2018, and zero at December 31,
2017. During the year ended December 31, 2018, the Company received
notice of conversion for 251,736 shares of Series B Convertible
Preferred Stock which converted to 503,472 shares of common
stock.
The shares of Series B Convertible Preferred Stock issued in the
Series B Offering were sold pursuant to the Company’s
Registration Statement, which was declared effective on February
13, 2018. Upon the receipt of the proceeds of the Series B
Offering, the 2017 Notes in the principal amount of approximately
$7,254,000 automatically converted into 1,577,033 shares
of common stock. (See Note 6 above.)
Upon liquidation, dissolution or winding up of the Company, each
holder of Series B Preferred Stock shall be entitled to receive a
distribution, to be paid in an amount equal to $9.50 for each and
every share of Series B Preferred Stock held by the holders of
Series B Preferred Stock, plus all accrued and unpaid dividends in
preference to any distribution or payments made or any asset
distributed to the holders of common stock, the Series A Preferred
Stock, or any other class or series of stock ranking junior to the
Series B Preferred Stock.
Pursuant to the Certificate of Designation, the Company has agreed
to pay cumulative dividends on the Series B 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 December 31, 2018 accrued dividends were
approximately $11,000. There were no accrued dividends as of
December 31, 2017. In 2018 a total of approximately $77,000 of
dividends was paid to the holders of the Series B Convertible
Preferred Stock. The Series B Convertible Preferred Stock ranks
senior to the Company’s outstanding Series A Convertible
Preferred Stock and the common stock with respect to dividend
rights and rights upon liquidation, dissolution or winding up.
Holders of the Series B Convertible Preferred Stock have no voting
rights.
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 voluntary convert their shares of Series C Preferred
to the Company’s common stock within two-years from the
issuance date. Each share of Series C Convertible Preferred
Stock is initially convertible at any time, in whole or in part, at
the option of the holders, at an initial conversion price of $4.75
per share, into two (2) shares of common stock and automatically
converts into two (2) shares of common stock on its two-year
anniversary of issuance.
The Company issued the placement agent in connection with the
Series C Offering 116,867 warrants as compensation, exercisable at
$4.75 per share and expire in December 2020. The Company determined
that the warrants should be classified as equity instruments and
used Black-Scholes to estimate the fair value of the warrants
issued to the placement agent of $458,000 as of the issuance date
December 19, 2018. As of December 31, 2018, the 116,867 warrants
issued to the placement agent remain outstanding.
The Company received aggregate gross proceeds totaling
approximately $6,625,000. The net proceeds to the Company from the
Series C Offering were approximately $6,236,000 after deducting
commissions, closing and issuance costs.
Upon liquidation, dissolution or winding up of the Company, each
holder of Series C Preferred Stock shall be entitled to receive a
distribution, to be paid in an amount equal to $9.50 for each and
every share of Series C Preferred Stock held by the holders of
Series C Preferred Stock, plus all accrued and unpaid dividends in
preference to any distribution or payments made or any asset
distributed to the holders of common stock, the Series A Preferred
Stock, the Series B Preferred Stock or any other class or series of
stock ranking junior to the Series C Preferred Stock.
The shares of Series C Convertible Preferred Stock issued in the
Series C Offering were sold pursuant to the Company’s
Registration Statement, which was declared effective with the SEC
on December 10, 2018.
Pursuant to the Certificate of Designation, the Company has agreed
to pay cumulative dividends on the Series C Convertible Preferred
Stock from the date of original issue at a rate of 6.0% per
annum payable quarterly in arrears on or about the last day of
March, June, September and December of each year, beginning
September 30, 2018. In 2018 a total of approximately $51,000 of
dividends was paid to the holders of the Series C Convertible
Preferred Stock. The Series C Convertible Preferred Stock ranks
senior to the Company’s outstanding Series A Convertible
Preferred Stock, Series B Convertible Preferred Stock and the
common stock with respect to dividend rights and rights upon
liquidation, dissolution or winding up. Holders of the Series C
Convertible Preferred Stock have no voting rights.
The contingent obligation to issue warrants is considered an
outstanding equity-linked financial instrument and was therefore
recognized as equity classified warrants, initially measured at
relative fair value of approximately $3,727,000, resulting in an
initial discount to the carrying value of the Series C Preferred
Stock.
Due to the reduction of allocated proceeds to the contingently
issuable common stock warrants and Series C Preferred Stock, the
effective conversion price of the Series C Preferred Stock was less
than the Company’s common stock price on each commitment
date, resulting in an aggregate beneficial conversion feature of
approximately $3,276,000, which reduced the carrying value of the
Series C Preferred Stock. Since the conversion option of the Series
C Preferred Stock was immediately exercisable, the beneficial
conversion feature was immediately accreted as a deemed dividend,
resulting in an increase in the carrying value of the C Preferred
Stock of approximately $3,276,000.
The
Series C Preferred Stock was automatically redeemable at a price
equal to its original purchase price plus all accrued but unpaid
dividends in the event the average of the daily volume weighted
average price of the Company’s common stock for the 30 days
preceding the two-year anniversary date of issuance is less than
$6.00 per share. As redemption was outside of the
Company’s control, the Series C Preferred Stock was
classified in temporary equity at issuance. As of December 31,
2018, all of the Series C Preferred shares were converted to common
stock and the Company has issued 1,394,726 warrants. As of December
31, 2018, no shares of Series C Convertible Preferred Stock remain
outstanding.
Amendments to Certificate of Incorporation or Bylaws
On
August 16, 2018, the Company filed a Certificate of Designation of
Powers, Preferences and Rights of Series C Convertible Preferred
Stock with the Secretary of State of the State of Delaware. On
September 28, 2018 the Company filed a Certificate of Designation
of Powers, Preferences and Rights of Series C Convertible Preferred
Stock with the Secretary of State of the State of Delaware
increasing the number of authorized shares of Series C Convertible
Preferred Stock from the original authorized issuance of 315,790 to
700,000.
On
March 2, 2018, the Company filed a Certificate of Designation of
Powers, Preferences and Rights of Series B Convertible Preferred
Stock with the Secretary of State of the State of Delaware (the
“Certificate of Designation”). On March 14, 2018, the
Company filed a Certificate of Correction to the Certificate of
Designation to correct two typographical errors in the Certificate
of Designation (the “Certificate of
Correction”).
2015 Convertible Note
On
October 19, 2018, Mr. Carl Grover, an investor in the
Company’s 2014 and 2015 Private Placements, exercised his
right to convert all amounts owed under the note issued to him in
the 2015 Private Placement in the principal amount of $3,000,000
which matured on October 12, 2018, into 428,571 shares of common
stock (at a conversion rate of $7.00 per share), in accordance with
its stated terms. (See Note 6,
above.)
2014 Convertible Note – Debt Exchange
On October 23, 2018, the Company entered into an agreement with Mr.
Carl Grover to exchange (the “Debt Exchange”), subject
to stockholder approval which was received on December 6, 2018, all
amounts owed under the 2014 Note held by him in the principal
amount of $4,000,000 which matures on July 30, 2019, for 747,664
shares of the Company’s common stock, at a conversion price
of $5.35 per share and a four-year warrant to purchase 631,579
shares of common stock at an exercise price of $4.75 per share.
(See Note 6, above.)
A FINRA
broker dealer, acted as the Company’s advisor in connection
with the Debt Exchange. Upon the closing of the Debt Exchange, the
Company issued to the broker dealer 30,000 shares of common stock,
a four-year warrant to purchase 80,000 shares of common stock at an
exercise price of $5.35 per share and a four-year warrant to
purchase 70,000 shares of common stock at an exercise price of
$4.75 per share. By a written consent dated October 29, 2018, the
holders of a majority of the Company’s issued and outstanding
common stock, Stephan Wallach and Michelle Wallach,
approved the issuance of the foregoing securities. The Company
received shareholder approval on December 6, 2018. (See Note 6, above.)
Private Placement – Securities Purchase
Agreement
Between
August 31, 2018 and October 5, 2018, the Company completed its
August 2018 Private Placement and entered into Securities Purchase
Agreements (the “Purchase Agreements”) with nine (9)
investors with whom the Company had a substantial pre-existing
relationship (the “Investors”) pursuant to which the
Company sold an aggregate of 630,526 shares of common stock at an
offering price of $4.75 per share. In addition, the Company issued
the Investors an aggregate of 150,000 additional shares of common
stock as an advisory fee and issued the investors three-year
warrants (the “Investor Warrants”) to purchase an
aggregate of 630,526 shares of common stock (at an exercise price
of $4.75 per share). The Investor
Warrants are ineligible for equity classification due to
anti-dilution provisions contained therein and as a result, the
Company determined that the warrants should be classified as
derivative liabilities and used the Monte-Carlo option-pricing
model to estimate the fair value of the warrants issued to the
investors of approximately $1,689,000 as of the issuance dates.
(See Note 6 above.) The warrants remain outstanding as of December
31, 2018.
The
Purchase Agreement requires the Company to issue the Investor
additional shares of the Company’s common stock in the event
that the average of the 15 lowest closing prices for the
Company’s common stock during the period beginning on August
31, 2018 and ending on the date 90 days from the effective date of
the Registration Statement (the “Subsequent Pricing
Period”) is less than $4.75 per share. The additional common
shares to be issued are calculated as the difference between the
common stock that would have been issued using the average price of
such lowest 15 closing prices during the Subsequent Pricing Period
less shares of common stock already issued pursuant to the August
2018 Private Placement. Notwithstanding the foregoing, in no event
may the aggregate number of shares issued by the Company, including
shares of common stock issued, shares of common stock underlying
the warrants, the shares of common stock issued as advisory shares
and True-up Shares exceed 2.9% of the Company’s issued and
outstanding common stock as of August 31, 2018 for each $1,000,000
invested in the Company.
The
True-up Share feature is considered to be embedded in the specific
common shares purchased by each Investor, by way of the Purchase
Agreement. As the economic characteristics and risks of the True-up
Share feature are clearly and closely related to the common stock
host contract, the True-up Share feature was not separately
recognized in the private placement transaction.
The
aggregate gross proceeds of approximately $2,995,000 from the aggregate
closings of the August 2018 Private Placement were first allocated
to the Investor Warrants, with an aggregate initial fair value of
approximately $1,689,000, with the residual amount allocated to the
common stock issued in the offering, including the common stock
issued to each Investor as an advisory fee. The net cash proceeds to the Company from the
August 2018 Private Placement were approximately $2,962,000 after deducting
advisory fees, closing and issuance costs.
Note Payable
On
December 13, 2018, the Company’s wholly owned subsidiary,
CLR, entered into a Credit Agreement with Mr. Carl Grover pursuant
to which CLR borrowed $5,000,000 from Mr. Grover and in exchange
issued to him a $5,000,000 Credit Note secured by its green coffee
inventory under a Security Agreement, dated December 13, 2018, with
Mr. Grover and CLR’s subsidiary, Siles. In connection with the Credit Agreement,
the Company issued to Mr. Grover a four-year warrant to purchase
250,000 shares of its common stock, exercisable at $6.82 per share
(“Warrant 1”), and a four-year warrant to purchase
250,000 shares of its common stock, exercisable at $7.82 per share
(“Warrant 2”), pursuant to a Warrant Purchase
Agreement, dated December 13, 2018, with Mr. Grover. The Company
also entered into an Advisory Agreement with Ascendant Alternative
Strategies, LLC (“Ascendant”), a third party not
affiliated with Mr. Grover, in connection with the Credit
Agreement, pursuant to which it agreed to pay to Ascendant a 3% fee
on the transaction with Mr. Grover and issued to Ascendant (or
it’s designee’s) a four-year warrant to purchase 50,000
shares of its common stock, exercisable at $6.33 per share.
(See Note 5,
above.)
Warrants
As of December 31, 2018, warrants to purchase 5,876,980 shares
of the Company's common stock at prices ranging from
$2.00 to $9.00 were outstanding. All warrants are exercisable as of
December 31, 2018 and expire at various dates through December 2022
and have a weighted average remaining term of approximately 2.21
years and are included in the table below as of December 31,
2018.
In May 2017, the Company entered a settlement agreement with Alain
Piedra Hernandez, one of the owners of H&H and the operating
manager of Siles, who was issued a non-qualified stock option for
the purchase of 75,000 shares of the Company’s common stock
at a price of $2.00 with an expiration date of three years, in lieu
of an obligation due from the Company to H&H as relates to a
Sourcing and Supply Agreement with H&H. During the period ended
September of 2017, the Company cancelled the non-qualified stock
option and issued a warrant agreement with the same terms. The fair
value of the warrant was $232,000 and was recorded in general and
administrative expense in the consolidated statements of
operations. There was no
financial impact to the change in the valuation related to the
cancellation of the option and the issuance of the warrant. As of
December 31, 2018, the warrant remains
outstanding.
In May 2017, the Company issued a warrant as compensation to an
associated Youngevity distributor to purchase 37,500 shares of the
Company’s common stock at a price of $2.00 with an expiration
date of three years. During the year ended December 31, 2017, the
warrant was exercised on a cashless basis based on the
Company’s closing stock price of $4.66 and 21,875 shares of
common stock were issued. The fair value of the warrant was
$109,000 and was recorded in distributor compensation in the
consolidated statements of operations.
The Company uses the Black-Scholes option-pricing model
(“Black-Scholes model”) to estimate the fair value of
the warrants.
Warrant Modification Agreements
In January 2018, the Company approved an amendment (the
“Warrant Amendment”) to its warrant agreements issued
to the placement agent, pursuant to which warrants were issued to
purchase 179,131 shares of the Company’s common stock as
compensation associated with the Company’s July 2017 Private
Placement. (See Note 6 above.) The Warrant Amendment amended the
transfer provisions of the warrants and removed the down-round
price protection provision. As a result of this change in terms,
the Company considered the guidance of ASC 815-40-35-8 in regard to
the appropriate treatment related to the modification of these
warrants that were initially classified as derivative liabilities.
In accordance with the guidance, the warrants should now be
classified as equity instruments. (See Note 7 above)
Warrants Activity
A summary of the warrant activity for the years ended December 31,
2018 and 2017 is presented in the following table:
|
Balance
at December 31, 2016
|
1,899,385
|
|
Issued
|
1,262,212
|
|
Expired
/ cancelled
|
(414,031)
|
|
Exercised
|
(37,500)
|
|
Balance
at December 31, 2017
|
2,710,066
|
|
Issued
|
3,511,815
|
|
Expired
/ cancelled
|
(120,606)
|
|
Exercised
|
(224,295)
|
Balance
at December 31, 2018
|
5,876,980
|
Advisory Agreements
The Company records the fair value of common stock issued in
conjunction with advisory service agreements based on the closing
stock price of the Company’s common stock on the measurement
date. The fair value of the stock issued is recorded through equity
and prepaid advisory fees and amortized over the life of the
service agreement.
ProActive Capital Resources Group, LLC
On September 1, 2015, the Company entered into an agreement
with ProActive
Capital Resources
Group, LLC (“PCG”), pursuant to which PCG
agreed to provide investor relations services for six (6) months in
exchange for fees paid in cash of $6,000 per month and 5,000 shares
of restricted common stock to be issued upon successfully meeting
certain criteria in accordance with the agreement. Subsequent
to the September 1, 2015 initial agreement, the agreement was
extended through August 2018 under six-month incremental service
agreements under the same terms with the monthly cash payments of
$6,000 per month and 5,000 shares of restricted common stock for
every six (6) months of service performed.
As of December 31, 2018, the Company has issued in the aggregate
30,000 shares of restricted common stock in connection with this
agreement. During the years ended December 31, 2018 and 2017 the
Company issued 15,000 and 10,000 shares of common stock with a fair
value of approximately $70,000 and $50,000, respectively. During
the year ended December 31, 2018 and 2017, the
Company recorded stock issuance expense of approximately
$31,000 and $56,000, respectively, in connection with amortization
of the stock issuance. The stock issuance expense associated with
the amortization of advisory fees is recorded as stock issuance
expense and is included in general and administrative expense on
the Company’s consolidated statements of operations for the
years ended December 31, 2018 and 2017. The Company did not further
extend this agreement subsequent to August 2018.
Ignition Capital, LLC
On April 1, 2018, the Company entered into an agreement
with Ignition Capital,
LLC (“Ignition”), pursuant to which
Ignition agreed to provide investor relations services for a period
of twenty-one (21) months in exchange for 50,000 shares of
restricted common stock which were issued in advance of the service
period. The fair value of the shares issued is approximately
$208,000 and is recorded as prepaid advisory fees and is included
in prepaid expenses and other current assets on the Company’s
consolidated balance sheets and is amortized on a pro-rata basis
over the term of the agreement. During the year ended December
31, 2018, the Company recorded expense of approximately
$89,000 in connection with amortization of the stock issuance. The
stock issuance expense associated with the amortization of advisory
fees is recorded as stock issuance expense and is included in
general and administrative expense on the Company’s
consolidated statements of operations for the year ended December
31, 2018.
Greentree Financial Group, Inc.
On March 27, 2018, the Company entered into an agreement
with Greentree Financial Group,
Inc. (“Greentree”), pursuant to which
Greentree agreed to provide investor relations services for a
period of twenty-one (21) months in exchange for 75,000 shares of
restricted common stock which were issued in advance of the service
period. The fair value of the shares issued is approximately
$311,000 and is recorded as prepaid advisory fees and is included
in prepaid expenses and other current assets on the Company’s
consolidated balance sheets and is amortized on a pro-rata basis
over the term of the agreement. During the year ended December
31, 2018, the Company recorded expense of approximately
$133,000 in connection with amortization of the stock issuance. The
stock issuance expense associated with the amortization of advisory
fees is recorded as stock issuance expense and is included in
general and administrative expense on the Company’s
consolidated statements of operations for the year ended December
31, 2018.
Capital Market Solutions, LLC.
On July 1, 2018, the Company entered into an agreement with
Capital Market
Solutions, LLC. (“Capital Market”), pursuant to which
Capital Market agreed to provide investor relations services for a
period of 18 months in exchange for 100,000 shares of restricted
common stock which were issued in advance of the service
period. In addition, the Company agreed to pay in cash a base
fee of $300,000, payable as follows; $50,000 paid in August 2018,
and the remaining balance shall be paid monthly in the amount of
$25,000 through January 1, 2019. Subsequent to the initial
agreement, the Company extended the term for an additional 24
months through December 31, 2021 and agreed to issue Capital Market
an additional 100,000 shares of restricted common stock which were
issued in advance of the service period and $125,000 of
additional fees.
The fair value of the shares issued is approximately $1,226,000 and
is recorded as prepaid advisory fees and is included in prepaid
expenses and other current assets on the Company’s
consolidated balance sheets and is amortized on a pro-rata basis
over the term of the agreement. During the year ended December
31, 2018, the Company recorded expense of approximately
$102,000, in connection with amortization of the stock issuance
expense. During the year ended December 31, 2018, the
Company recorded expense of approximately $425,000, in
connection with the base fee. The stock issuance expense associated
with the amortization of advisory fees is recorded as stock
issuance expense and is included in general and administrative
expense on the Company’s consolidated statements of
operations for the year ended December 31, 2018.
Stock Options
On May 16, 2012, the Company established the 2012 Stock Option Plan
(“Plan”) authorizing the granting of options for up to
2,000,000 shares of common stock. On February 23, 2017, the
Company’s Board of Directors received consent of the
Company’s majority stockholders, to amend the Plan to
increase the number of shares of common stock available for grant
and to expand the types of awards available for grant under the
Plan. The amendment of the Plan increased the number of authorized
shares of the Company’s common stock that may be delivered
pursuant to awards granted during the life of the Plan from
2,000,000 to 4,000,000 shares (as adjusted for the 1-for-20 reverse
stock split, which was effective on June 7, 2017). On January 10,
2019, the Company’s Board of Directors received consent of
the Company’s majority stockholders to further amend the Plan
to increase the number of shares of the Corporation’s common
stock that may be delivered pursuant to awards granted during the
life of the Plan from 4,000,000 to 9,000,000 shares
authorized.
The purpose of the Plan is to promote the long-term growth and
profitability of the Company by (i) providing key people and
consultants with incentives to improve stockholder value and to
contribute to the growth and financial success of the Company and
(ii) enabling the Company to attract, retain and reward the best
available persons for positions of substantial responsibility. The
Plan allows for the grant of: (a) incentive stock options; (b)
nonqualified stock options; (c) stock appreciation rights; (d)
restricted stock; and (e) other stock-based and cash-based awards
to eligible individuals qualifying under Section 422 of the
Internal Revenue Code, in any combination (collectively,
“Options”). At December 31, 2018, the Company had
1,077,297 shares of common stock remaining available for future
issuance under the Plan.
Stock-based compensation expense related to stock options and
restricted stock units included in the consolidated statements of
operations was charged as follows (in thousands):
|
|
|
|
|
|
|
|
Cost
of revenues
|
$20
|
$14
|
|
Distributor
compensation
|
-
|
4
|
|
Sales
and marketing
|
117
|
60
|
General
and administrative
|
1,316
|
576
|
Total
stock-based compensation related to stock options
|
$1,453
|
$654
|
A summary of the Plan stock option activity for the years ended
December 31, 2018 and 2017 is presented in the following
table:
|
|
|
Weighted
Average
Exercise Price
|
Weighted
Average
Remaining Contract Life (years)
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
Outstanding
December 31, 2016
|
1,660,964
|
$4.80
|
6.75
|
$1,346
|
|
Issued
|
21,624
|
4.60
|
|
|
|
Canceled/expired
|
(91,180)
|
4.39
|
|
|
|
Exercised
|
(6,885)
|
4.28
|
|
-
|
|
Outstanding
December 31, 2017
|
1,584,523
|
4.76
|
6.16
|
126
|
|
Issued
|
894,295
|
4.02
|
|
|
|
Canceled
/ expired
|
(73,303)
|
5.81
|
|
|
|
Exercised
|
(11,136)
|
3.80
|
|
33
|
Outstanding
December 31, 2018
|
2,394,379
|
$4.45
|
6.94
|
$3,049
|
|
Exercisable
December 31, 2018
|
1,212,961
|
$4.51
|
4.92
|
$1,486
|
The weighted-average fair value per share of the granted options
for the years ended December 31, 2018 and 2017 was approximately
$2.39 and $2.90, respectively.
As of December 31, 2018, there was approximately $2,617,000 of
total unrecognized compensation expense related to unvested stock
options granted under the Plan. The expense is expected to be
recognized over a weighted-average period of 2.03
years.
Valuation Inputs
The Company uses the Black-Scholes model to estimate the fair value
of equity-based options. The use of a valuation model requires the
Company to make certain assumptions with respect to selected model
inputs. Expected volatility is calculated based on the historical
volatility of the Company’s stock price over
the expected term of the option. The expected life is based on
the contractual life of the option and expected employee
exercise and post-vesting employment termination behavior. The
risk-free interest rate is based on U.S. Treasury zero-coupon
issues with a remaining term equal to the expected life assumed at
the date of the grant.
The following were the factors used in the Black-Scholes model to
calculate the compensation cost:
|
|
|
Years ended December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Dividend yield
|
|
|
-
|
|
|
|
-
|
|
|
Stock price volatility
|
|
|
67% - 75
|
%
|
|
|
56% - 64
|
%
|
|
Risk-free interest rate
|
|
|
2.73 - 2.85
|
%
|
|
|
1.22 - 2.06
|
%
|
|
Expected life of options
|
|
|
3.0 - 6.0 years
|
|
|
|
1.0 - 5.61 years
|
|
Restricted Stock Units
On August 9, 2017, the Company issued restricted stock units for an
aggregate of 500,000 shares of common stock, to its employees and
consultants. These shares of common stock will be issued upon
vesting of the restricted stock units. Full vesting occurs on the
sixth-year anniversary of the grant date, with 10% vesting on the
third-year, 15% on the fourth-year, 50% on the fifth-year and 25%
on the sixth-year anniversary of the vesting commencement date. As
of December 31, 2018, none of the restricted stock units have
vested. There were no grants during the year ended December 31,
2018.
The fair value of each restricted stock unit issued to employees is
based on the closing price on the grant date of $4.53 and
restricted stock units issued to consultants are revalued as they
vest and is recognized as stock-based compensation expense over the
vesting term of the award.
|
|
|
|
Balance
at December 31, 2017
|
500,000
|
|
Issued
|
-
|
|
Canceled
|
(25,000)
|
Balance
at December 31, 2018
|
475,000
|
As of December 31, 2018, total unrecognized stock-based
compensation expense related to restricted stock units to employees
and consultants was approximately $1,725,000, which will be
recognized over a weighted average period of 4.61
years.
Note 10. Commitments and Contingencies
Credit Risk
The Company maintains cash balances at various financial
institutions primarily located in the United States. Accounts held
at the United States institutions are secured, up to certain
limits, by the Federal Deposit Insurance Corporation. At times,
balances may exceed federally insured limits. The Company has not
experienced any losses in such accounts. There is credit risk
related to the Company’s ability to collect on its trade
account receivables from its major customers. Management believes
that the Company is not exposed to any significant credit risk with
respect to its cash and cash equivalent balances and trade accounts
receivables.
Litigation
The Company is party to litigation at the present time and may
become party to litigation in the future. In general, litigation
claims can be expensive, and time consuming to bring or defend
against and could result in settlements or damages that could
significantly affect financial results. However, it is not possible
to predict the final resolution of any litigation to which the
Company is, or may be party to, and the impact of certain of these
matters on the Company’s business, results of operations, and
financial condition could be material. As of December 31, 2018, the
Company believes that existing litigation has no merit and it is
not likely that the Company would incur any losses with respect to
litigation.
Leases
The Company leases its domestic and certain foreign facilities and
other equipment under non-cancelable operating lease agreements,
which expire at various dates through 2028. In addition to the
minimum future lease commitments presented below, the leases
generally require that the Company pay property taxes, insurance,
maintenance and repair costs. Such expenses are not included in the
operating lease amounts.
At December 31, 2018, future minimum lease commitments are as follows
(in thousands):
|
2019
|
$1,261
|
|
2020
|
984
|
|
2021
|
770
|
|
2022
|
658
|
|
2023
|
624
|
|
Thereafter
|
1,024
|
|
Total
|
$5,321
|
Rent expense was approximately $1,475,000 and $1,413,000 for the
years ended December 31, 2018 and 2017, respectively.
Other
Vendor Concentration
The Company purchases its inventory from multiple third-party
suppliers at competitive prices. For the year ended December 31,
2018, the Company’s commercial coffee segment made purchases
from two vendors, H&H Export and Rothfos Corporation, that
individually comprised more than 10% of total purchases and in
aggregate approximated 83% of total purchases. For the year ended
December 31, 2017, the Company’s commercial coffee segment
made purchases from two vendors, H&H Export and Rothfos
Corporation, that individually comprised more than 10% of total
purchases and in aggregate approximated 87% of total
purchases.
For the year ended December 31, 2018, the Company’s direct
selling segment made purchases from two vendors, Global Health
Labs, Inc. and Purity Supplements, that individually comprised more
than 10% of total purchases and in aggregate approximated 41% of
total purchases. For the year ended December 31, 2017, the
Company’s direct selling segment made purchases from two
vendors, Global Health Labs, Inc. and Columbia Nutritional, LLC.,
that individually comprised more than 10% of total purchases and in
aggregate approximated 41% of total purchases.
Customer Concentration
For the
years ended December 31, 2018 and 2017, the Company’s
commercial coffee segment had two customers, H&H Export and
Rothfos Corporation that individually comprised more than 10% of
revenue and in aggregate approximated 52% of total revenue,
respectively. The direct selling segment did not have any customers
during years ended December 31, 2018 and 2017 that comprised more
than 10% of revenue.
The Company has purchase obligations related to minimum future
purchase commitments for green coffee to be used in the
Company’s commercial coffee segment. Each individual contract
requires the Company to purchase and take delivery of certain
quantities at agreed upon prices and delivery dates. The
contracts as of December 31, 2018, have minimum future purchase
commitments of approximately $1,849,000, which are to be
delivered in 2019. The contracts contain provisions
whereby any delays in taking delivery of the purchased product will
result in additional charges related to the extended warehousing of
the coffee product. The fees can average approximately
$0.01 per pound for every month of delay. To-date the Company has
not incurred such fees.
Note 11. Income Taxes
The income tax provision contains the following components (in
thousands):
|
|
|
|
|
|
|
|
Current
|
|
|
|
Federal
|
$(146)
|
$135
|
|
State
|
292
|
12
|
|
Foreign
|
132
|
132
|
|
|
278
|
279
|
|
Deferred
|
|
|
|
Federal
|
239
|
2,617
|
|
State
|
(112)
|
(156)
|
|
Foreign
|
11
|
(13)
|
|
Total
deferred
|
138
|
2,448
|
|
Net
income tax provision
|
$416
|
$2,727
|
Loss before income taxes relating to non-U.S. operations were
$258,000 in the year ended December 31, 2018 compared to $130,000
of income in the year ended December 31, 2017.
The provision for income taxes differs from the amount of income
tax determined by applying the applicable U.S. statutory federal
income tax rate to pretax income (loss) as a result of the
following differences:
|
|
|
|
|
|
|
|
Income
tax benefit at federal statutory rate
|
$(4,171)
|
$(3,483)
|
|
|
|
|
|
Adjustments
for tax effects of:
|
|
|
|
Foreign
rate differential
|
74
|
(38)
|
|
State
taxes, net
|
540
|
(382)
|
|
Other
nondeductible items
|
162
|
246
|
|
Rate
change
|
173
|
-
|
|
Tax
reform rate change
|
-
|
2,022
|
|
Deferred
tax asset adjustment
|
1,202
|
95
|
|
Change
in valuation allowance
|
1,411
|
4,032
|
|
Loss
on debt modification
|
1,216
|
-
|
|
|
(146)
|
-
|
|
Other
|
(45)
|
235
|
|
Net income tax provision
|
$416
|
$2,727
|
Significant components of the Company's deferred tax assets and
liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
Amortizable
assets
|
$548
|
$1,089
|
|
Inventory
|
884
|
510
|
|
Accruals
and reserves
|
34
|
155
|
|
Stock
options
|
312
|
170
|
|
Net
operating loss carry-forward
|
6,150
|
4,674
|
|
Credit
carry-forward
|
252
|
305
|
|
|
8,180
|
6,903
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
Prepaids
|
(540)
|
(228)
|
|
Other
|
-
|
(288)
|
|
Depreciable
assets
|
(148)
|
(168)
|
|
Total
deferred tax liability
|
(688)
|
(685)
|
|
Deferred tax
|
7,492
|
6,219
|
|
Less
valuation allowance
|
(7,344)
|
(5,933)
|
|
Net
deferred tax asset
|
$148
|
$286
|
The Company has determined through consideration of all positive
and negative evidence that the U.S. deferred tax assets are not
more likely than not to be realized. The Company records a
valuation allowance in the U.S. Federal tax jurisdiction for the
year ended December 31, 2018 to all deferred tax assets and
liabilities. The Tax Cuts and Jobs Act ("TCJA") enacted in December
2017 repealed the corporate AMT for tax years beginning on or after
January 1, 2018 and provides for existing AMT tax credit carryovers
to be refunded beginning in 2018. The Company has approximately
$146,000 in refundable credits, and it expects that a substantial
portion will be refunded between 2019 and 2021. As such, the
Company does not have a valuation allowance relating to the
refundable AMT credit carryforward. A valuation allowance remains
on the state and foreign tax attributes that are likely to expire
before realization. The change in valuation allowance increased
approximately $1,411,000 for the year ended December 31, 2018 and
increased approximately $3,956,000 for the year ended December 31,
2017.
At
December 31, 2018, the Company had approximately $7,581,000 in
federal net operating loss carryforwards, which does not expire and
is limited to 80% of federal taxable income when utilized,
approximately $12,636,000 in federal net operating loss
carryforwards which begin to expire in 2028, and approximately
$38,466,000 in net operating loss carryforwards from various
states. The Company had approximately $2,265,000 in net operating
losses in foreign jurisdictions.
Pursuant to Internal Revenue Code ("IRC") Section 382, use of net
operating loss and credit carryforwards may be limited if the
Company experiences a cumulative change in ownership of greater
than 50% in a moving three-year period. Ownership changes
could impact the Company's ability to utilize the net operating
loss and credit carryforwards remaining at an ownership change
date. The Company has not completed a Section 382
study.
There was no uncertain tax position related to federal, state and
foreign reporting as of December 31, 2018.
U.S. Tax Reform
On December 22, 2017, H.R.1, known as the Tax Cuts and Jobs Act of
2017 ("TCJA") was signed into law and included widespread changes
to the Internal Revenue Code including, among other items, creation
of new taxes on certain foreign earnings, a deduction for certain
export sales by a domestic C corporation, a minimum tax on certain
related party expenses and transactions. The TCJA subjects certain
U.S. shareholders to current tax on global intangible low-taxed
income ("GILTI") earned by certain foreign subsidiaries.
Conversely, foreign-derived intangible income ("FDII") will be
taxed at a lower effective rate than the statutory rate by allowing
a tax deduction against the income. In addition to GILTI and FDII,
Congress passed the base erosion and anti-abuse tax
(“BEAT”) as part of the TCJA, which will impose a 5%
effective tax rate on corporations by disallowing certain related
party expenses and transactions and eliminating any associated
foreign tax credits. The Company has considered these new
provisions as they are effective for tax years starting after
December 31, 2017 and determined that none will likely apply for
fiscal year 2018.
During the enactment of TCJA in December 2017, among other things,
the TCJA reduces the U.S. federal corporate tax rate from 35% to
21% beginning in 2018, requires companies to pay a one-time
transition tax on previously unremitted earnings of non-U.S.
subsidiaries that were previously tax deferred, and creates new
taxes on certain foreign sourced earnings. The SEC staff issued
Staff Accounting Bulletin (SAB) 118, which provides guidance on
accounting for enactment effects of the TCJA. SAB 118 provides a
measurement period of up to one year from the TCJA’s
enactment date for companies to complete their accounting under ASC
740. In accordance with SAB 118, to the extent that a
company’s accounting for certain income tax effects of the
TCJA is incomplete but it is able to determine a reasonable
estimate, it must record a provisional estimate in its financial
statements. If a company cannot determine a provisional estimate to
be included in its financial statements, it should continue to
apply ASC 740 on the basis of the provisions of the tax laws that
were in effect immediately before the enactment of the
TCJA.
Note 12. Segment and Geographical
Information
The
Company is a leading multi-channel lifestyle company offering a
hybrid of the direct selling business model that also offers
e-commerce and the power of social selling. Assembling a
virtual main street of products and services under one corporate
entity, Youngevity offers products from top selling retail
categories: health/nutrition, home/family, food/beverage (including
coffee), spa/beauty, apparel/jewelry, as well as innovative
services. The Company operates in
two segments: the direct selling segment where products are offered
through a global distribution network of preferred customers and
distributors and the commercial coffee segment where roasted and
green coffee bean products are sold directly to
businesses.
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. In
addition, each reporting segment has similar products and
customers, similar methods of marketing and distribution and a
similar regulatory environment.
The accounting policies of the segments are consistent with those
described in the summary of significant accounting policies.
Segment revenue excludes intercompany revenue eliminated in the
consolidation. The following tables present certain financial
information for each segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
Direct
selling
|
$138,855
|
$142,450
|
|
Commercial
coffee
|
23,590
|
23,246
|
|
|
$162,445
|
$165,696
|
|
Gross
profit
|
|
|
|
Direct
selling
|
$94,910
|
$95,379
|
|
Commercial
coffee
|
122
|
186
|
|
|
$95,032
|
$95,565
|
|
Operating
income (loss)
|
|
|
|
Direct
selling
|
$1,733
|
$(2,526)
|
|
Commercial
coffee
|
(4,370)
|
(3,356)
|
|
|
$(2,637)
|
$(5,882)
|
|
Net
loss
|
|
|
|
Direct
selling
|
$(3,328)
|
$(3,922)
|
|
Commercial
coffee
|
(16,742)
|
(8,755)
|
|
|
$(20,070)
|
$(12,677)
|
|
Capital
expenditures
|
|
|
|
Direct
selling
|
$356
|
$854
|
|
Commercial
coffee
|
2,866
|
449
|
Total
capital expenditures
|
$3,222
|
$1,303
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
|
Direct
selling
|
$38,947
|
$44,082
|
|
Commercial
coffee
|
37,026
|
28,307
|
|
Total
assets
|
$75,973
|
$72,389
|
Total tangible assets, net located outside the United States were
approximately $6.2 million and $5.3 million as of December 31, 2018
and 2017, respectively.
The Company conducts its operations primarily in the United States.
For the years ended December 31, 2018 and 2017 approximately 14%
and 12%, respectively, 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
|
$139,985
|
$146,206
|
|
International
|
22,460
|
19,490
|
|
Total
revenues
|
$162,445
|
$165,696
|
Note 13. Subsequent Events
At-the-Market Equity Offering Program
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.
Option Plan / Stock Option Grants
On January 9, 2019, the Board of Directors granted to David Briskie
an option to purchase 541,471 shares of the Company’s common
stock. The stock option granted to Mr. Briskie has an exercise
price of $5.56 per share, which is the closing price of the common
stock on the date of the grant of January 9, 2019, vested upon
issuance and expires ten (10) years from the date of the grant,
unless terminated earlier. The stock option was granted pursuant to
the Company’s Amended and Restated 2012 Stock Option Plan
(the “2012 Option Plan”).
On January 9, 2019, the Board of Directors also granted to each
non-executive member of the Board an option to purchase 50,000
shares of the Company’s common stock. The stock options
granted have an exercise price of $5.56 per share, which is the
closing price of the common stock on the date of the grant of
January 9, 2019, vest upon issuance and expire ten (10) years from
the date of the grant, unless terminated earlier. The stock options
were granted pursuant to the 2012 Stock Option Plan.
In addition, on January 9, 2019, the Board of Directors approved an
amendment (the “Amendment”) to the 2012 Stock Option
Plan to increase the number of shares available for issuance
thereunder from 4,000,000 shares of common stock to 9,000,000
shares of common stock. The Amendment was also approved on January
9, 2019 by the stockholders holding a majority of the Company's
outstanding voting securities and became effective on the 21st day
following the mailing of a definitive information statement to the
Company’s stockholders regarding the Amendment (the
“Approval Date”).
On January 9, 2019, the Board of Directors awarded an option to
Stephan Wallach to purchase 500,000 shares of the Company’s
common stock, an option to Michelle Wallach to purchase 500,000
shares of the Company’s common stock and an option to David
Briskie to purchase 458,529 shares of the Company’s common
stock, each having an exercise price equal to the fair market value
of the common stock on the Approval Date, vesting upon the grant
date and expiring ten (10) years thereafter.
Cross-Marketing Agreement
On
January 10, 2019, the Company entered into an exclusive
cross-marketing agreement with Icelandic Glacial™ an Iceland
based spring water drinking water company and is now available for
customers to purchase.
Mill Construction Agreement
On
January 15, 2019, CLR entered into the CLR Siles Mill Construction
Agreement (the “Mill Construction Agreement”) with
H&H and H&H Export, Alain Piedra Hernandez
(“Hernandez”) and Marisol Del Carmen Siles Orozco
(“Orozco”), together with H&H, H&H Export,
Hernandez and Orozco, collectively referred to as the Nicaraguan
Partner, pursuant to which the Nicaraguan Partner agreed to
transfer a 45 acre tract of land in Matagalpa, Nicaragua (the
“Property”) to be owned 50% by the Nicaraguan Partner
and 50% by CLR. In consideration for the land acquisition the
Company issued to H&H Export, 153,846 shares of common stock.
In addition, the Nicaraguan Partner and CLR agreed to contribute
$4,700,000 toward construction of a processing plant, office, and
storage facilities (“Mill”) on the property for
processing coffee in Nicaragua. As of December 31, 2018, the
Company has made deposits of $900,000 towards the Mill, which is
included in construction in process in property and equipment, net
on the Company’s consolidated balance sheet.
Amendment to Operating and Profit-Sharing Agreement
On
January 15, 2019, CLR entered into an amendment to the March 2014
operating and profit-sharing agreement with the owners of H&H. CLR engaged Hernandez and
Orozco, the owners of H&H as employees to manage Siles. In
addition, CLR and H&H, Hernandez and Orozco have agreed to
restructure their profit-sharing agreement in regard to profits
from green coffee sales and processing that increases the
CLR’s profit participation by an additional 25%. Under the
new terms of the agreement with respect to profit generated from
green coffee sales and processing from La Pita, a leased mill, or
the new mill, now will provide for a split of profits of 75% to CLR
and 25% to the Nicaraguan Partner, after certain conditions are
met. The Company issued 295,910 shares of the Company’s
common stock to H&H Export to pay for certain working capital,
construction and other payables. In addition, H&H Export has
sold to CLR its espresso brand Café Cachita in consideration
of the issuance of 100,000 shares of the Company’s common
stock. Hernandez and Orozco are employees of CLR. The shares of
common stock issued were valued at $7.80 per
share.
Stock Offering
On
February 7, 2019, the Company entered into a Securities Purchase
Agreement (the “Purchase Agreement”) with one
accredited investor that had a substantial pre-existing
relationship with the Company pursuant to which the Company sold
250,000 shares of the Company’s common stock, par value
$0.001 per share, at an offering price of $7.00 per share. Pursuant
to the Purchase Agreement, the Company also issued to the investor
a three-year warrant to purchase 250,000 shares of common stock at
an exercise price of $7.00. The proceeds to the Company were
$1,750,000. Consulting fees for arranging the Purchase Agreement
include the issuance of 5,000 shares of restricted shares of the
Company’s common stock, par value $0.001 per share, and
100,000 3-year warrants priced at $10.00. No cash commissions were
paid.
New Acquisitions - Khrysos Global, Inc.
On February 12, 2019, the Company and Khrysos Industries, Inc., a
Delaware corporation and wholly owned subsidiary of the Company
(“KII”) entered into an Asset and Equity Purchase
Agreement (the “AEPA”) with, Khrysos Global, Inc., a
Florida corporation (“Seller”), Leigh Dundore
(“LD”), and Dwayne Dundore (the “Representing
Party”) for KII to acquire substantially all the assets (the
“Assets”) of KGI and all the outstanding equity of INXL
Laboratories, Inc., a Florida corporation (“INXL”) and
INX Holdings, Inc., a Florida corporation (“INXH”).
Seller, INXL and INXH are engaged in the cannabidiol
(“CBD”) hemp extraction technology equipment business
(the “Business”) and develop and sell equipment and
related services to clients which enable them to extract CBD oils
from hemp stock. The
consideration payable for the assets and the equity of INXL and
INXH is an aggregate of $16,000,000, to be paid as set forth under
the terms of the AEPA and allocated between the Sellers and LD in
such manner as they determine at their
discretion.
At closing, Seller, LD and the Representing Party received an
aggregate of 1,794,972 shares of the Company’s common stock
which have a deemed value of $14,000,000 for the purposes of the
AEPA and $500,000 in cash. Thereafter, Seller, LD and the
Representing Party are to receive an aggregate of: $500,000 in cash
thirty (30) days following the date of closing; $250,000 in cash
ninety (90) days following the date of closing; $250,000 in cash
one hundred and eighty (180) days following the Date of closing;
$250,000 in cash two hundred and seventy (270) days following the
date of closing; and $250,000 in cash one (1) year following
the date of closing.
In addition, the Company agreed to issue to Representing Party,
subject to the approval of the holders of at least a majority of
the issued and outstanding shares of the Company’s common
stock and the approval of The Nasdaq Stock Market (collectively,
the “Contingent Consideration Warrants”) consisting of
six (6) six-year warrants, to purchase 500,000 shares of common
stock each, for an aggregate of 3,000,000 shares of common stock at
an exercise price of $10 per share exercisable upon reaching
certain levels of cumulative revenue or cumulative net income
before taxes by the business during the any of the years ending
December 31, 2019, 2020, 2021, 2022, 2023 or 2024.
The AEPA contains customary representations, warranties and
covenants of the Company, KII, the Seller, LD and the Representing
Party. Subject to certain customary limitations, the Seller, LD and
the Representing Party have agreed to indemnify the Company and KII
against certain losses related to, among other things, breaches of
the Seller’s, LD’s and the Representing Party’s
representations and warranties, certain specified liabilities and
the failure to perform covenants or obligations under the
AEPA.
On February 28, 2019, KII purchased a 45-acre tract of land in
Groveland, Florida, in central Florida, which KII intends to build
a R&D facility, greenhouse and allocate a portion for
farming.
Convertible Debt Offering
On
February 15, 2019 and on March 10, 2019, the Company closed its
first and second tranches of its 2019 January Private Placement
debt offering, respectively, pursuant to which the Company offered
for sale a minimum of notes in the principal amount of minimum of
$100,000 and a maximum of notes in the principal amount $10,000,000
(the “Notes”), with each investor receiving 2,000
shares of common stock for each $100,000 invested. The Company
entered into subscription agreements with thirteen (13) accredited
investors that had a substantial pre-existing relationship with the
Company pursuant to which the Company received aggregate gross
proceeds of $2,440,000 and issued Notes in the aggregate principal
amount of $2,440,000 and an aggregate of 48,800 shares of common
stock. The placement agent will receive up to 50,000 shares of
common stock in the offering. Each Note matures 24 months after
issuance, bears interest at a rate of six percent (6%) per annum,
is issued at a 5% original issue discount and the outstanding
principal is convertible into shares of common stock at any time
after the 180th day anniversary of the issuance of the Note, at a
conversion price of $10 per share (subject to adjustment for stock
splits, stock dividends and reclassification of the common
stock).
Issuance of additional common shares and repricing of warrants
related to 2018 Private Placement
On
March 13, 2019, the Company determined that three of the investors
of the Company’s August 2018 Private Placement became
eligible to receive additional shares of the Company’s common
stock as it was referred to in their respective Purchase Agreement
as True-up Shares. Total number of additional shares issued to
those three investors is 44,599 shares of restricted shares of the
Company’s common stock, par value $0.001. In addition, the
exercise price of the warrants issued at their respective closings
is reset pursuant to the terms of the warrants to exercise prices
ranging from $4.06 to $4.44 from the exercise price at issuance of
$4.75. (See Note 9 above.) There were no issuances during the year
ended December 31, 2018.
Note Payable
On
March 18, 2019, the Company entered into a two-year Secured
Promissory Note (the “Note” or “Notes”)
with two (2) accredited investors that had a substantial
pre-existing relationship with the Company pursuant to which the
Company raised cash proceeds of $2,000,000. In consideration of the
Notes, the Company issued 20,000 shares of the Company’s
common stock par value $0.001 for each $1,000,000 invested as well
as for each $1,000,000 invested five-year warrants to purchase
20,000 shares of the Company’s common stock at a price per
share of $6.00. The Notes pay interest
at a rate of eight percent (8%) per annum and interest is paid
quarterly in arrears with all principal and unpaid interest due at
maturity on March 18, 2021.
On April 1, 2019, we announced that Khrysos executed a one-year
$11,000,000 supply and processing agreement to produce 99% pure CDB
Isolate. Shipping under the agreement is expected to begin this
month and continue in equal amounts through March of
2020.