N
otes to Unaudited Condensed
Consolidated Financial Statements
Note 1. Basis of Presentation and Description of
Business
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission (the
“SEC”) for interim financial information. Accordingly,
certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted
accounting principles, have been condensed or omitted pursuant to
such rules and regulations.
Youngevity International, Inc. (the “Company”)
consolidates all wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
The statements presented as of March 31, 2019 and for the three
months ended March 31, 2019 and 2018 are unaudited. In the opinion
of management, these financial statements reflect all normal
recurring and other adjustments necessary for a fair presentation,
and to make the financial statements not misleading. These
condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements
included in the Company’s Form 10-K for the year ended
December 31, 2018, filed with the SEC on April 15, 2019. The
results for interim periods are not necessarily indicative of the
results for the entire year.
Nature of Business
Youngevity International, Inc. (the “Company”), founded
in 1996, develops and distributes health and nutrition related
products through its global independent direct selling network,
also known as multi-level marketing, and sells coffee products to
commercial customers. During the year ended December 31, 2018
the Company operated in two business segments, its direct selling
segment where products are offered through a global distribution
network of preferred customers and distributors and its commercial
coffee segment where products are sold directly to businesses.
During the first quarter of 2019, the Company through the
acquisition of the assets of Khrysos Global, Inc. added a third
business segment to its operations, the commercial hemp segment.
The Company's three segments are listed below:
●
Commercial coffee business is
operated through CLR and its wholly owned subsidiary, Siles
Plantation Family Group
S.A. (“Siles”).
●
Domestic direct selling network is operated
through the following (i) domestic subsidiaries: AL Global
Corporation, 2400 Boswell LLC, MK Collaborative LLC, and Youngevity
Global LLC and (ii) foreign subsidiaries: Youngevity Australia Pty.
Ltd., Youngevity NZ, Ltd., Youngevity Mexico S.A. de CV, Youngevity
Israel, Ltd., Youngevity Russia, LLC, Youngevity Colombia S.A.S,
Youngevity International Singapore Pte. Ltd., Mialisia Canada, Inc.
and Legacy for Life Limited (Hong Kong). The Company also operates
through the BellaVita Group LLC, with operations in Taiwan, Hong
Kong, Singapore, Indonesia, Malaysia and Japan.
The Company
also operates subsidiary branches of
Youngevity Global LLC in the Philippines and
Taiwan.
●
Commercial
hemp business is operated through the Company’s wholly owned
subsidiary, Khrysos Industries, Inc., a Delaware corporation.
Khrysos Industries, Inc. acquired the assets of Khrysos Global Inc.
a Florida corporation in February 2019 and the wholly-owned
subsidiaries of Khrysos Global Inc., INXL Laboratories, Inc., a
Florida corporation and INX Holdings, Inc., a Florida
corporation.
Segment Information
The Company has three reportable segments: direct selling,
commercial coffee, and commercial hemp. The direct selling segment
develops and distributes health and wellness products through its
global independent direct selling network also known as multi-level
marketing. The commercial coffee segment is a coffee roasting and
distribution company specializing in gourmet coffee. The
determination that the Company has three reportable segments is
based upon the guidance set forth in Accounting Standards
Codification (“ASC”) Topic
280,
“Segment
Reporting.”
During
the three months ended March 31, 2019, the Company derived
approximately 59% of its revenue from its direct selling segment
and approximately 41% of its revenue from its commercial coffee
segment. Commercial hemp segment revenues during the current
quarter represented less than 1% of total revenues as it is newly
acquired. During the three months ended March 31, 2018, the Company
had two reportable segments and derived approximately 82% of its
revenue from its direct selling segment and approximately 18% of
its revenue from its commercial coffee segment.
Liquidity and Going Concern
The accompanying condensed consolidated financial statements have
been prepared and presented on a basis assuming the Company will
continue as a going concern. The Company has sustained significant
losses during the three months ended March 31, 2019 and 2018 of
approximately $12,260,000 and $2,308,000, respectively. Net cash
used in operating activities was approximately $4,831,000 and
$1,427,000 for the three months ended March 31, 2019 and 2018,
respectively. The Company does not currently believe that its
existing cash resources are sufficient to meet the Company’s
anticipated needs over the next twelve months from the date hereof.
Based on its current cash levels and its current rate of cash
requirements, the Company will need to raise additional capital
and/or will need to further reduce its expenses from current
levels. These factors raise substantial doubt about the
Company’s ability to continue as a going
concern.
The
Company anticipates that revenues will grow, and it intends to make
necessary cost reductions related to international operations that
are not performing well and reduce non-essential
expenses.
The
Company is also considering multiple other fund-raising
alternatives.
On
March 18, 2019, the Company entered into a two-year Secured
Promissory Note (the “Note” or “Notes”)
with two (2) accredited investors that had a substantial
pre-existing relationship with the Company pursuant to which the
Company raised cash proceeds of $2,000,000. In consideration of the
Notes, the Company issued 20,000 shares of the Company’s
common stock par value $0.001 for each $1,000,000 invested as well
as for each $1,000,000 invested five-year warrants to purchase
20,000 shares of the Company’s common stock at a price per
share of $6.00.
The Notes pay
interest at a rate of eight percent (8%) per annum and interest is
paid quarterly in arrears with all principal and unpaid interest
due at maturity on March 18, 2021.
On
February 15, 2019 and on March 10, 2019, the Company closed its
first and second tranches of its 2019 January Private Placement
debt offering, respectively, pursuant to which the Company offered
for sale notes in the principal amount of a minimum of $100,000 and
a maximum of notes in the principal amount $10,000,000 (the
“2019 PIPE Notes”), with each investor receiving 2,000
shares of common stock for each $100,000 invested. The Company
entered into subscription agreements with thirteen (13) accredited
investors that had a substantial pre-existing relationship with the
Company pursuant to which the Company received aggregate gross
proceeds of $2,440,000 and issued the 2019 PIPE Notes in the
aggregate principal amount of $2,440,000 and an aggregate of 48,800
shares of common stock. The placement agent received 12,200 shares
of common stock in aggregate for the first and second tranches. The
placement agent will receive up to 50,000 shares of common stock in
the offering. Each 2019 PIPE Note matures 24 months after issuance,
bears interest at a rate of six percent (6%) per annum, and the
outstanding principal is convertible into shares of common stock at
any time after the 180th day anniversary of the issuance of the
2019 PIPE Note, at a conversion price of $10 per share (subject to
adjustment for stock splits, stock dividends and reclassification
of the common stock).
On
February 6, 2019, the Company entered into a Securities Purchase
Agreement (the “Purchase Agreement”) with one
accredited investor that had a substantial pre-existing
relationship with the Company pursuant to which the Company sold
250,000 shares of the Company’s common stock, par value
$0.001 per share, at an offering price of $7.00 per share. Pursuant
to the Purchase Agreement, the Company also issued to the investor
a three-year warrant to purchase 250,000 shares of common stock at
an exercise price of $7.00. The proceeds to the Company were
$1,750,000. Consulting fees for arranging the Purchase Agreement
include the issuance of 5,000 shares of restricted shares of the
Company’s common stock, par value $0.001 per share, and
100,000 3-year warrants priced at $10.00. No cash commissions were
paid.
On January 7, 2019, the Company entered into an
At-the-Market Offering Agreement (the “ATM Agreement”)
with The Benchmark Company, LLC (“Benchmark”), as sales
agent, pursuant to which the Company may sell from time to time, at
its option, shares of its common stock, par value $0.001 per share,
through Benchmark, as sales agent (the “Sales Agent”),
for the sale of up to $60,000,000 of shares of the Company’s
common stock. The Company is not obligated to make any sales of
common stock under the ATM Agreement and the Company cannot provide
any assurances that it will issue any shares pursuant to the ATM
Agreement. The Company will pay the Sales Agent 3.0% commission of
the gross sales proceeds. During the three months ended March 31,
2019, the Company sold a total of 1,000 shares of common stock
under the ATM Agreement for an aggregate purchase price of $6.6118
pursuant to the ATM Agreement.
Depending
on market conditions, there can be no assurance that additional
capital will be available when needed or that, if available, it
will be obtained on terms favorable to the Company or to its
stockholders.
Failure
to raise additional funds from the issuance of equity securities
and failure to implement cost reductions could adversely affect the
Company’s ability to operate as a going concern. The
financial statements do not include any adjustments that might be
necessary from the outcome of this uncertainty.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
(“GAAP”) requires the Company to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expense for each reporting period. Estimates are
used in accounting for, among other things, allowances for doubtful
accounts, deferred taxes and related valuation allowances,
fair value of derivative liabilities, uncertain tax positions, loss
contingencies, fair value of options granted under the
Company’s stock-based compensation plan, fair value of assets
and liabilities acquired in business combinations, finance leases,
asset impairments, estimates of future cash flows used to evaluate
impairments, useful lives of property, equipment and intangible
assets, value of contingent acquisition debt, inventory
obsolescence, and sales returns.
Actual results may differ from previously estimated amounts and
such differences may be material to the consolidated financial
statements. Estimates and assumptions are reviewed
periodically, and the effects of revisions are reflected
prospectively in the period they occur.
Cash and Cash Equivalents
The Company considers only its monetary liquid assets with original
maturities of three months or less as cash and cash
equivalents.
Related Party Transactions
Richard Renton
Richard
Renton is a member of the Board of Directors and owns and operates
WVNP, Inc., a supplier of certain inventory items sold by the
Company. The Company made purchases of approximately $8,000
and $54,000 from WVNP Inc., for the three months ended March 31,
2019 and 2018, respectively.
Carl Grover
Mr.
Grover is the sole beneficial owner of in excess of five percent
(5%) of the Company’s outstanding common shares. On December
13, 2018, CLR, entered into a Credit Agreement with Mr. Grover (the
“Credit Agreement”) pursuant to which CLR borrowed
$5,000,000 from Mr. Grover and in exchange issued to him a
$5,000,000 credit note (“Credit Note”) secured by its
green coffee inventory under a Security Agreement, dated December
13, 2018 (the “Security Agreement”), with Mr. Grover
and CLR’s subsidiary, Siles Family Plantation Group S.A.
(“Siles”), as guarantor, and Siles executed a separate
Guaranty Agreement (“Guaranty”). The Company issued to
Mr. Grover a four-year warrant to purchase 250,000 shares of our
common stock, exercisable at $6.82 per share, and a four-year
warrant to purchase 250,000 shares of the Company’s common
stock, exercisable at $7.82 per share, pursuant to a Warrant
Purchase Agreement, dated December 13, 2018, with Mr. Grover. (See
Note 6 below.)
Paul Sallwasser
Mr. Paul Sallwasser is a member of the board directors
and prior to joining the Company’s Board of Directors he
acquired a note (the “2014 Note”) issued in the
Company’s private placement consummated in 2014 (the
“2014 Private Placement”) in the principal amount of
$75,000 convertible into 10,714 shares of common stock and a
warrant (the “2014 Warrant”) issued, in the 2014
Private Placement, exercisable for 14,673 shares of common stock.
Prior to joining the Company’s Board of Directors, Mr.
Sallwasser acquired in the 2017 Private Placement a 2017 Note in
the principal amount of approximately $38,000 convertible into
8,177 shares of common stock and a warrant (the “2017
Warrant”) issued, in the 2017 Private Placement, exercisable
for 5,719 shares of common stock. Mr. Sallwasser also acquired in
the 2017 Private Placement in exchange for the “2015
Note” that he acquired in the Company’s private
placement consummated in 2015 (the “2015 Private
Placement”), a 2017 Note in the principal amount of $5,000
convertible into 1,087 shares of common stock and a 2017 Warrant
exercisable for 543 shares of common stock. On March 30, 2018, the
Company completed its Series B Offering, and in accordance with the
terms of the 2017 Notes, Mr. Sallwasser’s 2017 Notes
converted to 9,264 shares of the Company’s common
stock.
2400 Boswell LLC
In March 2013, the Company acquired 2400 Boswell for approximately
$4,600,000. 2400 Boswell is the owner and lessor of the building
occupied by the Company for its corporate office and warehouse in
Chula Vista, California. The purchase was from an immediate family
member of the Company’s Chief Executive Officer and consisted
of approximately $248,000 in cash, approximately $334,000 of debt
forgiveness and accrued interest, and a promissory note of
approximately $393,000, payable in equal payments over 5 years and
bears interest at 5.0%. Additionally, the Company
assumed a long-term mortgage of $3,625,000, payable over 25 years
with an initial interest rate of 5.75%. The interest rate is the
prime rate plus 2.5%. The current interest rate as of March 31,
2019 was 7.75%. The lender will adjust the interest rate on the
first calendar day of each change period or calendar quarter. The
Company and its Chief Executive Officer are both co-guarantors of
the mortgage. As of March 31, 2019, the balance on the long-term
mortgage is approximately
$3,198,000 a
nd the balance on the promissory note is
zero.
Other Relationship Transactions
Hernandez, Hernandez, Export Y Company and H&H Coffee Group
Export Corp.
The Company’s commercial coffee segment, CLR, is associated
with Hernandez, Hernandez, Export Y Company
(“H&H”), a Nicaragua company, through sourcing
arrangements to procure Nicaraguan grown green coffee beans. In
March 2014, as part of the Siles acquisition, CLR engaged the
owners of H&H as employees to manage Siles. H&H is a
sourcing agent acting on behalf of CLR for purchases of coffee from
the producers. In consideration for H&H's sourcing of green
coffee, CLR and H&H share in the green coffee profit from
operations. H&H made purchases for CLR of approximately
$17,520,000 and $3,734,000 for the three months ended March 31,
2019 and 2018, respectively.
In addition, CLR sold approximately $20,026,000 and $2,443,000 for
the three months ended March 31, 2019 and 2018, respectively, of
green coffee beans to H&H Coffee Group Export Corp.,
(“H&H Export”) a Florida based company which is
affiliated with H&H.
In May 2017, the Company entered a settlement agreement with Alain
Piedra Hernandez, one of the owners of H&H and the operating
manager of Siles, who was issued a non-qualified stock option for
the purchase of 75,000 shares of the Company’s common stock
at a price of $2.00 with an expiration date of three years, in lieu
of an obligation due from the Company to H&H as relates to a
Sourcing and Supply Agreement with H&H. During the period ended
September 30, 2017 the Company replaced the non-qualified stock
option and issued a warrant agreement with the same terms. There
was no financial impact related to the cancellation of the option
and the issuance of the warrant. As of March 31, 2019, the warrant
remains outstanding.
In
December 2018, CLR advanced $5,000,000 to H&H Export to provide
services in support of a 5-year contract for the sale and
processing of 41 million pounds of green coffee beans on an annual
basis. The services include providing hedging and financing
opportunities to producers and delivering harvested coffee to the
Company’s mills. On March 31, 2019, this advance was
converted to a $5,000,000 loan agreement and bears interest at 9%
per annum and is due and payable by H&H Export at the end of
each year’s harvest season, but no later than October 31 for
any harvest year. The loan is secured by H&H Export’s
hedging account with INTL FC Stone, trade receivables, green coffee
inventory in the possession of H&H Export and all green coffee
contracts.
Mill Construction Agreement
On
January 15, 2019, CLR entered into the CLR Siles Mill Construction
Agreement (the “Mill Construction Agreement”) with
H&H and H&H Export, Alain Piedra Hernandez
(“Hernandez”) and Marisol Del Carmen Siles Orozco
(“Orozco”), together with H&H, H&H Export,
Hernandez and Orozco, collectively referred to as the Nicaraguan
Partner, pursuant to which the Nicaraguan Partner agreed to
transfer a 45 acre tract of land in Matagalpa, Nicaragua (the
“Property”) to be owned 50% by the Nicaraguan Partner
and 50% by CLR. In consideration for the land acquisition the
Company issued to H&H Export, 153,846 shares of common stock.
In addition, the Nicaraguan Partner and CLR agreed to contribute
$4,700,000 each toward the construction of a processing plant,
office, and storage facilities (“Mill”) on the property
for processing coffee in Nicaragua. As of March 31, 2019, the
Company paid $1,350,000 towards construction of a mill, which is
included in construction in process within property and equipment,
net on the Company's condensed consolidated balance
sheet.
Amendment to Operating and Profit-Sharing Agreement
On
January 15, 2019, CLR entered into an amendment to the March 2014
operating and profit-sharing agreement with the
owners of H&H. CLR previously engaged
Hernandez and Orozco, the owners of H&H as employees to manage
Siles. In addition, CLR and H&H, Hernandez and Orozco have
agreed to restructure their profit-sharing agreement in regard to
profits from green coffee sales and processing that increases the
CLR’s profit participation by an additional 25%. Under the
new terms of the agreement with respect to profit generated from
green coffee sales and processing from La Pita, a leased mill, or
the new mill, now will provide for a split of profits of 75% to CLR
and 25% to the Nicaraguan Partner, after certain conditions are
met. The Company issued 295,910 shares of the Company’s
common stock to H&H Export to pay for certain working capital,
construction and other payables. In addition, H&H Export has
sold to CLR its espresso brand Café Cachita in consideration
of the issuance of 100,000 shares of the Company’s common
stock. Hernandez and Orozco are employees of CLR. The shares of
common stock issued were valued at $7.50 per
share.
Revenue Recognition
The Company recognizes revenue from product sales under the
following five steps are completed: i) Identify the contract with
the customer; ii) Identify the performance obligations in the
contract; iii) Determine the transaction price; iv) Allocate the
transaction price to the performance obligations in the contract;
and v) Recognize revenue when (or as) each performance obligation
is satisfied (see Note 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. The Company’s distributors are
required to pay a one-time enrollment fee and receive a welcome kit
specific to that country or region that consists of forms, policy
and procedures, selling aids, access to the Company’s
distributor website and a genealogy position with no down line
distributors.
The
Company has determined that most contracts will be completed in
less than one year. For those transactions where all performance
obligations will be satisfied within one year or less, the Company
is applying the practical expedient outlined in ASC 606-10-32-18.
This practical expedient allows the Company not to adjust promised
consideration for the effects of a significant financing component
if the Company expects at contract inception the period between
when the Company transfers the promised good or service to a
customer and when the customer pays for that good or service will
be one year or less. For those transactions that are expected to be
completed after one year, the Company has assessed that there are
no significant financing components because any difference between
the promised consideration and the cash selling price of the good
or service is for reasons other than the provision of
financing.
Deferred Revenues and Costs
As of March 31, 2019 and December 31, 2018, the balance in deferred
revenues was approximately $2,268,000 and $2,312,000, respectively.
Deferred revenue related to the Company’s direct selling
segment is attributable to the Heritage Makers product line and
also for future Company convention and distributor
events.
Deferred revenues related to Heritage Makers were approximately
$2,095,000 and $2,153,000, as of March 31, 2019, and December 31,
2018, respectively. The deferred revenue represents Heritage
Maker’s obligation for points purchased by customers that
have not yet been redeemed for product. Cash received for points
sold is recorded as deferred revenue. Revenue is recognized when
customers redeem the points and the product is
shipped.
Deferred costs relate to Heritage Makers prepaid commissions that
are recognized in expense at the time the related revenue is
recognized. As of March 31, 2019 and 2018, the balance in deferred
costs was approximately $338,000 and $364,000, respectively, and is
included in prepaid expenses and current assets.
Deferred revenues related to pre-enrollment in upcoming conventions
and distributor events of approximately $173,000 and $159,000
as of March 31, 2019 and December 31, 2018, respectively, relate
primarily to the Company’s 2019 and 2018 events. The Company
does not recognize this revenue until the conventions or
distributor events occur.
Plantation Costs
The Company’s commercial coffee segment includes the results
of Siles, which is a 500-acre coffee plantation and a
dry-processing facility located on 26 acres located in Matagalpa,
Nicaragua. Siles is a wholly-owned subsidiary of CLR, and the
results of CLR include the depreciation and amortization of
capitalized costs, development and maintenance and harvesting costs
of Siles. In accordance with GAAP, plantation maintenance and
harvesting costs for commercially producing coffee farms are
charged against earnings when sold. Deferred harvest costs
accumulate and are capitalized throughout the year and are expensed
over the remainder of the year as the coffee is sold. The
difference between actual harvest costs incurred and the amount of
harvest costs recognized as expense is recorded as either an
increase or decrease in deferred harvest costs, which is reported
as an asset and included with prepaid expenses and other current
assets in the condensed consolidated balance sheets. Once the
harvest is complete, the harvest costs are then recognized as the
inventory value. Deferred costs associated with the harvest as of
March 31, 2019 and December 31, 2018 are approximately zero and
$400,000, respectively, and are included in prepaid expenses and
other current assets on the Company’s balance
sheets.
Stock-based Compensation
The Company accounts for stock-based compensation in accordance
with ASC Topic 718, “
Compensation – Stock
Compensation,”
which
establishes accounting for equity instruments exchanged for
employee services. Under such provisions, stock-based compensation
cost is measured at the grant date, based on the calculated fair
value of the award, and is recognized as an expense, under the
straight-line method, over the vesting period of the equity
grant.
The Company accounts for equity instruments issued to non-employees
in accordance with authoritative guidance for equity-based payments
to non-employees. Stock options issued to non-employees are
accounted for at their estimated fair value, determined using the
Black-Scholes option-pricing model. The fair value of options
granted to non-employees is re-measured as they vest, and the
resulting increase in value, if any, is recognized as expense
during the period the related services are rendered.
Income Taxes
The Company accounts for income taxes in accordance with ASC
Topic 740,
"Income
Taxes,"
under the asset
and liability method which includes the recognition of deferred tax
assets and liabilities for the expected future tax consequences of
events that have been included in the consolidated financial
statements. Under this approach, deferred taxes are recorded for
the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The
provision for income taxes represents income taxes paid or payable
for the current year plus the change in deferred taxes during the
year. Deferred taxes result from differences between the financial
statement and tax basis of assets and liabilities and are adjusted
for changes in tax rates and tax laws when changes are enacted. The
effects of future changes in income tax laws or rates are not
anticipated.
Income taxes for the interim periods are computed using the
effective tax rates estimated to be applicable for the full fiscal
year, as adjusted for any discrete taxable events that occur during
the period.
The Company files income tax returns in the United States
(“U.S.”) on a federal basis and in many U.S. state and
foreign jurisdictions. Certain tax years remain open to examination
by the major taxing jurisdictions to which the Company is
subject.
Commitments and Contingencies
The Company is from time to time, the subject of claims and suits
arising out of matters related to the Company’s business. The
Company is party to litigation at the present time and may become
party to litigation in the future. In general, litigation claims
can be expensive, and time consuming to bring or defend against and
could result in settlements or damages that could significantly
affect financial results. It is not possible to predict the final
resolution of the current litigation to which the Company is party
to, and the impact of certain of these matters on the
Company’s business, results of operations, and financial
condition could be material. Regardless of the outcome, litigation
has adversely impacted the Company’s business because of
defense costs, diversion of management resources and other
factors.
Recently Issued Accounting Pronouncements
In August 2018,
the
Financial Accounting Standards Board
(FASB)
issued
Accounting
Standards Update (ASU) N
o. 2018-15,
Intangibles
— Goodwill and Other — Internal-Use Software
(Subtopic 350-40): Customer’s Accounting for
Implementation Costs Incurred in a Cloud Computing Arrangement That
Is a Service Contract
. Subtopic 350-40
clarifies the accounting for implementation costs of a hosting
arrangement that is a service contract and aligns that accounting,
regardless of whether the arrangement conveys a license to the
hosted software. The amendments in this update are effective for
reporting periods beginning after December 15, 2019, with
early adoption permitted.
The Company does not expect
this new guidance to have a material impact on its condensed
consolidated financial statements.
In August 2018, the FASB issued ASU No.
2018-13,
Fair Value Measurement (Topic
820): Disclosure Framework-Changes to the Disclosure Requirements
for Fair Value Measurement
.
Topic 820 removes or modifies certain current disclosures and
adds additional disclosures. The changes are meant to provide more
relevant information regarding valuation techniques and inputs used
to arrive at measures of fair value, uncertainty in the fair value
measurements, and how changes in fair value measurements impact an
entity's performance and cash flows. Certain disclosures
in Topic 820 will need to be applied on a retrospective
basis and others on a prospective basis.
Topic 820 is
effective for fiscal years, and interim periods within those years,
beginning after December 15, 2019.
Early adoption is permitted. The Company expects
to adopt the provisions of this guidance on January 1, 2020 and is
currently evaluating the impact that Topic 820 will have on its
related disclosures.
In
January 2017, the FASB
issued
ASU No.
2017-04,
Intangibles —
Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment
. This ASU simplifies the test for goodwill
impairment by removing Step 2 from the goodwill impairment test.
Companies will now perform the goodwill impairment test by
comparing the fair value of a reporting unit with its carrying
amount, recognizing an impairment charge for the amount by which
the carrying amount exceeds the reporting unit’s fair value
not to exceed the total amount of goodwill allocated to that
reporting unit. An entity still has the option to perform the
qualitative assessment for a reporting unit to determine if the
quantitative impairment test is necessary. The amendments in this
update are effective for goodwill impairment tests in fiscal years
beginning after December 15,
2019
for public companies,
with early adoption permitted for
goodwill impairment tests performed after January 1,
2017.
The Company does not expect
this new guidance to have a material impact on its condensed
consolidated financial statements.
Recently Adopted Accounting Pronouncements
In
February 2018, the FASB issued Accounting Standards Update ASU No.
2018-02,
Income Statement -
Reporting Comprehensive Income
(Topic 220),
Reclassification of Certain Tax Effects from Accumulated Other
Comprehensive Income, Topic 220. The amendments in this Update
allow a reclassification from accumulated other comprehensive
income to retained earnings for stranded tax effects resulting from
the Tax Cuts and Jobs Act (H.R.1) (the Act). Consequently, the
amendments eliminate the stranded tax effects resulting from the
Act and will improve the usefulness of information reported to
financial statement users. However, because the amendments only
relate to the reclassification of the income tax effects of the
Act, the underlying guidance that requires that the effect of a
change in tax laws or rates be included in income from continuing
operations is not affected. The amendments in this Update also
require certain disclosures about stranded tax effects. Topic 220
is effective for fiscal years, and interim periods within those
years, beginning after December 15, 2018.
The Company adopted the provisions of this
guidance on January 1, 2019 and the adoption of this standard did
not have a material impact on the Company’s condensed
consolidated financial statements.
In July
2017, the FASB issued ASU No. 2017-11,
Earnings Per Share (Topic 260); Distinguishing
Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic
815): (Part I) Accounting for Certain Financial Instruments with
Down Round Features, (Part II) Replacement of the Indefinite
Deferral for Mandatorily Redeemable Financial Instruments of
Certain Nonpublic Entities and Certain Mandatorily Redeemable
Noncontrolling Interests with a Scope Exception
. Topic 260
allows companies to exclude a down round feature when determining
whether a financial instrument (or embedded conversion feature) is
considered indexed to the entity’s own stock. As a result,
financial instruments (or embedded conversion features) with down
round features may no longer be required to be accounted classified
as liabilities. A company will recognize the value of a down round
feature only when it is triggered, and the strike price has been
adjusted downward. For equity-classified freestanding financial
instruments, such as warrants, an entity will treat the value of
the effect of the down round, when triggered, as a dividend and a
reduction of income available to common shareholders in computing
basic earnings per share. For convertible instruments with embedded
conversion features containing down round provisions, entities will
recognize the value of the down round as a beneficial conversion
discount to be amortized to earnings. The guidance in Topic 260 is
effective for fiscal years beginning after December 15, 2018, and
interim periods within those fiscal years. Early adoption is
permitted, and the guidance is to be applied using a full or
modified retrospective approach.
The Company adopted ASU No. 2017-11 effective
January 1, 2019 and determined that it’s 2018 warrants were
to no longer be classified as a derivative, as a result of the
adoption and subsequent change in classification of the 2018
warrants, the company reclassed approximately $1,494,000 of warrant
derivative liability to equity.
In
February
2016,
FASB established
Topic
842,
Leases, by issuing ASU
No. 2016-02,
Leases (Topic
842)
which required
lessees to recognize leases on-balance sheet and disclose key
information about leasing arrangements.
Topic
842
was
subsequently amended by ASU
No. 2018-01,
Land Easement Practical
Expedient for Transition to Topic
842;
ASU
No. 2018-10,
Codification Improvements to
Topic
842,
Leases
; ASU
No. 2018-11,
Targeted
Improvements
; ASU No.
2018-20,
Narrow-Scope Improvements for
Lessors; and
ASU
2019-01,
Codification
Improvements
. The new standard
establishes a right-of-use model (ROU) that requires a lessee to
recognize a ROU asset and lease liability on the balance sheet for
all leases with a term longer than
12
months. Leases are classified as finance or
operating, with classification affecting the pattern and
classification of expense recognition in the income statement. The
amendments were adopted by the
Company on
January 1,
2019.
A modified
retrospective transition approach is required, applying the
standard to all leases existing at the date of initial application.
The Company elects to use its effective date as its date of initial
application. Consequently, financial information
will
not
be
updated, and the disclosures required under the new standard
will
not
be
provided for dates and periods before
January 1, 2019.
The new standard provides a number of optional
practical expedients in transition. The Company elected the
“package of practical expedients”, which permits the
Company not to reassess under the new standard prior conclusions
about lease identification, lease classification and initial
direction costs. In addition, the Company elected the practical
expedient to use hindsight when determining lease terms. The
practicable expedient pertaining to land easement is not applicable
to the Company. The Company continues to assess all of the effects
of adoption, with the most significant effect relating to the
recognition of new ROU assets and lease liabilities on the
Company’s balance sheet for real estate operating
leases.
The Company
adopted the provisions of this guidance on January 1, 2019 and
accordingly recognized additional operating liabilities of
approximately
$5,509,000
with corresponding ROU assets of the same amount based on the
present value of the remaining minimum rental payments under
current leasing standards for existing operating
leases.
Following the expiration of the Company’s Emerging Growth
Company filing status (“EGC”) on December 31, 2018 the
Company adopted the following accounting pronouncements effective
January 1, 2018.
In May
2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic
606)
, to supersede nearly all existing revenue recognition
guidance under GAAP. Topic 606 also requires new qualitative and
quantitative disclosures, including disaggregation of revenues and
descriptions of performance obligations. The Company adopted the
provision of this guidance using the modified retrospective
approach. The Company has performed an assessment of its revenue
contracts as well as worked with industry participants on matters
of interpretation and application and has not identified any
material changes to the timing or amount of its revenue recognition
under Topic 606. The Company’s accounting policies did not
change materially as a result of applying the principles of revenue
recognition from Topic 606 and are largely consistent with existing
guidance and current practices applied by the Company. (See Note 3,
below.)
Note 2. Basic and Diluted Net Loss Per Share
Basic loss per share is computed by dividing net loss attributable
to common stockholders by the weighted-average number of common
shares outstanding during the period. Diluted loss per share is
computed by dividing net loss attributable to common stockholders
by the sum of the weighted-average number of common shares
outstanding during the period and the weighted-average number of
dilutive common share equivalents outstanding during the period,
using the treasury stock method. Dilutive common share equivalents
are comprised of stock options, restricted stock, warrants,
convertible preferred stock and common stock associated with the
Company's convertible notes based on the average stock price for
each period using the treasury stock method. Potentially dilutive
shares are excluded from the computation of diluted net loss per
share when their effect is anti-dilutive. In periods where a net
loss is presented, all potentially dilutive securities are
anti-dilutive and are excluded from the computation of diluted net
loss per share.
Potentially dilutive securities for the three months ended March
31, 2019 were
12,882,194.
Potentially dilutive securities were 7,321,334 for
the three months ended March 31, 2018.
The
calculation of diluted loss per share requires that, to the extent
the average market price of the underlying shares for the reporting
period exceeds the exercise price of the warrants and the presumed
exercise of such securities are dilutive to loss per share for the
period, an adjustment to net loss used in the calculation is
required to remove the change in fair value of the warrants, net of
tax from the numerator for the period. Likewise, an adjustment to
the denominator is required to reflect the related dilutive shares,
if any, under the treasury stock method. During the three months
ended March 31, 2019 and 2018, the Company recorded net of tax gain
of $1,409,000 and $254,000, on the valuation of the Warrant
Derivative Liability which has a dilutive impact on loss per share,
respectively.
|
|
Three months ended March 31,
|
|
|
|
|
|
Loss per Share – Basic
|
|
|
|
Numerator
for basic loss per share
|
$
(12,274,000
)
|
$
(2,311,000
)
|
|
Denominator
for basic loss per share
|
27,577,576
|
19,744,144
|
|
Loss
per common share – basic
|
$
(0.45
)
|
$
(0.12
)
|
|
|
|
|
|
Loss per Share – Diluted
|
|
|
|
Numerator
for basic loss per share
|
$
(12,274,000
)
|
$
(2,311,000
)
|
|
Adjust:
Fair value of dilutive warrants outstanding
|
(1,409,000
)
|
(254,000
)
|
|
Numerator
for dilutive loss per share
|
$
(13,683,000
)
|
$
(2,565,000
)
|
|
|
|
|
|
Denominator
for basic loss per share
|
27,577,576
|
19,744,144
|
|
Plus:
Incremental shares underlying “in the money” warrants
outstanding
|
447,595
|
14,258
|
|
Denominator
for diluted loss per share
|
28,025,172
|
19,758,402
|
|
Loss
per common share – diluted
|
$
(0.49
)
|
$
(0.13
)
|
Note 3. Balance Sheet Account Details
Inventory and Cost of Revenues
Inventory is stated at the lower of cost or net realizable value,
net of a valuation allowance. Cost is determined using the
first-in, first-out method. The Company records an inventory
reserve for estimated excess and obsolete inventory based upon
historical turnover, market conditions and assumptions about future
demand for its products. When applicable, expiration dates of
certain inventory items with a definite life are taken into
consideration.
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Finished
goods
|
$
14,948
|
$
11,300
|
|
Raw
materials
|
34,284
|
12,744
|
|
Total
inventory
|
49,232
|
24,044
|
|
Reserve
for excess and obsolete
|
(2,427
)
|
(2,268
)
|
|
Inventory,
net
|
$
46,805
|
$
21,776
|
Cost of revenues includes the cost of inventory, shipping and
handling costs, royalties associated with certain products,
transaction banking costs, warehouse labor costs and depreciation
on certain assets.
Leases
Generally, the Company leases certain office space, warehouses,
distribution centers, manufacturing centers, and equipment. A
contract is or contains a lease if the contract conveys the right
to control the use of identified property, plant, or equipment (an
identified asset) for a period of time in exchange for
consideration
In general, the Company’s leases include one or more options
to renew, with renewal terms that generally vary from one to ten
years. The exercise of lease renewal options is generally at the
Company’s sole discretion. The depreciable life of assets and
leasehold improvements are limited by the expected lease term,
unless there is a transfer of title or purchase option reasonably
certain of exercise.
The Company’s lease agreements do not contain any material
residual value guarantees or material restrictive
covenants.
Leases with an initial term of twelve months or less are
not recorded on the Company’s condensed
consolidated balance sheets, and the Company does not separate
nonlease components from lease components. The Company’s
lease assets and liabilities recognized within its condensed
consolidated balance sheets were as follows (in
thousands):
|
|
|
Balance Sheet Location
|
|
ASSETS:
|
|
|
|
Operating
lease right-of-use assets
|
$
5,509
|
Operating
lease right-of-use assets
|
|
Finance
lease right-of-use assets
|
1,330
|
Property,
plant, and equipment, net at cost, net of accumulated amortization
(1)
|
|
Total
lease assets
|
$
6,839
|
|
|
LIABILITIES:
|
|
|
|
Current:
|
|
|
|
Operating
lease liabilities
|
$
745
|
Other
current liabilities
|
|
Finance
lease liabilities
|
978
|
Current
portion of long-term debt
|
|
Non-current:
|
|
|
|
Operating
lease liabilities
|
4,764
|
Non-current
operating lease liabilities
|
|
Finance
lease liabilities
|
927
|
Long-term
debt, net of current portion
|
|
Total
lease liabilities
|
$
7,714
|
|
(1)
Finance
lease assets are recorded net of accumulated amortization of
approximately $522,000 as of March 31, 2019.
Lease cost is recognized on a straight-line basis over the lease
term (in thousands):
|
|
|
|
Operating
lease costs
|
$
271
|
|
Finance
lease cost
|
-
|
|
Amortization
of right-of-use assets
|
96
|
|
Interest
on lease liabilities
|
37
|
|
Net
lease costs
|
$
404
|
As of March 31, 2019, annual scheduled lease payments were as
follows (in thousands):
|
|
|
|
|
2019
|
$
788
|
$
1,086
|
|
2020
|
753
|
742
|
|
2021
|
688
|
204
|
|
2022
|
648
|
9
|
|
2023
|
889
|
3
|
|
Thereafter
|
3,139
|
-
|
|
Total
lease payments
|
6,905
|
2,044
|
|
Less
imputed interest
|
1,396
|
139
|
|
Present
value of lease liabilities
|
$
5,509
|
$
1,905
|
Finance lease right-of-use assets are amortized over their
estimated useful life, as the Company does believe that it is
reasonably certain that options which transfer ownership will be
exercised. In general, for the majority of the Company’s
material leases, the renewal options are not included in the
calculation of its right-of-use assets and lease liabilities, as
the Company does not believe that it is reasonably certain that
these renewal options will be exercised. Periodically, the Company
assesses its leases to determine whether it is reasonably certain
that these options and any renewal options could be reasonably
expected to be exercised.
The majority of the Company’s leases are for real estate and
equipment. In general, the individual lease contracts do not
provide information about the rate implicit in the lease. Because
the Company is not able to determine the rate implicit in its
leases, it instead generally uses its incremental borrowing rate to
determine the present value of lease liabilities. In determining
its incremental borrowing rate, the Company reviewed the terms of
its leases, its senior secured credit facility, swap rates, and
other factors. The weighted-average remaining lease term and
weighted-average discount rate used to calculate the present value
of lease liabilities are as follows:
|
|
|
|
Weighted-average
remaining lease terms:
|
|
|
Operating
leases
|
5.8
|
|
Finance
leases
|
2.1
|
|
Weighted-average
remaining discount rate:
|
|
|
Operating
leases
|
5.5
%
|
|
Finance
leases
|
9.1
%
|
Revenue Recognition
Direct Selling
Direct distribution sales are made through the Company’s
network (direct selling segment), which is a web-based global
network of customers and distributors. The Company’s
independent sales force markets a variety of products to an array
of customers, through friend-to-friend marketing and social
networking. The Company considers itself to be an e-commerce
company whereby personal interaction is provided to customers by
its independent sales network. Sales generated from direct
distribution includes; health and wellness, beauty product and skin
care, scrap booking and story booking items, packaged food products
and other service-based products.
Revenue is recognized when the Company satisfies its performance
obligations under the contract. The Company recognizes revenue by
transferring the promised products to the customer, with revenue
recognized at shipping point, the point in time the customer
obtains control of the products. The majority of the
Company’s contracts have a single performance obligation and
are short term in nature. Sales taxes in domestic and foreign
jurisdictions are collected from customers and remitted to
governmental authorities, all at the local level, and are accounted
for on a net basis and therefore are excluded from
revenues.
Commercial Coffee - Coffee Roaster
The Company engages in the commercial sale of roasted coffee
through its subsidiary CLR, which is sold under a variety of
private labels through major national sales outlets and to
customers including cruise lines and office coffee service
operators, and under its own Café La Rica brand, Josie’s
Java House Brand and Javalution brands as well as through its
distributor network within the direct selling segment.
Revenue is recognized when the title and risk of loss is passed to
the customer under the terms of the shipping arrangement,
typically, FOB shipping point. At this point the customer has a
present obligation to pay, takes physical possession of the
product, takes legal title to the product, bears the risks and
rewards of ownership, and as such, revenue will be recognized at
this point in time. Sales taxes in domestic and foreign
jurisdictions are collected from customers and remitted to
governmental authorities, all at the local level, and are accounted
for on a net basis and therefore are excluded from
revenues.
Commercial Coffee - Green Coffee
The commercial coffee segment includes the sale of green coffee
beans, which are sourced from the Nicaraguan
rainforest.
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 Hemp
The commercial hemp segment provides end to end extraction and
processing via the Company’s proprietary systems that allow
for the conversion of hemp feed stock into hemp oil and hemp
extracts. The primary focus of the segment will be to
generate revenue through sales of extraction services and end to
end processing services for the conversion of Hemp and Hemp oil
into sellable ingredients. Additionally, the Company offers
various rental, sales, and service programs of the company’s
extraction and processing systems.
Revenue is recognized when the title and risk of loss is passed to
the customer under the terms of the shipping arrangement,
typically, FOB shipping point. At this point the customer has a
present obligation to pay, takes physical possession of the
product, takes legal title to the product, bears the risks and
rewards of ownership, and as such, revenue will be recognized at
this point in time. Sales taxes in domestic and foreign
jurisdictions are collected from customers and remitted to
governmental authorities, all at the local level, and are accounted
for on a net basis and therefore are excluded from
revenues.
The Company operates in three primary segments: the direct selling
segment where products are offered through a global distribution
network of preferred customers and distributors, the commercial
coffee segment where products are sold directly to businesses and
the Hemp segment.
The following table summarizes revenue disaggregated by direct
selling and the coffee segment (in thousands):
|
|
For the three months ended
March 31,
|
|
|
|
|
|
Direct
Selling Segment
|
$
33,420
|
$
35,311
|
|
Commercial
Coffee - coffee roaster
|
2,780
|
2,698
|
Commercial
Coffee - green coffee
|
20,033
|
4,985
|
|
|
67
|
-
|
|
Total
|
$
56,300
|
$
42,994
|
Contract Balances
Timing of revenue recognition may differ from the timing of
invoicing to customers. The Company records contract assets when
performance obligations are satisfied prior to
invoicing.
Contract liabilities are reflected as deferred revenues in current
liabilities on the Company’s condensed consolidated balance
sheets and includes deferred revenue and customer deposits.
Contract liabilities relate to payments invoiced or received in
advance of completion of performance obligations, and are
recognized as revenue upon the fulfillment of performance
obligations. Contract Liabilities are classified as short-term as
all performance obligations are expected to be satisfied within the
next 12 months.
As of March 31, 2019 and December 31, 2018, the balance in deferred
revenues was approximately $2,268,000 and $2,312,000, respectively.
The Company records deferred revenue related to its direct selling
segment which is primarily attributable to the Heritage Makers
product line and represents Heritage Maker’s obligation for
points purchased by customers that have not yet been redeemed for
product. In addition, deferred revenues include future Company
convention and distributor events.
Deferred revenue related to the commercial coffee segment
represents deposits on customer orders that have not yet been
completed and shipped. Revenue is recognized when the title and
risk of loss is passed to the customer under the terms of the
shipping arrangement FOB shipping point. (See Note 1,
above.)
Of the
deferred revenue from the year ended December 31, 2018, the Company
recognized revenue of approximately $2,095,000 from the Heritage
Makers product line during the three months ended March 31.
2019.
There
were no deferred revenues associated with the commercial coffees
segment and the commercial hemp as of March 31, 2019.
Note 4. Acquisitions and Business Combinations
The Company accounts for business combinations under the
acquisition method and allocates the total purchase price for
acquired businesses to the tangible and identified intangible
assets acquired and liabilities assumed, based on their estimated
fair values. When a business combination includes the exchange of
the Company’s common stock, the value of the common stock is
determined using the closing market price as of the date such
shares were tendered to the selling parties. The fair values
assigned to tangible and identified intangible assets acquired and
liabilities assumed are based on management or third-party
estimates and assumptions that utilize established valuation
techniques appropriate for the Company’s industry and each
acquired business. Goodwill is recorded as the excess, if any, of
the aggregate fair value of consideration exchanged for an acquired
business over the fair value (measured as of the acquisition date)
of total net tangible and identified intangible assets acquired. A
liability for contingent consideration, if applicable, is recorded
at fair value as of the acquisition date. In determining the fair
value of such contingent consideration, management estimates the
amount to be paid based on probable outcomes and expectations on
financial performance of the related acquired business. The fair
value of contingent consideration is reassessed quarterly, with any
change in the estimated value charged to operations in the period
of the change. Increases or decreases in the fair value of the
contingent consideration obligations can result from changes in
actual or estimated revenue streams, discount periods, discount
rates and probabilities that contingencies will be
met.
During the three months ended March 31, 2019, the Company entered
into one acquisition, which is detailed below. The acquisition was
conducted in an effort to expand the Company’s operations
into the field of commercial hemp business.
2019 Acquisitions
Khrysos Global, Inc.
On February 12, 2019, the Company and Khrysos Industries, Inc., a
Delaware corporation and wholly owned subsidiary of the Company
(“KII”) entered into an Asset and Equity Purchase
Agreement (the “AEPA”) with, Khrysos Global, Inc., a
Florida corporation (“Seller”), Leigh Dundore
(“LD”), and Dwayne Dundore (the “Representing
Party”) for KII to acquire substantially all the assets (the
“Assets”) of KGI and all the outstanding equity of INXL
Laboratories, Inc., a Florida corporation (“INXL”) and
INX Holdings, Inc., a Florida corporation (“INXH”).
Seller, INXL and INXH
provides end to end extraction and
processing via the company’s proprietary systems that allow
for the conversion of hemp feed stock into hemp oil and hemp
extracts. Additionally, KII offers various rental, sales, and
service programs of KII’s extraction and processing
systems.
The consideration payable for the assets and the equity of KGI,
INXL and INXH is an aggregate of $16,000,000, to be paid as set
forth under the terms of the AEPA and allocated between the Sellers
and LD in such manner as they determine at their
discretion.
At closing, Seller, LD and the Representing Party received an
aggregate of 1,794,972 shares of the Company’s common stock
which have a value of $14,000,000 for the purposes of the AEPA or
$12.649,000 fair value for the acquisition valuation and $500,000
in cash. Thereafter, Seller, LD and the Representing Party are to
receive an aggregate of: $500,000 in cash thirty (30) days
following the date of closing; $250,000 in cash ninety (90) days
following the date of closing; $250,000 in cash one hundred and
eighty (180) days following the Date of closing; $250,000 in cash
two hundred and seventy (270) days following the date of closing;
and $250,000 in cash one (1) year following the date of
closing.
In addition, the Company agreed to issue to Representing Party,
subject to the approval of the holders of at least a majority of
the issued and outstanding shares of the Company’s common
stock and the approval of The Nasdaq Stock Market (collectively,
the “Contingent Consideration Warrants”) consisting of
six (6) six-year warrants, to purchase 500,000 shares of common
stock each, for an aggregate of 3,000,000 shares of common stock at
an exercise price of $10 per share exercisable upon reaching
certain levels of cumulative revenue or cumulative net income
before taxes by the business during the any of the years ending
December 31, 2019, 2020, 2021, 2022, 2023 or 2024.
The AEPA contains customary representations, warranties and
covenants of the Company, KII, the Seller, LD and the Representing
Party. Subject to certain customary limitations, the Seller, LD and
the Representing Party have agreed to indemnify the Company and KII
against certain losses related to, among other things, breaches of
the Seller’s, LD’s and the Representing Party’s
representations and warranties, certain specified liabilities and
the failure to perform covenants or obligations under the
AEPA.
On February 28, 2019, KII purchased a 45-acre tract of land in
Groveland, Florida, in central Florida, which KII intends to build
a R&D facility, greenhouse and allocate a portion for
farming.
The Company has estimated fair value (in thousands) at the date of
acquisition of the acquired tangible and intangible assets and
liabilities as follows (unaudited):
|
Present value of
cash consideration
|
$
1,894
|
Estimated fair
value of common stock issued
|
12,649
|
|
|
$
14,543
|
|
The following table summarizes the
estimated preliminary fair values of the assets acquired and
liabilities assumed during the period ended March 31, 2019 (in
thousands):
|
|
|
Current assets
|
$
211
|
|
Inventory
|
1,264
|
|
Property, plant and
equipment
|
2,260
|
|
Trademarks and
trade name
|
1,876
|
|
Customer-related
intangible
|
5,629
|
|
Non-compete
intangible
|
956
|
|
Goodwill
|
4,353
|
|
Current
liabilities
|
(1,913
)
|
|
Notes
payable
|
(518
)
|
|
Net assets
acquired
|
$
14,118
|
The preliminary estimated fair value of intangible assets acquired
in the amount of $8,461,000 was determined through the use of a
third-party valuation firm using various income and cost approach
methodologies. Specifically, the intangibles identified in the
acquisition were trademarks and trade name, customer-related
intangible and non-compete agreement. The trademarks and trade
name, customer-related intangible and non-compete are being
amortized over their estimated useful life of 8 years, 7 years and
6 years, respectively. The straight-line method is being used and
is believed to approximate the time-line within which the economic
benefit of the underlying intangible asset will be
realized.
Goodwill of $4,353,000 was recognized as the excess purchase price
over the acquisition-date fair value of net assets acquired.
Goodwill is estimated to represent the synergistic values expected
to be realized from the combination of the two businesses. The
goodwill is expected to be deductible for tax
purposes.
The Contingent Consideration Warrants discussed above are subject
to vesting based upon the achievement of various sales milestones
and only if the sellers do not terminate their services. As
such, the warrants were considered equity-based compensation for
future services and not considered contingent consideration in the
calculation of the purchase price.
The costs related to the acquisition are included in legal and
accounting fees.
Revenues included in the consolidated statement of operations for
the three months ended March 31, 2019 were approximately
$67,000.
Note 5. Intangible Assets and Goodwill
Intangible Assets
Intangible assets are comprised of distributor organizations,
trademarks and tradenames, customer relationships and internally
developed software. The Company's acquired intangible
assets, which are subject to amortization over their estimated
useful lives, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
intangible asset may not be recoverable. An impairment loss is
recognized when the carrying amount of an intangible asset exceeds
its fair value.
Intangible assets consist of the following (in
thousands):
|
|
March 31, 2019
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Distributor
organizations
|
$
14,559
|
$
9,796
|
$
4,763
|
$
14,559
|
$
9,575
|
$
4,984
|
|
Trademarks
and trade names
|
9,963
|
2,033
|
7,930
|
7,337
|
1,781
|
5,556
|
|
Customer
relationships
|
16,028
|
5,895
|
10,133
|
10,398
|
5,723
|
4,675
|
|
Internally
developed software
|
720
|
583
|
137
|
720
|
558
|
162
|
|
Non-compete
agreement
|
956
|
-
|
956
|
-
|
-
|
-
|
|
Intangible
assets
|
$
42,226
|
$
18,307
|
$
23,919
|
$
33,014
|
$
17,637
|
$
15,377
|
Amortization expense related to intangible assets was approximately
$670,000 and $827,000 for the three months ended March 31, 2019 and
2018, respectively.
Trade names, which do not have legal, regulatory, contractual,
competitive, economic, or other factors that limit the useful lives
are considered indefinite lived assets and are not amortized but
are tested for impairment on an annual basis or whenever events or
changes in circumstances indicate that the carrying amount of these
assets may not be recoverable. As of March 31, 2019 and December
31, 2018, approximately $1,649,000 in trademarks from business
combinations have been identified as having indefinite
lives.
Goodwill
Goodwill is recorded as the excess, if any, of the aggregate fair
value of consideration exchanged for an acquired business over the
fair value (measured as of the acquisition date) of total net
tangible and identified intangible assets acquired. In accordance
with Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) Topic
350,
“Intangibles —
Goodwill and Other”,
goodwill and other intangible assets with
indefinite lives are not amortized but are tested for impairment on
an annual basis or whenever events or changes in circumstances
indicate that the carrying amount of these assets may not be
recoverable. The Company conducts annual reviews for goodwill and
indefinite-lived intangible assets in the fourth quarter or
whenever events or changes in circumstances indicate that the
carrying amounts of the assets may not be fully
recoverable.
The Company first assesses qualitative factors to determine whether
it is more likely than not (a likelihood of more than 50%) that
goodwill is impaired. After considering the totality of events and
circumstances, the Company determines whether it is more likely
than not that goodwill is not impaired. If impairment is
indicated, then the Company conducts the two-step impairment
testing process. The first step compares the Company’s fair
value to its net book value. If the fair value is less than the net
book value, the second step of the test compares the implied fair
value of the Company’s goodwill to its carrying amount. If
the carrying amount of goodwill exceeds its implied fair value, the
Company would recognize an impairment loss equal to that excess
amount. The testing is generally performed at the “reporting
unit” level. A reporting unit is the operating segment, or a
business one level below that operating segment (referred to as a
component) if discrete financial information is prepared and
regularly reviewed by management at the component level. The
Company has determined that its reporting units for goodwill
impairment testing are the Company’s reportable segments. As
such, the Company analyzes its goodwill balances separately for the
commercial coffee reporting unit, the direct selling reporting unit
and the commercial hemp reporting unit. The goodwill balance as of
March 31, 2019 and December 31, 2018 is approximately $10,677,000
and $6,323,000, respectively. There were no triggering events
indicating impairment of goodwill or intangible assets during the
three months ended March 31, 2019 and 2018.
Goodwill consists of the following (in thousands):
|
|
March 31,
2019
(unaudited)
|
|
|
Goodwill,
commercial coffee
|
$
3,314
|
$
3,314
|
|
Goodwill,
direct selling
|
3,009
|
3,009
|
|
Goodwill,
commercial hemp
|
4,353
|
-
|
|
Total
goodwill
|
$
10,676
|
$
6,323
|
Note 6. Notes Payable and Other Debt
Short-term Debt
On July 18, 2018, the Company entered into lending agreements (the
“Lending Agreements”) with three (3) separate entities
and received loans in the total amount of $1,907,000, net of loan
fees to be paid back over an eight-month period on a monthly
basis. Payments are comprised of principal and accrued interest
with an effective interest rate between 15% and 20%
.
The
Company’s outstanding balance related to the Lending
Agreements was approximately $504,000 as of December 31, 2018 and
was included in other current liabilities on the Company’s
balance sheet as of December 31, 2018. During the quarter ended
March 31, 2019 the loans were paid in their entirety and the
outstanding loan balance was zero.
Notes Payable
Promissory
Notes
On
March 18, 2019, the Company entered into a two-year Secured
Promissory Note (the “Note” or “Notes”)
with two (2) accredited investors that had a substantial
pre-existing relationship with the Company pursuant to which the
Company raised cash proceeds of $2,000,000. In consideration of the
Notes, the Company issued 20,000 shares of the Company’s
common stock par value $0.001 for each $1,000,000 invested as well
as for each $1,000,000 invested five-year warrants to purchase
20,000 shares of the Company’s common stock at a price per
share of $6.00.
The Notes pay interest
at a rate of eight percent (8%) per annum and interest is paid
quarterly in arrears with all principal and unpaid interest due at
maturity on March 18, 2021.
The Company recorded debt discounts of approximately $139,000
related to the fair value of warrants issued in the transaction and
$212,000 of transaction issuance costs to be amortized to interest
expense over the life of the Notes. As of March 31, 2019, the
remaining balance of the debt discounts is approximately $345,000.
The Company recorded approximately $5,000 amortization of the debt
discounts during the three months ended March 31, 2019 and is
recorded as interest expense.
Credit
Note
On
December 13, 2018, the Company’s wholly owned subsidiary,
CLR, entered into a Credit Agreement with Mr. Carl Grover pursuant
to which CLR borrowed $5,000,000 from Mr. Grover and in exchange
issued to him a $5,000,000 Credit Note (the “Credit
Note”) secured by its green coffee inventory under a Security
Agreement, dated December 13, 2018, with Mr. Grover and CLR’s
subsidiary, Siles
.
In
connection with the Credit Agreement, the Company issued to Mr.
Grover a four-year warrant to purchase 250,000 shares of its common
stock, exercisable at $6.82 per share (“Warrant 1”),
and a four-year warrant to purchase 250,000 shares of its common
stock, exercisable at $7.82 per share (“Warrant 2”),
pursuant to a Warrant Purchase Agreement, dated December 13, 2018,
with Mr. Grover. The Company also entered into an Advisory
Agreement with Ascendant Alternative Strategies, LLC
(“Ascendant”), a third party not affiliated with Mr.
Grover, in connection with the Credit Agreement, pursuant to which
it agreed to pay to Ascendant a 3% fee on the transaction with Mr.
Grover and issued to Ascendant (or it’s designees) a
four-year warrant to purchase 50,000 shares of its common stock,
exercisable at $6.33 per share.
Upon the occurrence of an event of default, the unpaid balance of
the principal amount of this Credit Note together with all accrued
but unpaid interest, may become, or may be declared to be, due and
payable in the manner, upon the conditions and with the effect
provided in the Credit Agreement. The Company determined that the
contingent call (put) option meets the definition of a derivative
(i.e., has an underlying, a notional amount, requires no initial
investment, and can be net settled). Therefore, it must be
separately measured at fair value with changes in fair value
impacting current earnings.
Management has assessed the probability of a trigger event (i.e.,
the occurrence of an event of default, such amounts are declared
due and payable or made automatically due and payable, in each
case, in accordance with the terms of this Note) to be de minimis
during the term of the Credit Note. As such, the fair value of the
contingent put feature would have a de minimis value (i.e., there
is no need to separately measure the contingent put feature, as
assigning a probability of zero percent or near zero percent to the
occurrence of an event of default would result in de minimis fair
value for the feature). Management will reassess the probability of
a trigger event at each reporting period during the term of the
Credit Note. As of March 31, 2019, 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 March 31,
2019, the remaining balance of the debt discounts is approximately
$1,460,000. The Company recorded approximately $154,000
amortization of the debt discounts during the three months ended
March 31, 2019 and is recorded as interest expense.
2400 Boswell Mortgage
In March 2013, the Company acquired 2400 Boswell for approximately
$4,600,000. 2400 Boswell is the owner and lessor of the building
occupied by the Company for its corporate office and warehouse in
Chula Vista, California. The purchase was from an immediate family
member of our Chief Executive Officer and consisted of
approximately $248,000 in cash, $334,000 of debt forgiveness and
accrued interest, and a promissory note of approximately $393,000,
payable in equal payments over 5 years with interest at
5.0%. Additionally, the Company assumed a long-term
mortgage of $3,625,000, payable over 25 years with an initial
interest rate of 5.75%. The interest rate is the prime rate plus
2.5%. As of March 31, 2019, the interest rate was 7.75%. The lender
will adjust the interest rate on the first calendar day of each
change period. The Company and its Chief Executive Officer are both
co-guarantors of the mortgage. As of March 31, 2019, the balance on
the long-term mortgage is approximately $3,198,000 and the balance
on the promissory note is zero.
M2C Purchase Agreement
In March 2007, the Company entered into an agreement to purchase
certain assets of M2C Global, Inc., a Nevada corporation, for
$4,500,000. The agreement required payments totaling
$500,000 in three installments during 2007, followed by monthly
payments in the amount of 10% of the sales related to the acquired
assets until the entire note balance is paid. As of March 31,
2019 and December 31, 2018, the carrying value of the liability was
approximately $1,061,000 and $1,071,000, respectively. The
interest associated with the note for the three months ended March
31, 2019 and 2018 was minimal.
Khrysos Mortgage Notes
In conjunction with the Company’s acquisition of Khrysos, the
Company assumed one interest only mortgage in the amounts of
$350,000 (due in September 2021) that bears an interest rate of 8%
and a second mortgage of approximately $177,000 (due in June 2023)
that bears an interest rate of 7% per annum. Both properties are
located in Florida. As of March 31, 2019, the remaining mortgage
balances are approximately $527,000.
In February 2019, Khrysos purchased a 45-acre tract of land in
Groveland, Florida, in central Florida for $750,000, which Khrysos
intends to build a R&D facility, greenhouse and allocate a
portion for farming. Khrysos paid approximately $303,000 down and
assumed a mortgage of $450,000. The entire balance is due in
February 2024 and bears interest at 6% per annum. As of March 31,
2019, the remaining mortgage balance is $450,000.
Other
Notes
The Company’s other notes relate to loans for commercial vans
at CLR in the amount of $90,000 as of March 31, 2019 which expire
at various dates through 2023.
Line of Credit - Loan and Security Agreement
CLR had a factoring agreement (“Factoring Agreement”)
with Crestmark Bank (“Crestmark”) related to accounts
receivable resulting from sales of certain CLR products. On
November 16, 2017, CLR entered into a new Loan and Security
Agreement (“Agreement”) with Crestmark which amended
and restated the original Factoring Agreement dated February 12,
2010 with Crestmark and subsequent agreement amendments thereto.
CLR is provided with a line of credit related to accounts
receivables resulting from sales of certain products that includes
borrowings to be advanced against acceptable eligible inventory
related to CLR. Effective December 29, 2017, CLR entered into a
First Amendment to the Agreement, to include an increase in the
maximum overall borrowing to $6,250,000. The loan amount may not
exceed an amount which is the lesser of (a) $6,250,000 or (b) the
sum of up (i) to 85% of the value of the eligible accounts; plus,
(ii) the lesser of $1,000,000 or 50% of eligible inventory or 50%
of (i) above, plus (iii) the lesser of $250,000 or eligible
inventory or 75% of certain specific inventory identified within
the Agreement.
The Agreement contains certain financial and nonfinancial covenants
with which the Company must comply to maintain its borrowing
availability and avoid penalties.
The outstanding principal balance of the Agreement will bear
interest based upon a year of 360 days with interest being charged
for each day the principal amount is outstanding including the date
of actual payment. The interest rate is a rate equal to the prime
rate plus 2.50% with a floor of 6.75%. As of March 31, 2019,
the interest rate was 8.0%. In addition, other fees are incurred
for the maintenance of the loan in accordance with the Agreement.
Other fees may be incurred in the event the minimum loan balance of
$2,000,000 is not maintained. The Agreement is effective until
November 16, 2020.
The Company and the Company’s CEO, Stephan Wallach, have
entered into a Corporate Guaranty and Personal Guaranty,
respectively, with Crestmark guaranteeing payments in the event
that the Company’s commercial coffee segment CLR were to
default. In addition, the Company’s President and Chief
Financial Officer, David Briskie, personally entered into a
Guaranty of Validity representing the Company’s financial
statements so long as the indebtedness is owing to Crestmark,
maintaining certain covenants and guarantees.
The Company’s outstanding line of credit liability related to
the Agreement was approximately $2,432,000 as of March 31, 2019 and
$2,256,000 as of December 31, 2018.
Contingent Acquisition Debt
The Company has contingent acquisition debt associated with its
business combinations. The Company accounts for business
combinations under the acquisition method and allocates the total
purchase price for acquired businesses to the tangible and
identified intangible assets acquired and liabilities assumed,
based on their estimated fair values as of the acquisition date. A
liability for contingent consideration, if applicable, is recorded
at fair value as of the acquisition date and evaluated each period
for changes in the fair value and adjusted as appropriate. (See
Note 9 below.)
The Company’s contingent acquisition debt as of March 31,
2019 and December 31, 2018 is $8,133,000 and $8,261,000,
respectively, and is attributable to debt associated with the
Company’s direct selling segment.
Note 7. Convertible Notes Payable
Total convertible notes payable as of March 31, 2019 and December
31, 2018, net of debt discount outstanding consisted of the amount
set forth in the following table (in thousands):
|
|
March 31,
2019
(unaudited)
|
|
|
8%
Convertible Notes due July and August 2019 (2014 Notes),
principal
|
$
750
|
$
750
|
|
Debt
discounts
|
(69
)
|
(103
)
|
|
Carrying
value of 2014 Notes
|
681
|
647
|
|
|
|
|
|
6%
Convertible Notes due February and March 2021 (2019 PIPE Notes),
principal
|
2,400
|
-
|
|
Debt
discounts
|
(459
)
|
-
|
|
Carrying
value of 2019 PIPE Notes
|
1,941
|
-
|
|
|
|
|
|
Total
carrying value of convertible notes payable
|
$
2,622
|
$
647
|
July 2014 Private Placement
Between July 31, 2014 and September 10, 2014 the Company entered
into Note Purchase Agreements (the “Note” or
“Notes”) related to its private placement offering
(“2014 Private Placement”) with seven accredited
investors pursuant to which the Company raised aggregate gross
proceeds of $4,750,000 and sold units consisting of five (5) year
senior secured convertible Notes in the aggregate principal amount
of $4,750,000 that are convertible into 678,568 shares of our
common stock, at a conversion price of $7.00 per share, and
warrants to purchase 929,346 shares of common stock at an exercise
price of $4.60 per share. The Notes bear interest at a rate of
eight percent (8%) per annum and interest is paid quarterly in
arrears with all principal and unpaid interest due between July and
September 2019
The Company has the right to prepay the Notes at any time after the
one-year anniversary date of the issuance of the Notes at a rate
equal to 110% of the then outstanding principal balance and any
unpaid accrued interest. The Notes are secured by Company pledged
assets and rank senior to all debt of the Company other than
certain senior debt that has been previously identified as senior
to the convertible notes.
Additionally, Stephan Wallach, the Company’s
Chief Executive Officer, has also personally guaranteed the
repayment of the Notes, subject to the terms of a Guaranty
Agreement executed by him with the investors. In
addition, Mr. Wallach has agreed not to sell, transfer or pledge
1.5 million shares of the common stock that he owns so long as his
personal guaranty is in effect.
On October 23, 2018, the Company entered into an agreement with
Carl Grover to exchange (the “Debt Exchange”), subject
to stockholder approval which was received on December 6, 2018, all
amounts owed under the 2014 Note held by him in the principal
amount of $4,000,000 which matures on July 30, 2019, for 747,664
shares of the Company’s common stock, at a conversion price
of $5.35 per share and a four-year warrant to purchase 631,579
shares of common stock at an exercise price of $4.75 per
share.
Upon the closing t
he Company
issued Ascendant
Alternative Strategies, LLC, a FINRA broker dealer (or its
designees), which acted as the Company’s advisor in
connection with a Debt Exchange transaction, 30,000 shares of
common stock in accordance with an advisory agreement and four-year
warrants to purchase 80,000 shares of common stock at an exercise
price of $5.35 per share and four-year warrants to purchase 70,000
shares of common stock at an exercise price of $4.75 per
share.
The Company considered the guidance of ASC 470-20,
Debt:
Debt with Conversion and Other
Options
and ASC 470-60,
Debt:
Debt Troubled Debt
Restructuring by Debtors
and concluded that the 2014 Note held by Mr.
Grover should be recognized as a debt modification for an induced
conversion of convertible debt under the guidance of ASC 470-20.
The Company recognized all remaining unamortized discounts of
approximately $679,000 immediately subsequent to October 23, 2018
as interest expense, and the fair value of the warrants and
additional shares issued as discussed above were recorded as a loss
on the Debt Exchange in the amount of $4,706,000 during the year
ended December 31, 2018 with the corresponding entry recorded to
equity.
In 2014, the Company initially recorded debt discounts of
$4,750,000 related to the beneficial conversion feature and related
detachable warrants. The beneficial conversion feature discount and
the detachable warrants discount are amortized to interest expense
over the life of the Notes. The unamortized debt discounts
recognized with the Debt Exchange was approximately $679,000. As of
March 31, 2019 and December 31, 2018 the remaining balance of the
debt discounts is approximately $63,000 and $94,000, respectively.
The Company recorded approximately $31,000 and $238,000
amortization of the debt discounts during the three months ended
March 31, 2019 and 2018, and is recorded as interest
expense.
With respect to the 2014 Private Placement, the Company paid
approximately $490,000 in expenses including placement
agent fees. The issuance costs are amortized to interest
expense over the term of the Notes. The unamortized issuance costs
recognized with the Debt Exchange was approximately $63,000. As of
March 31, 2019 and December 31, 2018 the remaining balance of the
issuance costs is approximately $6,000 and $10,000, respectively.
The Company recorded approximately $3,000 and $25,000 of the debt
discounts amortization during the three months ended March 31, 2019
and 2018, respectively, and is recorded as interest
expense.
As of March 31, 2019 and December 31, 2018 the principal amount of
$750,000 remains outstanding.
Unamortized debt discounts and issuance costs are included with
convertible notes payable, net of debt discount on the condensed
consolidated balance sheets.
January 2019 Private Placement
On
February 15, 2019 and on March 10, 2019, the Company closed its
first and second tranches of its 2019 January Private Placement
debt offering, respectively, pursuant to which the Company offered
for sale a minimum of notes in the principal amount of a minimum of
$100,000 and a maximum of notes in the principal amount $10,000,000
(the “2019 PIPE Notes”), with each investor receiving
2,000 shares of common stock for each $100,000 invested. The
Company entered into subscription agreements with thirteen (13)
accredited investors that had a substantial pre-existing
relationship with the Company pursuant to which the Company
received aggregate gross proceeds of $2,440,000 and issued 2019
PIPE Notes in the aggregate principal amount of $2,440,000 and an
aggregate of 48,800 shares of common stock. The placement agent
will receive up to 50,000 shares of common stock in the offering.
Each 2019 PIPE Note matures 24 months after issuance, bears
interest at a rate of six percent (6%) per annum, and the
outstanding principal is convertible into shares of common stock at
any time after the 180th day anniversary of the issuance of the
2019 PIPE Note, at a conversion price of $10 per share (subject to
adjustment for stock splits, stock dividends and reclassification
of the common stock).
Upon issuance of the 2019 PIPE Notes, the Company recognized debt
discounts of approximately $467,000, resulting from the allocated
portion of offering proceeds to the separable common stock
issuance. The debt discount is being amortized to interest expense
over the term of the 2019 PIPE Notes.
During the three
months ended March 31, 2019 the Company recorded approximately
$7,000 of amortization related to the debt
discounts.
Note 8. Derivative Liability
The Company recognizes and measures the warrants issued in
conjunction with the Company’s August 2018, July 2017,
November 2015 and July 2014 Private Placements in accordance with
ASC Topic 815,
Derivatives and
Hedging
. The accounting
guidance sets forth a two-step model to be applied in determining
whether a financial instrument is indexed to an entity’s own
stock, which would qualify such financial instruments for a scope
exception. This scope exception specifies that a contract that
would otherwise meet the definition of a derivative financial
instrument would not be considered as such if the contract is both
(i) indexed to the entity’s own stock and
(ii) classified in the stockholders’ equity section of
the entity’s balance sheet. The Company determined
that certain warrants and embedded conversion features issued in
the Company’s private placements are ineligible for equity
classification due to anti-dilution provisions set forth
therein.
Derivative liabilities are recorded at their estimated fair value
(see Note 9, below) at the issuance date and are revalued at each
subsequent reporting date. The Company will continue to revalue the
derivative liability on each subsequent balance sheet date until
the securities to which the derivative liabilities relate are
exercised or expire.
Various factors are considered in the pricing models the Company
uses to value the derivative liabilities, including its current
stock price, the remaining life, the volatility of its stock price,
and the risk-free interest rate. Future changes in these factors
may have a significant impact on the computed fair value of the
liability. As such, the Company expects future changes in the fair
values to continue and may vary significantly from period to
period. The warrant and embedded liability and revaluations
have not had a cash impact on working capital, liquidity or
business operations.
Warrants
Effective January 1, 2019, the Company adopted ASU No. 2017-11 (see
above,
Recently Adopted Accounting
Pronouncements
).
The new guidance requires companies to exclude any
down round feature when determining whether a freestanding
equity-linked financial instrument (or embedded conversion option)
is considered indexed to the entity’s own stock when applying
the classification guidance in ASC 815-40. Upon adoption of the new
guidance, existing equity-linked financial instruments (or embedded
conversion options) with down round features must be reassessed as
liability classification may no longer be required. As a result,
the Company determined in regard to its 2018 warrants the
appropriate treatment of these warrants that were initially
classified as derivative liabilities should now be classified as
equity instruments.
The Company determined that the liability associated with the 2018
warrants should be remeasured and adjusted to fair value on the
date of the change in classification with the offset to be recorded
through earnings and then the fair value of the warrants should be
reclassified to equity. The Company recorded the change in the
fair value of the 2018 warrants as of the date of change in
classification to earnings. The fair value of the 2018 warrants as
of the date of change in classification, in the amount of
$1,494,000 was reclassified from warrant derivative liability to
additional paid in capital as a result of the change in
classification of the warrants.
Increases or decreases in the fair value of the derivative
liability are included as a component of total other expense in the
accompanying condensed consolidated statements of operations for
the respective period. The changes to the derivative liability for
warrants resulted in
a decrease of $1,486,000
and a decrease of $712,000 for the three months
ended March 31, 2019 and 2018, respectively.
The estimated fair value of the outstanding warrant liabilities is
$5,369,000 and $9,216,000 as of March 31, 2019 and December 31,
2018, respectively.
The estimated fair value of the warrants was computed as of March
31, 2019 and December 31, 2018 using the Monte Carlo option pricing
model with the following assumptions:
|
|
March 31,
2019
(unaudited)
|
|
|
Stock price volatility
|
97.2% - 111.5%
|
83.78% - 136.76%
|
|
Risk-free interest rates
|
2.33% - 2.42%
|
2.465% - 2.577%
|
|
Annual dividend yield
|
0%
|
0%
|
|
Expected life
|
0.33 -
1.54 years
|
0.58 - 2.76 years
|
In addition, management assessed the probabilities of future
financing assumptions in the valuation models.
Note 9. Fair Value of Financial
Instruments
Fair value measurements are performed in accordance with the
guidance provided by ASC Topic 820,
“Fair Value Measurements
and Disclosures.”
ASC Topic 820 defines fair value as the price that
would be received from selling an asset or paid to transfer a
liability in an orderly transaction between market participants at
the measurement date. Where available, fair value is based on
observable market prices or parameters or derived from such prices
or parameters. Where observable prices or parameters are not
available, valuation models are applied.
ASC Topic 820 establishes a fair value hierarchy that requires an
entity to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. Assets and
liabilities recorded at fair value in the financial statements are
categorized based upon the hierarchy of levels of judgment
associated with the inputs used to measure their fair value.
Hierarchical levels directly related to the amount of subjectivity
associated with the inputs to fair valuation of these assets and
liabilities, are as follows:
Level 1 – Quoted prices in active markets for identical
assets or liabilities that an entity has the ability to
access.
Level 2 – Observable inputs other than quoted prices included
in Level 1, such as quoted prices for similar assets and
liabilities in active markets; quoted prices for identical or
similar assets and liabilities in markets that are not active; or
other inputs that are observable or can be corroborated by
observable market data.
Level 3 – Unobservable inputs that are supportable by little
or no market activity and that are significant to the fair value of
the asset or liability.
The carrying amounts of the Company’s financial instruments,
including cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities, capital lease obligations and
deferred revenue approximate their fair values based on their
short-term nature. The carrying amount of the Company’s
long-term notes payable approximates its fair value based on
interest rates available to the Company for similar debt
instruments and similar remaining maturities.
The estimated fair value of the contingent consideration related to
the Company's business combinations is recorded using significant
unobservable measures and other fair value inputs and is therefore
classified as a Level 3 financial instrument.
The following table details the fair value measurement within the
fair value hierarchy of the Company’s financial instruments,
which includes the Level 3 liabilities (in thousands):
|
|
Fair Value at March 31, 2019
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Contingent
acquisition debt, current portion
|
$
792
|
$
-
|
$
-
|
$
792
|
|
Contingent
acquisition debt, less current portion
|
7,341
|
-
|
-
|
7,341
|
Warrant
derivative liability
|
5,369
|
-
|
-
|
5,369
|
|
|
$
13,502
|
$
-
|
$
-
|
$
13,502
|
|
|
Fair Value at December 31,2018
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Contingent
acquisition debt, current portion
|
$
795
|
$
-
|
$
-
|
$
795
|
|
Contingent
acquisition debt, less current portion
|
7,466
|
-
|
-
|
7,466
|
Warrant
derivative liability
|
9,216
|
-
|
-
|
9,216
|
|
|
$
17,477
|
$
-
|
$
-
|
$
17,477
|
The following table reflects the activity for the Company’s
warrant derivative liability associated with the Company’s
2019, 2018, 2017, 2015 and 2014 Private Placements measured at fair
value using Level 3 inputs (in thousands):
|
|
Warrant Derivative Liability
|
|
Balance
at December 31, 2018
|
$
9,216
|
|
Issuance
|
-
|
|
Adjustments
to estimated fair value
|
(1,486
)
|
|
Adjustments
related to warrant exercises
|
(867
)
|
|
Adjustments
related to the reclassification of warrants to equity
|
(1,494
)
|
|
Balance
at March 31, 2019
|
$
5,369
|
The following table reflects the activity for the Company’s
contingent acquisition liabilities measured at fair value using
Level 3 inputs (in thousands):
|
|
|
|
Balance
at December 31, 2018
|
$
8,261
|
|
Liabilities
acquired
|
-
|
|
Liabilities
settled
|
(128
)
|
|
Adjustments
to liabilities included in earnings
|
-
|
|
Adjustment
to purchase price
|
-
|
|
Balance
at March 31, 2019
|
$
8,133
|
The fair value of the contingent acquisition liabilities is
evaluated each reporting period using projected revenues, discount
rates, and projected timing of revenues. Projected contingent
payment amounts are discounted back to the current period using a
discount rate. Projected revenues are based on the Company’s
most recent internal operational budgets and long-range strategic
plans. Increases in projected revenues will result in higher fair
value measurements. Increases in discount rates and the time to
payment will result in lower fair value measurements. Increases
(decreases) in any of those inputs in isolation may result in a
significantly lower (higher) fair value measurement. During the
three months ended March 31, 2018, the net adjustment to the fair
value of the contingent acquisition debt was a decrease $213,000
and is included in the Company’s statements of operations in
general and administrative expense. The Company did not
have any adjustments to the fair value of the contingent
acquisition debt during the three months ended March 31,
2019.
Note
10. Stockholders’ Equity
The Company’s Certificate of Incorporation, as amended,
authorizes the issuance of two classes of stock to be designated;
“Common Stock” and “Preferred
Stock”.
The
total number of shares of stock which the Company has authority to
issue is 50,000,000 shares of common stock, par value $0.001 per
share and 5,000,000 shares of preferred stock, par value $0.001 per
share, of which 161,135 shares have been designated as Series A
convertible preferred stock, par value $0.001 per share
(“Series A Convertible Preferred”), 1,052,631 has been
designated as Series B convertible preferred stock (“Series B
Convertible Preferred”), and 700,000 has been designated
as Series C convertible preferred stock (“Series C
Convertible Preferred”).
Common Stock
As of March 31, 2019 and December 31, 2018 there were 28,890,671
and 25,760,708 shares of common stock outstanding,
respectively.
The holders of the common stock are
entitled to one vote for each share held at all meetings of
stockholders (and written actions in lieu of
meetings).
Stock Offering
On
February 6, 2019, the Company entered into a Securities Purchase
Agreement (the “Purchase Agreement”) with one
accredited investor that had a substantial pre-existing
relationship with the Company pursuant to which the Company sold
250,000 shares of common stock, par value $0.001 per share, at an
offering price of $7.00 per share. Pursuant to the Purchase
Agreement, the Company also issued to the investor a three-year
warrant to purchase 250,000 shares of common stock at an exercise
price of $7.00. The proceeds were $1,750,000. Consulting fees for
arranging the Purchase Agreement include the issuance of 5,000
shares of restricted shares of the Company’s common stock,
par value $0.001 per share, and 100,000 3-year warrants priced at
$10.00. No cash commissions were paid.
On
February 15, 2019 and on March 10, 2019, the Company closed its
first and second tranches of its 2019 January Private Placement
debt offering, respectively, pursuant to which the Company offered
for sale a minimum of notes in the principal amount of a minimum of
$100,000 and a maximum of notes in the principal amount $10,000,000
(the “2019 PIPE Notes”), with each investor receiving
2,000 shares of common stock for each $100,000 invested. The
Company entered into subscription agreements with thirteen (13)
accredited investors that had a substantial pre-existing
relationship with the Company pursuant to which the Company
received aggregate gross proceeds of $2,440,000 and issued 2019
PIPE Notes in the aggregate principal amount of $2,440,000 and an
aggregate of 48,800 shares of common stock. The placement agent
will receive up to 50,000 shares of common stock in the offering.
Each 2019 PIPE Note matures 24 months after issuance, bears
interest at a rate of six percent (6%) per annum, and the
outstanding principal is convertible into shares of common stock at
any time after the 180th day anniversary of the issuance of the
2019 PIPE Note, at a conversion price of $10 per share (subject to
adjustment for stock splits, stock dividends and reclassification
of the common stock).
On
March 18, 2019, the Company entered into a two-year Secured
Promissory Note (the “Note or Notes”) with two
accredited investors that the Company had a substantial
pre-existing relationship with and from whom the Company raised
cash proceeds in the aggregate of $2,000,000. In consideration of
the Notes, the Company issued 20,000 shares of common stock par
value $0.001 for each $1,000,000 invested as well as for each
$1,000,000 invested five-year warrants to purchase 20,000 shares of
common stock at a price per share of $6.00.
The Notes pay interest at a rate of eight percent
(8%) per annum and interest is paid quarterly in arrears with all
principal and unpaid interest due at maturity on March 18, 2021.
The Company issued 40,000 shares of common stock and 40,000
warrants with the Notes.
Issuance of additional common shares and repricing of warrants
related to 2018 Private Placement
On
March 13, 2019, the Company determined that three of the investors
of the Company’s August 2018 Private Placement became
eligible to receive additional shares of the Company’s common
stock as it was referred to in their respective Purchase Agreement
as True-up Shares. Total number of additional shares issued to
those three investors is 44,599 shares of restricted shares of the
Company’s common stock, par value $0.001. In addition, the
exercise price of the warrants issued at their respective closings
is reset pursuant to the terms of the warrants to exercise prices
ranging from $4.06 to $4.44 from the exercise price at issuance of
$4.75.
Convertible Preferred Stock
Series A Convertible Preferred Stock
The Company has 161,135 shares of Series A Convertible Preferred
Stock outstanding as of March 31, 2019, and December 31, 2018 and
accrued dividends of approximately $140,000 and $137,000,
respectively. The holders of the Series A Convertible Preferred
Stock are entitled to receive a cumulative dividend at a rate of
8.0% per year, payable annually either in cash or shares of the
Company's common stock at the Company's election. Each share of
Series A Convertible Preferred is convertible into common stock at
a conversion rate of 0.10. The holders of Series A Convertible
Preferred are entitled to receive payments upon liquidation,
dissolution or winding up of the Company before any amount is paid
to the holders of common stock. The holders of Series A Convertible
Preferred have no voting rights, except as required by
law.
Series B Convertible Preferred Stock
On March 30, 2018, the Company completed the Series B Offering,
pursuant to which the Company sold 381,173 shares of Series B
Convertible Preferred Stock at an offering price of $9.50 per share
and received gross proceeds in aggregate of approximately
$3,621,000. The net proceeds to the Company from the Series B
Offering were approximately $3,289,000 after deducting commissions,
closing and issuance costs. Each share of Series B Convertible
Preferred Stock is initially convertible at any time, in whole or
in part, at the option of the holders, at an initial conversion
price of $4.75 per share, into two (2) shares of common stock and
automatically converts into two (2) shares of common stock on its
two-year anniversary of issuance.
The Company has 129,437 shares of Series B Convertible Preferred
Stock outstanding as of March 31, 2019 and December 31, 2018. The
holders of the Series B Convertible Preferred Stock are entitled to
receive cumulative dividends on the Series B Convertible Preferred
Stock from the date of original issue at a rate of 5.0% per
annum payable quarterly in arrears on or about the last day of
March, June, September and December of each year, beginning June
30, 2018. As of March 31, 2019 and December 31, 2018 accrued
dividends were approximately $11,000 and $11,000,
respectively.
The shares of Series B Convertible Preferred Stock issued in the
Series B Offering were sold pursuant to the Company’s
Registration Statement, which was declared effective on February
13, 2018. Upon the receipt of the proceeds of the Series B
Offering, the 2017 Notes in the principal amount of approximately
$7,254,000 automatically converted into 1,577,033 shares
of common stock. The holders of Series B Convertible Preferred
are entitled to receive a distribution, to be paid in an amount
equal to $9.50 for each and every share of Series B Preferred Stock
held by the holders of Series B Preferred Stock, plus all accrued
and unpaid dividends in preference to any distribution or payments
made or any asset distributed to the holders of common stock, the
Series A Preferred Stock, or any other class or series of stock
ranking junior to the Series B Preferred Stock. Holders of the
Series B Convertible Preferred Stock have no voting rights, except
as required by law.
Series C Preferred Stock
Between August 17, 2018 and October 4, 2018, the Company closed
three tranches of its Series C Offering, pursuant to which the
Company sold 697,363 shares of Series C Convertible Preferred Stock
at an offering price of $9.50 per share and agreed to issue
two-year warrants (the “Preferred Warrants”) to
purchase up to 1,394,726 shares of the Company’s common stock
at an exercise price of $4.75 per share to Series C Preferred
holders that voluntarily convert their shares of Series C Preferred
to the Company’s common stock within two-years from the
issuance date. Each share of Series C Convertible Preferred
Stock is initially convertible at any time, in whole or in part, at
the option of the holders, at an initial conversion price of $4.75
per share, into two (2) shares of common stock and automatically
converts into two (2) shares of common stock on its two-year
anniversary of issuance.
The Company issued the placement agent in connection with the
Series C Offering 116,867 warrants as compensation, exercisable at
$4.75 per share and expire in December 2020. The Company determined
that the warrants should be classified as equity instruments and
used Black-Scholes to estimate the fair value of the warrants
issued to the placement agent of $458,000 as of the issuance date
December 19, 2018. As of December 31, 2018, the 116,867 warrants
issued to the placement agent remain outstanding.
The Company received aggregate gross proceeds totaling
approximately $6,625,000. The net proceeds to the Company from the
Series C Offering were approximately $6,236,000 after deducting
commissions, closing and issuance costs.
Upon liquidation, dissolution or winding up of the Company, each
holder of Series C Preferred Stock was entitled to receive a
distribution, to be paid in an amount equal to $9.50 for each and
every share of Series C Preferred Stock held by the holders of
Series C Preferred Stock, plus all accrued and unpaid dividends in
preference to any distribution or payments made or any asset
distributed to the holders of common stock, the Series A Preferred
Stock, the Series B Preferred Stock or any other class or series of
stock ranking junior to the Series C Preferred Stock.
The shares of Series C Convertible Preferred Stock issued in the
Series C Offering were sold pursuant to the Company’s
Registration Statement, which was declared effective with the SEC
on December 10, 2018.
Pursuant to the Certificate of Designation, the Company agreed to
pay cumulative dividends on the Series C Convertible Preferred
Stock from the date of original issue at a rate of 6.0% per
annum payable quarterly in arrears on or about the last day of
March, June, September and December of each year, beginning
September 30, 2018. In 2018 a total of approximately $51,000 of
dividends was paid to the holders of the Series C Convertible
Preferred Stock. The Series C Convertible Preferred Stock ranks
senior to the Company’s outstanding Series A Convertible
Preferred Stock, Series B Convertible Preferred Stock and the
common stock with respect to dividend rights and rights upon
liquidation, dissolution or winding up. Holders of the Series C
Convertible Preferred Stock have no voting rights.
The contingent obligation to issue warrants is considered an
outstanding equity-linked financial instrument and was therefore
recognized as equity classified warrants, initially measured at
relative fair value of approximately $3,727,000, resulting in an
initial discount to the carrying value of the Series C Preferred
Stock.
Due to the reduction of allocated proceeds to the contingently
issuable common stock warrants and Series C Preferred Stock, the
effective conversion price of the Series C Preferred Stock was less
than the Company’s common stock price on each commitment
date, resulting in an aggregate beneficial conversion feature of
approximately $3,276,000, which reduced the carrying value of the
Series C Preferred Stock. Since the conversion option of the Series
C Preferred Stock was immediately exercisable, the beneficial
conversion feature was immediately accreted as a deemed dividend,
resulting in an increase in the carrying value of the C Preferred
Stock of approximately $3,276,000.
The Series C Preferred Stock was automatically redeemable at a
price equal to its original purchase price plus all accrued but
unpaid dividends in the event the average of the daily volume
weighted average price of the Company’s common stock for the
30 days preceding the two-year anniversary date of issuance is less
than $6.00 per share. As redemption was outside of the
Company’s control, the Series C Preferred Stock was
classified in temporary equity at issuance. All of the Series C
Preferred shares were converted to common stock during 2018 and the
Company has issued 1,394,726 warrants. As of March 31, 2019, no
shares of Series C Convertible Preferred Stock remain
outstanding.
Repurchase of Common Stock
On December 11, 2012, the Company authorized a share repurchase
program to repurchase up to 750,000 of the Company's issued and
outstanding shares of common stock from time to time on the open
market or via private transactions through block
trades. A total of 196,594 shares have been repurchased
to-date as of March 31, 2019 at a weighted-average cost of $5.30
per share. There were no repurchases during the three months ended
March 31, 2019 and 2018. The remaining number of shares authorized
for repurchase under the plan as of March 31, 2019 is
553,406.
Advisory Agreements
The
Company records the fair value of common stock issued in
conjunction with advisory service agreements based on the closing
stock price of the Company’s common stock on the measurement
date. The fair value of the stock issued is recorded through equity
and prepaid advisory fees and amortized over the life of the
service agreement.
ProActive Capital
Resources Group, LLC
On September 1, 2015, the Company entered into an agreement
with
ProActive
Capital
Resources
Group, LLC
(“PCG”), pursuant to which PCG
agreed to provide investor relations services for six (6) months in
exchange for fees paid in cash of $6,000 per month and 5,000 shares
of restricted common stock to be issued upon successfully meeting
certain criteria in accordance with the agreement. Subsequent
to the September 1, 2015 initial agreement, the agreement was
extended through August 2018 under six-month incremental service
agreements under the same terms with the monthly cash payments of
$6,000 per month and 5,000 shares of restricted common stock for
every six (6) months of service performed.
The stock issuance expense
associated with the amortization of advisory fees is recorded as
stock issuance expense and is included in general and
administrative expense on the Company’s condensed
consolidated statements of operations for the three months ended
March 31, 2018 is approximately $13,000. The Company did not
further extend this agreement subsequent to August
2018.
Ignition Capital, LLC
On April 1, 2018, the Company entered into an agreement
with
Ignition Capital,
LLC
(“Ignition”), pursuant to which
Ignition agreed to provide investor relations services for a period
of twenty-one (21) months in exchange for 50,000 shares of
restricted common stock which were issued in advance of the service
period. The fair value of the shares issued is recorded as
prepaid advisory fees and is included in prepaid expenses and other
current assets on the Company’s condensed consolidated
balance sheets and is amortized on a pro-rata basis over the term
of the agreement. During the three months ended March 31,
2019, the Company recorded expense of
approximately
$30,000
in connection with amortization of the stock
issuance. The stock issuance expense associated with the
amortization of advisory fees is recorded as stock issuance expense
and is included in general and administrative expense on the
Company’s condensed consolidated statements of operations for
the three months ended March 31, 2019.
Greentree Financial Group, Inc.
On March 27, 2018, the Company entered into an agreement
with
Greentree Financial Group,
Inc.
(“Greentree”), pursuant to which
Greentree agreed to provide investor relations services for a
period of twenty-one (21) months in exchange for 75,000 shares of
restricted common stock which were issued in advance of the service
period. The fair value of the shares issued is approximately
$311,000 and is recorded as prepaid advisory fees and is included
in prepaid expenses and other current assets on the Company’s
condensed consolidated balance sheets and is amortized on a
pro-rata basis over the term of the agreement. During the
three months ended March 31, 2018, the Company recorded
expense of approximately
$44,000
in connection with amortization of the stock
issuance. The stock issuance expense associated with the
amortization of advisory fees is recorded as stock issuance expense
and is included in general and administrative expense on the
Company’s condensed consolidated statements of operations for
the three months ended March 31, 2019.
Capital Market Solutions, LLC.
On
July 1, 2018, the Company entered into an agreement
with
Capital Market
Solutions, LLC.
(“Capital Market”),
pursuant to which Capital Market agreed to provide investor
relations services for a period of 18 months in exchange for
100,000 shares of restricted common stock which were issued in
advance of the service period. In addition, the Company agreed
to pay in cash a base fee of $300,000, payable as follows; $50,000
paid in August 2018, and the remaining balance shall be paid
monthly in the amount of $25,000 through January 1, 2019.
Subsequent to the initial agreement, the Company extended the term
for an additional 24 months through December 31, 2021 and agreed to
issue Capital Market an additional 100,000 shares of restricted
common stock which were issued in advance of the service period and
$125,000 of additional fees. On January 9, 2019, the Company
executed the second amendment to the agreement with Capital Market,
pursuant to which, the aggregate base fee increased to $525,000,
and the Company issued an additional 75,000 of restricted common
stock.
In addition, the
Company issued to Capital Market a four-year warrant to purchase
925,000 shares of the Company’s common stock at $6.00 per
share vesting 50% at issuance on January 9, 2019 and 25% on January
9, 2020 and 25% on January 9, 2021. The fair value of the vested
portion of the warrant is approximately $1,656,000 and is recorded
as equity on the Company’s balance sheet as of March 31, 2019
and equity issuance expense on the Company’s
condensed consolidated statement of operations for
the three months ended March 31,
2019.
The fair value of the common stock shares issued is recorded as
prepaid advisory fees and is included in prepaid expenses and other
current assets on the Company’s condensed consolidated
balance sheets and is amortized on a pro-rata basis over the term
of the agreement. During the three months ended March 31, 2019
and 2018, the Company recorded expense of
approximately
$129,000,
in connection with amortization of the stock issuance expense.
During the three months ended March 31, 2019, the
Company recorded expense of approximately
$50,000, in connection with the base fee.
The stock issuance expense associated with the amortization of
advisory fees is recorded as stock issuance expense and is included
in general and administrative expense on the Company’s
condensed consolidated statements of operations for the three
months ended March 31, 2019.
Warrants
As of March 31, 2019, warrants to purchase 6,943,874 shares
of the Company's common stock at prices ranging from
$2.00 to
$10.00
were outstanding. As of March 31,
2019, 6,539,187 warrants are exercisable and expire at various
dates through
March
2024
and have a weighted
average remaining term of approximately
2.23
years and are included in the table below as of
March 31, 2019.
The Company uses the Monte Carlo and Black-Scholes option-pricing
model to estimate the fair value of the
warrants.
Warrants – Securities Purchase Agreement
During the three months ended March 31, 2019, the Company issued
the selling agent in connection with the Securities Purchase
Agreement 100,000 warrants as compensation, exercisable at $10.00
per share and expire in February 2022. The Company used the
Black-Scholes option-pricing model (“Black-Scholes”) to
estimate the fair value of the warrants issued to the selling agent
of $324,000 as of March 30, 2019.
A summary of the warrant activity for the three months ended March
31, 2019 is presented in the following table:
|
|
|
|
Balance
at December 31, 2018
|
5,876,980
|
|
Issued
|
1,315,000
|
|
Expired
/ cancelled
|
-
|
|
Exercised
|
(248,106
)
|
|
Balance
at March 31, 2019, outstanding
|
6,943,874
|
|
Balance
at March 31, 2019, exercisable
|
6,539,187
|
Stock Options
On May 16, 2012, the Company established the 2012 Stock Option Plan
(“Plan”) authorizing the granting of options for up to
9,000,000 shares of common stock.
The purpose of the Plan is to promote the long-term growth and
profitability of the Company by (i) providing key people and
consultants with incentives to improve stockholder value and to
contribute to the growth and financial success of the Company and
(ii) enabling the Company to attract, retain and reward the best
available persons for positions of substantial responsibility. The
Plan allows for the grant of: (a) incentive stock options; (b)
nonqualified stock options; (c) stock appreciation rights; (d)
restricted stock; and (e) other stock-based and cash-based awards
to eligible individuals qualifying under Section 422 of the
Internal Revenue Code, in any combination (collectively,
“Options”). At March 31, 2019, the Company had
3,587,072
shares of common stock
available for issuance under the Plan.
A summary of the Plan stock option activity for the three months
ended March 31, 2019 is presented in the following
table:
|
|
|
Weighted
Average
Exercise Price
|
Weighted
Average
Remaining Contract Life (years)
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
Outstanding
December 31, 2018
|
2,394,379
|
$
4.45
|
6.94
|
$
3,049
|
|
Issued
|
2,540,000
|
6.66
|
|
|
|
Canceled /
expired
|
(37,275
)
|
5.00
|
|
|
|
Exercised
|
(60,530
)
|
4.46
|
|
-
|
|
Outstanding March
31, 2019
|
4,836,574
|
$
5.61
|
8.35
|
$
3,045
|
|
Exercisable March
31, 2019
|
3,723,870
|
$
5.96
|
8.23
|
$
1,617
|
The weighted-average fair value per share of the granted options
for the three months ended March 31, 2019 was approximately
$4.26.
There were no options granted
during the three months ended March 31, 2018
Stock-based compensation expense included in the condensed
consolidated statements of operations was
$11,248,000
and $122,000 for the three months
ended March 31, 2019 and 2018, respectively.
As of March 31, 2019, there was approximately
$2,132,000
of total unrecognized compensation
expense related to unvested stock options granted under the Plan.
The expense is expected to be recognized over a weighted-average
period of
1.75
years.
The Company uses the Black-Scholes to estimate the fair value of
stock options. The use of a valuation model requires the Company to
make certain assumptions with respect to selected model inputs.
Expected volatility is calculated based on the historical
volatility of the Company’s stock price over
the expected term of the option. The expected life is based on
the contractual life of the option and expected employee
exercise and post-vesting employment termination behavior. The
risk-free interest rate is based on U.S. Treasury zero-coupon
issues with a remaining term equal to the expected life assumed at
the date of the grant.
Restricted Stock Units
On August 9, 2017, the Company issued restricted stock units for an
aggregate of 500,000 shares of common stock, to its employees and
consultants. These shares of common stock will be issued upon
vesting of the restricted stock units. Full vesting occurs on the
sixth-year anniversary of the grant date, with 10% vesting on the
third-year, 15% on the fourth-year, 50% on the fifth-year and 25%
on the sixth-year anniversary of the vesting commencement date. As
of March 31, 2019, none of the restricted stock units have vested.
There were no grants during the three months ended March 31,
2019.
The fair value of each restricted stock unit issued to employees is
based on the closing stock price on the grant date of $4.53 and
restricted stock units issued to consultants are revalued as they
vest and is recognized as stock-based compensation expense over the
vesting term of the award.
|
|
|
|
Balance
at December 31, 2018
|
475,000
|
|
Issued
|
-
|
|
Canceled
|
-
|
|
Balance
at March 31, 2019
|
475,000
|
Stock-based compensation expense included in the condensed
consolidated statements of operations was $96,000 and $115,000 for
the three months ended March 31, 2019 and 2018,
respectively.
As of March 31, 2019, total unrecognized stock-based compensation
expense related to restricted stock units to employees and
consultants was approximately $1,629,000, which will be recognized
over a weighted average period of 4.36 years.
Note 11. Segment and Geographical
Information
The
Company is a leading multi-channel lifestyle company offering a
hybrid of the direct selling business model that also offers
e-commerce and the power of social selling. Assembling a
virtual main street of products and services under one corporate
entity, Youngevity offers products from top selling retail
categories: health/nutrition, home/family, food/beverage (including
coffee), spa/beauty, apparel/jewelry, as well as innovative
services. The Company
operates in three segments: the direct selling
segment where products are offered through a global distribution
network of preferred customers and distributors, the commercial
coffee segment where roasted and green coffee bean products are
sold directly to businesses, and commercial hemp segment provides
end to end extraction and processing via the Company’s
proprietary systems that allow for the conversion of hemp feed
stock into hemp oil and hemp extracts. The primary focus of
the segment will be to generate revenue through sales of extraction
services and end to end processing services for the conversion of
Hemp and Hemp oil into sellable ingredients. Additionally,
the Company offers various rental, sales, and service programs of
the company’s extraction and processing
systems.
The Company’s segments reflect the manner in which the
business is managed and how the Company allocates resources and
assesses performance. The Company’s chief operating decision
maker is the Chief Executive Officer. The Company’s chief
operating decision maker evaluates segment performance primarily
based on revenue and segment operating income. The principal
measures and factors the Company considered in determining the
number of reportable segments were revenue, gross margin
percentage, sales channel, customer type and competitive
risks.
The accounting policies of the segments are consistent with those
described in the summary of significant accounting policies.
Segment revenue excludes intercompany revenue eliminated in the
consolidation. The following tables present certain financial
information for each segment (in thousands):
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
Revenues
|
|
|
|
Direct selling
|
$
33,420
|
$
35,311
|
|
Commercial coffee
|
22,813
|
7,683
|
|
Commercial hemp
|
67
|
-
|
|
Total revenues
|
$
56,300
|
$
42,994
|
|
Gross
profit
|
|
|
|
Direct selling
|
$
22,755
|
$
24,735
|
|
Commercial coffee
|
4,067
|
277
|
|
Commercial hemp
|
27
|
-
|
|
Total gross profit
|
$
26,849
|
$
25,012
|
|
Operating
income (loss)
|
|
-
|
|
Direct selling
|
$
(12,309
)
|
$
781
|
|
Commercial coffee
|
884
|
(757
)
|
|
Commercial hemp
|
(516
)
|
-
|
|
Total operating income (loss)
|
$
(11,941
)
|
$
24
|
|
Net
income (loss)
|
|
|
|
Direct selling
|
$
(13,377
)
|
$
(591
)
|
|
Commercial coffee
|
1,633
|
(1,717
)
|
|
Commercial hemp
|
(516
)
|
-
|
|
Total net loss
|
$
(12,260
)
|
$
(2,308
)
|
|
Capital
expenditures
|
|
|
|
Direct selling
|
$
17
|
$
87
|
|
Commercial coffee
|
2,572
|
679
|
|
Commercial hemp
|
1,384
|
-
|
|
Total capital expenditures
|
$
3,973
|
$
766
|
|
|
|
|
|
March 31,
2019
(unaudited)
|
|
|
Total
assets
|
|
|
|
Direct selling
|
$
45,011
|
$
38,947
|
|
Commercial coffee
|
78,148
|
37,026
|
|
Commercial hemp
|
19,838
|
-
|
|
Total assets
|
$
142,997
|
$
75,973
|
Total tangible assets, net located outside the United States were
approximately $7.3 million and $6.2 million as of March 31, 2019
and December 31, 2018, respectively.
The Company conducts its operations primarily in the United States.
For the three months ended March 31, 2019 and 2018, approximately
10% and 13%, 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):
|
|
Three Months
Ended March 31,
|
|
|
|
|
|
Revenues
|
|
|
|
United States
|
$
50,890
|
$
37,393
|
|
International
|
5,410
|
5,601
|
|
Total revenues
|
$
56,300
|
$
42,994
|
Note 12. Subsequent Events
None.