The following discussion of our financial condition and results of operation in
this Quarterly Report on Form 10-Q for the three months ended March 31, 2020
(the "March 2020 10-Q") should be read in conjunction with the audited
consolidated financial statements and related notes, which are included in Part
II, Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in our Annual Report on Form 10-K for the year ended
December 31, 2019 (the "2019 10-K"), as filed with the Securities and Exchange
Commission on June 25, 2021. In addition to historical information, the
following discussion contains certain forward-looking statements that involve
risks, uncertainties and assumptions. Where possible, we have tried to identify
these forward-looking statements by using words such as "anticipate," "believe,"
"intends," or similar expressions. Our actual results could differ materially
from those anticipated expressed or implied by the forward-looking statements
due to important factors and risks including, but not limited to, those set
forth under "Risk Factors" in Part I, Item 1A of the 2019 10-K.
Unless the context requires otherwise, references to "we," "us," "our," the
"Company" and "Youngevity," refer to Youngevity International, Inc. and its
subsidiaries.
Overview
We operate in three segments: (i) the direct selling segment, where products are
offered through a global distribution network of preferred customers and
distributors, (ii) the commercial coffee segment, where products are sold
directly to businesses, the distribution of processed green coffee beans and
provides milling services for unprocessed green coffee beans, and (iii) the
commercial hemp segment where we manufacture proprietary systems to provide
end-to-end extraction and processing of hemp feed stock into hemp oil and hemp
extracts, oil extraction services, and contract manufacturing services.
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For the three months ended March 31, 2020, we derived approximately 87.7% of our
revenue from direct sales, 11.4% of our revenue from our commercial coffee sales
and 0.9% of our revenue from our commercial hemp business. For the three months
ended March 31, 2019, we derived 81.1% of our revenue from direct sales, 18.7%
of our revenue from our commercial coffee sales and 0.2% of our revenue from our
commercial hemp business.
We conduct our operations primarily in the United States ("U.S."). For the three
months ended March 31, 2020 and 2019 approximately 17% and 13%, respectively, of
our revenues were derived from sales outside the U.S.
Overview of Significant Events
Public Offering. Between September and December 2019, we closed two tranches of
our Series D offering, pursuant to which we issued and sold a total of 578,898
shares of our 9.75% Series D preferred stock at a weighted average price to the
public of $24.05 per share, less underwriting discounts and commissions,
pursuant to the terms of the underwriting agreement that we entered into with
the Benchmark Company, LLC ("Benchmark") as representative of the several
underwriters. The 578,898 shares of Series D preferred stock that were sold
included 43,500 shares sold pursuant to the overallotment option that we granted
to the underwriters that was exercised in full. In January 2020, we issued an
additional 11,375 shares of Series D preferred stock upon the partial exercise
by the underwriters.
The Series D preferred stock was approved for listing on The Nasdaq Capital
Market under the symbol "YGYIP," and had commenced trading on September 20,
2019. The net proceeds from this offering were approximately $12,269,000 after
deducting underwriting discounts and commissions and expenses which were paid by
us. Trading in the Series D preferred stock was suspended on the Nasdaq Capital
Market on November 20, 2020, and on February 2, 2021, the Series D preferred
stock was removed from listing on Nasdaq Capital Market, effective at the
opening of the trading session on February 12, 2021. Our Series D preferred
stock is now traded on OTC Pink market under the same symbol YGYIP.
Stock Offerings. In February 2019, we entered into a securities purchase
agreement with one accredited investor that had a substantial pre-existing
relationship with us pursuant to which we sold 250,000 shares of our common
stock at an offering price of $7.00 per share. Pursuant to the purchase
agreement, we also issued to the investor a three-year warrant to purchase
250,000 shares of common stock at an exercise price of $7.00. We received
proceeds of $1,750,000 from the stock offering. Consulting fees for arranging
the purchase agreement include the issuance of 5,000 shares of restricted shares
of our common stock and a three-year warrant priced at $10.00 per share
convertible into 100,000 shares of our common stock upon exercise.
In June 2019, we entered into a securities purchase agreement with Daniel
Mangless, with whom we had a pre-existing relationship, pursuant to which we
sold 250,000 shares of common stock at an offering price of $5.50 per share. We
received proceeds of $1,375,000 from the stock offering.
At-the-Market Equity Offering Program. In January 2019, we entered into an
at-the-market offering agreement (the "ATM agreement") with Benchmark pursuant
to which we may sell from time to time, at our option, shares of our common
stock through Benchmark, as sales agent, for the sale of up to $60,000,000 of
shares of our common stock. We are not obligated to make any sales of common
stock under the ATM agreement and we cannot provide any assurances that we will
issue any shares pursuant to the ATM agreement. During the year ended December
31, 2019, we received approximately $102,000 from the sale of 17,524 shares of
common stock under the ATM agreement. We are not currently eligible to register
the offer and sale of our securities using a registration statement on Form S-3
and therefore cannot make sales under the ATM agreement until such time as we
once again become S-3 eligible.
Convertible Notes. Between February and July 2019, we closed five tranches
related to the January 2019 private placement debt offering, pursuant to which
we offered for sale up to $10,000,000 in principal amount of notes (the "2019
PIPE Notes"), with each investor receiving 2,000 shares of common stock for each
$100,000 invested. We entered into subscription agreements with thirty-one
accredited investors that had a substantial pre-existing relationship with us
pursuant to which we received aggregate gross proceeds of $3,090,000 and issued
2019 PIPE Notes in the aggregate principal amount of $3,090,000 and an aggregate
of 61,800 shares of common stock. The placement agent received 15,450 shares of
common stock for the closed tranches as compensation. Each 2019 PIPE Note
matures 24 months after issuance, bears interest at a rate of 6.00% per annum,
and the outstanding principal is convertible into shares of common stock at any
time after the 180th day anniversary of the issuance of the 2019 PIPE Notes, at
a conversion price of $10.00 per share, subject to adjustment for stock splits,
stock dividends and reclassification of the common stock. The 2019 PIPE Notes
are secured by all equity in KII.
In February and March 2021, the 2019 PIPE Notes that were maturing were amended
to extend the maturity dates by one year with certain note holders of an
aggregate total of $2,440,000 in principal amount. At the filing date of this
Quarterly Report on Form 10-Q, we were in default of the terms of settlement set
forth in the amendments. (See Note 13 to the condensed consolidated financial
statements.)
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Promissory Notes. In March 2019, we entered into 2019 Promissory Notes with two
accredited investors with whom we had a substantial pre-existing relationship
with and from whom we raised cash proceeds in the aggregate of $2,000,000. The
2019 Promissory Notes are secured by all equity in KII. In consideration of the
2019 Promissory Notes, we issued 20,000 shares of our common stock for each
$1,000,000 invested as well as for each $1,000,000 invested five-year warrants
to purchase 20,000 shares of our common stock at a price per share of $6.00. The
2019 Promissory Notes paid interest at a rate of 8.00% per annum and interest
was paid quarterly in arrears with all principal and unpaid interest due at
maturity in March 2021. We issued in the aggregate 40,000 shares of common stock
and 40,000 warrants with the 2019 Promissory Notes.
In February 2021, we entered into amendment agreements extending the 2019
Promissory Notes and increasing the interest rate. (See Note 13 to the condensed
consolidated financial statements.)
In March 2020, we closed one tranche of our March 2020 private placement debt
offering, pursuant to which we received proceeds of $1,000,000 and we issued a
senior secured promissory note in the principal amount of $1,000,000 which
matured in December 2020 and 50,000 shares of our common stock in connection
with this senior secured promissory note. The promissory note and common stock
were issued in our private placement pursuant to which we offered up to an
aggregate of $5,000,000 in principal amount together with up to 250,000 shares
of common stock with each investor receiving 50,000 shares of common stock for
each $1,000,000 invested. The senior secured promissory notes interest rate was
18.00% per annum.
In April 2021, we entered into a settlement agreement with Mr. Mangless related
to the payment schedule of the senior secured promissory note issued in March
2020. (See Note 13 to the condensed consolidated financial statements.)
Small Business Administration - Paycheck Protection Program Loan. Our three
segments participated in "The Coronavirus Aid, Relief, and Economic Security
Act, and the Paycheck Protection Program due to losses caused by the COVID-19
pandemic. In April 2020, we received cash in the aggregate of approximately
$3,763,000 from qualified Small Business Administrators ("SBA") lenders. Under
the SBA loans, we received $2,508,000 related to our direct selling segment,
$633,000 related to our commercial coffee segment and $623,000 related to our
commercial hemp segment of which $613,000. In July 2020, our commercial coffee
segment received a second loan in the amount of $150,000 from SBA lenders. Our
direct selling segment qualified for mortgage assistance, whereby our corporate
office's mortgage was paid directly from the SBA lenders for a period of six
months in 2020 and an additional two months in 2021. In November 2020, the SBA
lenders forgave approximately $613,000 of the loan proceeds received related to
our commercial hemp segment. In April 2021, our commercial coffee segment
received a third loan in the amount of approximately $633,000 from SBA lenders.
In June 2021, the SBA lenders forgave approximately $3,141,000 which represented
loan proceeds we received in 2020. (See Note 13 to the condensed consolidated
financial statements.)
H&H transactions
Mill Construction Agreement
In January 2019, to accommodate CLR's green coffee purchase contract, CLR
entered into an agreement with H&H and H&H Export, Mr. Hernandez and Ms. Orozco,
collectively referred to as the Nicaraguan Partner, pursuant to which the
Nicaraguan Partner agreed to transfer the Matagalpa Property to be owned 50% by
the Nicaraguan Partner and 50% by CLR. In consideration for the land acquisition
we issued to H&H Export, 153,846 shares of common stock. The fair value of the
shares issued was $1,200,000 and was based on the stock price on the date of
issuance of the shares. In addition, the Nicaraguan Partner and CLR agreed to
contribute $4,700,000 each toward construction of a processing plant, office,
and storage facilities on the Matagalpa Property for processing coffee in
Nicaragua. The addition of the mill will accommodate CLR's green coffee contract
commitments. For the three months ended March 31, 2020 and 2019, CLR made
payments of approximately $300,000 and $1,350,000, respectively, towards the
construction of the Matagalpa Mill project. At March 31, 2020, CLR contributed a
total of $3,350,000 towards the construction of the Matagalpa Mill project, and
paid a total of $391,000 for operating equipment. At March 31, 2020, the
Nicaraguan Partner contributed a total of $2,513,000 towards the Matagalpa Mill
project. At the filing date of this Quarterly Report on Form 10-Q, the Matagalpa
Mill was still incomplete for total operations.
In January 2019, we issued 295,910 shares of our common stock to H&H Export to
pay for certain working capital, construction and other payables. In connection
with the issuance, we over issued 121,649 shares of common stock, resulting in
the net issuance of common stock to settle payables of 174,261 shares. H&H
Export agreed to reimburse CLR for the over issuance of the 121,649 shares of
common stock in cash. At March 31, 2020 and December 31, 2019, the value of the
shares was approximately $85,000 and $397,000, respectively, based on the stock
price at the respective periods. Management has reviewed the amount due and in
conjunction with the impact of the underlying COVID crisis and has determined
that the full receivable balances was more than likely to be uncollected at
March 31, 2020 and 2019, respectively, and therefore the full amount was
recognized as an allowance for collectability at the respective periods.
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Amendment to Operating and Profit-Sharing Agreement between CLR and H&H
In January 2019, CLR entered into an amendment to the March 2014 operating and
profit-sharing agreement with the owners of H&H. In addition, CLR and H&H, Mr.
Hernandez and Ms. Orozco restructured their profit-sharing agreement in regard
to profits from green coffee sales and processing that increased CLR's profit
participation by an additional 25%. Under the new terms of the agreement with
respect to profit generated from green coffee sales and processed from La Pita
or the Matagalpa Mill. now will provide for a split of profits of 75% to CLR and
25% to the Nicaraguan Partner, after certain conditions are met. Profit-sharing
income for the three months ended March 31, 2020 was approximately $115,000
compared to profit-sharing expense of $243,000 for the three months ended March
31, 2019.
Joint Venture Agreement in Nicaragua for Hemp Processing Center between the CLR
and KII and Nicaraguan partner
In April and July 2020, CLR and KII (the U.S. Partners) entered into agreements
(the "Hemp Joint Venture Agreements") with H&H Export and Fitracomex, Inc.
("Fitracomex") (collectively "The Nicaraguan JV Partners") and established the
Nicaraguan Hemp Grow and Extractions Group joint venture (the "Hemp Joint
Venture"). Fitracomex is indirectly related to us due to its relationship with
H&H and is being treated as a related party.
In accordance with the terms of the Hemp Joint Venture Agreements, H&H Export
will contribute the 2,200-acre Chaguitillo Farms in Sebaco-Matagalpa, Nicaragua
which will be owned by H&H Export and the U.S. Partners on a 50/50 basis
separate from the Hemp Joint Venture should the Hemp Joint Venture determine to
sell the land in the future.
The Nicaraguan JV Partners will contribute the excavation and preparation for
hemp growth of the 2,200 acres, installation of electrical service, and the
construction of 45,000 square feet of buildings to be used for office,
processing, storage, drying and green house space.
The U.S. Partners will contribute all the necessary extraction equipment to
convert hemp to crude oil and will also provide the feminized hemp seeds for the
pilot grow program, along with their expertise in the hemp business. The U.S.
Partners will also provide all necessary working capital as required.
In July 2020, we issued 1,500,000 shares of restricted common stock to
Fitracomex in accordance with the April 2020 Hemp Joint Venture Agreements. The
fair value of the shares at issuance was approximately $2,490,000. We also
agreed to issue warrants to Fitracomex for the purchase 5,000,000 shares of our
common stock at an exercise price of $1.50, exercisable for a term of five years
after completion of the construction and upon the approval of our stockholders.
At December 31, 2020, we reserved the full amount of the investment issued to
Fitracomex.
The U.S. Partners and H&H Export will serve as the managing partners and all
business decisions will require prior consent and agreement of both parties. The
net profits and net losses for each fiscal period shall be allocated twenty five
percent to the Nicaraguan JV Partners and seventy five percent to the U.S.
Partners. At the filing date of this Quarterly Report on Form 10-Q, the Hemp
Joint Venture is currently being assessed for changing market conditions related
to the hemp industry, and as a result of the fluctuating indicators we are
considering the timing of entering the market space in regard to the launch of
this project.
Master Relationship Agreement
In March 2021, CLR entered into a Master Relationship Agreement ("MA Agreement")
with the owners of H&H in order to memorialize the various agreements and
modifications to those agreements. Additionally, certain events have occurred
that have kept the parties from complying with the terms of each of the original
agreements and have caused there to be an imbalance with the respect to the
funds owed by one party to the other; therefore this MA Agreement also sets
forth a detailed accounting of the different business relationships and
reconciles the monetary obligations between each party through the end of fiscal
year 2020.
This MA Agreement memorialized the key settlement terms and established that H&H
owes CLR approximately $10,700,000 that is composed of:
? past due accounts receivable owed to CLR from H&H for 2019 and 2020;
? the $5,000,000 note due to CLR plus accrued interest on the note;
? CLR lost profits in 2019 and 2020;
? the return of working capital provided by CLR for the 2019 and 2020 green
coffee program.
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The agreement also includes an offset against amounts owed by H&H to CLR
consisting of:
? H&H's 25% profit sharing participation for 2019 and 2020;
? and an offset of H&H's open payables owed by CLR to H&H in the amount of
approximately $243,000.
The MA Agreement provides that approximately $10,700,000 is owed to CLR by H&H
and H&H agrees to satisfy this obligation by providing CLR a minimum of 20
containers (approximately 825,000 pounds) of strictly high grown coffee per
month, commencing at the end of March 2021 and continuing monthly until the
aforesaid amount is paid in full. The MA Agreement stipulates that the parties
have agreed that the coffee to be provided to CLR by H&H for the shipments
described above, that in order to satisfy H&H's debt to CLR, shall not be
produced on any plantation that the parties have a joint interest in. CLR has
recorded allowances of $7,871,000 related to the H&H trade accounts receivable
and $5,789,000 related to the H&H note receivable during the year ended December
31, 2020 due to H&H's repayment history and risks associated with redemption of
the receivable in coffee.
Acquisitions
In November 2019, we acquired certain assets of BeneYOU. BeneYOU is a
nutritional and beauty product company that brings customers and distributors of
brands of Jamberry which offers a line of nail products, the brand Avisae which
focuses on gut health and the brand M.Global which delivers hydration products.
(See Note 2 to the condensed consolidated financial statements.)
In February 2019, KII acquired the assets of Khrysos Global and all the
outstanding equity of INXL and INXH. The collective business manufactures
proprietary systems to provide end-to-end extraction and processing that allow
for the conversion of hemp feed stock into hemp oil and hemp extracts. For the
three months ended March 31, 2019, commercial hemp revenues represented
transactions beginning from the date of acquisition of Khrysos Global. (See Note
2 to the condensed consolidated financial statements.)
Going Concern
The accompanying condensed consolidated financial statements have been prepared
and presented on a basis assuming we will continue as a going concern. At March
31, 2020, we had a significant accumulated deficit and had experienced
significant losses and incurred negative cash flows for the last few years. We
sustained significant net losses during the three months ended March 31, 2020
and 2019 of approximately $5,791,000 and $12,260,000, respectively. Net cash
used in operating activities was $681,000 and $4,831,000 for the three months
ended March 31, 2020 and 2019, respectively. We anticipate similar continued
results for the year 2021.
Management has assessed our ability to continue as a going concern and concluded
that additional capital will be required during the twelve-months subsequent to
the filing date of this Quarterly Report on Form 10-Q. The timing of when the
additional capital will be required is uncertain and highly dependent on factors
discussed below. There can be no assurance that we will be able to execute
license or purchase agreements or to obtain equity or debt financing, or on
terms acceptable to it. Factors within and outside our control could have a
significant bearing on its ability to obtain additional financing. As a result,
management has determined that there are material uncertainties that raise
substantial doubt upon our ability to continue as a going concern.
At March 31, 2020, cash and cash equivalents totaled approximately $3,243,000.
We have and continue to take actions to alleviate the cash used in operations.
During the three months ended March 31, 2020, we reported total revenue of
approximately $35,531,000 a decrease of approximately 13.7% compared to the same
period a year ago. We continue to focus on revenue growth, but we cannot make
assurances that revenues will grow. Additionally, we have plans to make the
necessary cost reductions and to reduce non-essential expenses, including
international operations that are not performing well to help alleviate the cash
used in operating activities.
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The outbreak of COVID-19 and resulting pandemic resulted in significant
contraction of economies around the world and interrupted global supply chains
as many governments issued stay-at-home orders to combat COVID-19. The outbreak
of COVID-19 also impacted our ability to properly staff and maintain our
domestic and international warehousing operations due to stay-at-home orders
issued within various locations where we operate warehouse and shipping
operations. We took actions to mitigate the impact but cannot assert that future
stay-at-home orders or further restrictive orders will not have an impact on
future operations. We experienced changes in product mix demand, with demand
increasing toward health-oriented products and weakening for non-health related
products. Such changes in demand may have a significant impact on revenues,
margins and net operating profit in the future. The outbreak has also impacted
our ability to obtain some ingredients and packaging as well as ship products in
some markets. Our supply chain and logistics have incurred some interruptions
and cost impacts to date, and we could experience more significant interruptions
and cost impacts. Our suppliers of raw material and supplies have and could
continue to be impacted by geopolitical events, such as the war in Ukraine, thus
interrupting our supply chain. Additionally, our customers may experience
interruptions from other suppliers that could cause a customer to delay or
cancel orders. These factors and other events have negatively impacted our sales
and operations and will likely continue to negatively affect our business and
financial results. We are unable to predict the possible future effect on the
demand for products sold by the Company, and the related revenues, margins and
operating profit due to these events.
In addition, the outbreak of the COVID-19 coronavirus has disrupted our
operations due to absenteeism by infected or ill members of management or other
employees, or absenteeism by members of management and other employees who elect
not to come to work due to the illness affecting others in our office or other
workplace, or due to quarantines. COVID-19 illness could also impact members of
our board of directors resulting in absenteeism from meetings of the directors
or committees of directors and making it more difficult to convene the quorums
of the full board of directors or its committees needed to conduct meetings for
the management of the Company's affairs.
We continue to seek and obtain equity or debt financing on terms that are
acceptable to the Company. 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 us and our stockholders.
These financial statements have been prepared on a going concern basis, which
asserts the Company has the ability in the near term to continue to realize its
assets and discharge its liabilities and commitments in a planned manner giving
consideration to the above and expected possible outcomes. The financial
statements do not include any adjustments that might be necessary from the
outcome of this uncertainty. Within the current operating environment due to the
declared national emergency, related to COVID 19 combined with the management
plans described above the Company cannot assert that the doubt of the Company's
ability to continue as a going concern has been substantially alleviated,
Conversely, if the going concern assumption is not appropriate, adjustments to
the carrying amounts of the Company's assets, liabilities, revenues, expenses
and balance sheet classifications may be necessary, and these adjustments could
be material.
Results of Operations
Three months ended March 31, 2020 compared to three months ended March 31, 2019
Revenues
For the three months ended March 31, 2020, our revenues decreased approximately
$5,661,000 or 13.7% to approximately $35,531,000 as compared to $41,192,000 for
the three months ended March 31, 2019. During the three months ended March 31,
2020, we derived 87.7% of our revenue from our direct selling sales, 11.4% of
our revenue from our commercial coffee sales and approximately 0.9% from our
hemp segment.
For the three months ended March 31, 2020, direct selling segment revenues
decreased by approximately $2,264,000 or 6.8% to $31,156,000 as compared to
$33,420,000 for the three months ended March 31, 2019. The decrease was
primarily attributed to the continued impact of COVID-19 that has disrupted
various supply chains affecting product availability and the year-over-year
decline in the number of distributors resulting from the Company's inability to
hold distributor events and training.
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For the three months ended March 31, 2020, commercial coffee segment revenues
decreased by approximately $3,646,000 or 47.3% to $4,059,000 as compared to
$7,705,000 for the three months ended March 31, 2019. The decrease in revenue
was attributed to decreases in revenues from milling and processing services of
$4,658,000, partially offset by an increase in our roasted coffee business of
$593,000 and an increase in green coffee sales of $419,000. The decrease in
milling and processing services and the increase in green coffee sales reflects
the Company's strategic shift in moving from mill processing revenues, primarily
billed to H&H Export, to sales of green coffee, primarily sold to Rothfos.
For the three months ended March 31, 2020, commercial hemp segment revenues
increased by $249,000 to $316,000 as compared to $67,000 for the three months
ended March 31, 2019 which represented a partial quarter of revenue. The
increase was primarily attributed to higher sales of the hemp product lines and
tolling services.
The following table summarizes our revenue by segment (in thousands):
Three Months Ended
March 31, Percentage
2020 2019 Change
Direct selling $ 31,156 $ 33,420 (6.8 )%
As a % of Revenue 87.7 % 81.1 % 6.6 %
Commercial coffee:
Processed green coffee 519 100 419.0 %
As a % of Segment Revenue 12.8 % 1.3 % 11.5 %
Milling and processing services 168 4,826 (96.5 )%
As a % of Segment Revenue 4.1 % 62.6 % (58.5 )%
Roasted coffee and other 3,372 2,779 21.3 %
As a % of Segment Revenue 83.1 % 36.1 % 47.0 %
Total commercial coffee 4,059 7,705 (47.3 )%
As a % of Revenue 11.4 % 18.7 % (7.3 )%
Commercial hemp 316 67 371.6 %
As a % of Revenue 0.9 % 0.2 % 0.7 %
Total $ 35,531 $ 41,192 (13.7 )%
Cost of Revenues
For the three months ended March 31, 2020, cost of revenues increased
approximately 9.8% to $15,744,000 as compared to $14,343,000 for the three
months ended March 31, 2019.
The direct selling segment cost of revenues decreased 1.7% to approximately
$10,481,000 as compared to $10,665,000 for the three months ended March 31,
2019, primarily attributable to the decrease in revenues discussed above.
The commercial coffee segment cost of revenues increased 27.1% to approximately
$4,623,000 as compared to $3,638,000 for the three months ended March 31, 2019,
primarily attributable to the shift away from revenue for milling and processing
services in 2020 when compared to 2019. As revenue for milling services does not
contain a cost of goods sold component, the shift in revenue away from milling
and processing services increased our cost of revenue year-over-year. Cost of
revenues for processed green coffee for the three months ended March 31, 2020
increased 25.9% to $764,000 compared to $607,000 during the three months ended
March 31, 2019. Cost of revenues for roasted coffee for the three months ended
March 31, 2020 increased 27.3% to $3,859,000 compared to $3,031,000 during the
three months ended March 31, 2019.
The commercial hemp segment cost of revenues increased to approximately $640,000
as compared to $40,000 for the three months ended March 31, 2019 which
represented a partial quarter of cost of revenues. The increase was primarily
attributable to higher manufacturing consulting fees, direct labor costs, and
supply and material costs.
Gross Profit (Loss)
For the three months ended March 31, 2020, gross profit decreased to
approximately $19,787,000 as compared to $26,849,000 for the three months ended
March 31, 2019. Gross profit as a percentage of revenues for the three months
ended March 31, 2020 and 2019 was 55.7% and 65.2%, respectively.
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Gross profit in the direct selling segment decreased to approximately
$20,675,000 from $22,755,000 for the three months ended March 31, 2019,
primarily due to the decrease in revenues. Gross profit as a percentage of
revenues for the three months ended March 31, 2020 and 2019 was 66.4% and 68.1%,
respectively.
Gross loss in the commercial coffee segment was approximately $564,000 compared
to gross profit of $4,067,000 for the three months ended March 31, 2019. Gross
loss as a percentage of revenues for the three months ended March 31, 2020 was
13.9%. Gross profit as a percentage of revenues for the three months ended March
31, 2019 was 52.8%. The decrease in gross profit in the commercial coffee
segment was primarily due to the decrease of $4,658,000 in revenue from the
processing and milling of unprocessed green coffee that in turn drove lower
gross profit results year-over-year combined with the year-over-year change in
roasted coffee sales and cost of goods sold that increased negative gross profit
by $235,000, partially offset with the changes in revenue and cost of goods sold
from processed green coffee sales that generated a year-over-year decrease in
negative gross profit of approximately $262,000.
Gross loss in the commercial hemp segment was approximately $324,000 compared to
gross profit of $27,000 for the three months ended March 31, 2019 which
represented a partial quarter of gross profit. Gross loss as a percentage of
revenues for the three months ended March 31, 2020 was 102.5%. Gross profit as a
percentage of revenues for the three months ended March 31, 2019 was 40.3%. The
increase in the gross loss was primarily attributable to cost of goods sold
increasing at a higher rate than revenues in 2020 compared to 2019.
Below is a table of gross profit (loss) by segment (in thousands) and gross
profit (loss) as a percentage of segment revenues:
Three Months Ended
March 31, Percentage
2020 2019 Change
Direct selling $ 20,675 $ 22,755 (9.1 )%
Gross Profit % of Segment Revenues 66.4 % 68.1 % (1.7 )%
Commercial coffee:
Processed green coffee (245 ) (507 ) (51.7 )%
Gross Loss % of Segment Revenues (6.0 )% (6.6 )% 0.5 %
Milling and processing services 168 4,826 (96.5 )%
Gross Profit % of Segment Revenues 4.1 % 62.6 % (58.5 )%
Roasted coffee and other (487 ) (252 ) (93.3 )%
Gross Loss % of Segment Revenues (12.0 )% (3.3 )% (8.7 )%
Total commercial coffee (564 ) 4,067 (113.9 )%
Gross Profit (Loss) % of Segment Revenues (13.9 )% 52.8 % (66.7 )%
Commercial hemp
(324 ) 27 (1,300.0 )%
Gross Profit (Loss)% of Segment Revenues (102.5 )% 40.3 % (142.8 )%
Total $ 19,787 $ 26,849 (26.3 )%
Gross Profit % of Revenues 55.7 % 65.2 % (9.5 )%
Operating Expenses
For the three months ended March 31, 2020, our operating expenses decreased
31.8% to approximately $26,464,000 as compared to $38,790,000 for the three
months ended March 31, 2019. The decrease included lower stock-based
compensation and equity-based compensation for services of $11,012,000 and
$1,170,000, respectively, in 2020 compared to 2019.
Distributor Compensation
For the three months ended March 31, 2020, the distributor compensation paid to
our independent distributors in the direct selling segment decreased 5.6% to
approximately $14,051,000 from $14,890,000 for the three months ended March 31,
2019. The decrease was primarily attributable to lower revenues. Distributor
compensation as a percentage of direct selling revenues was 45.1% and 44.6% for
the three months ended March 31, 2020 and 2019, respectively.
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Sales and Marketing
For the three months ended March 31, 2020, total sales and marketing expense
decreased by 13.6% to approximately $3,473,000 from $4,019,000 for the three
months ended March 31, 2019. The decrease included lower stock-based
compensation of $466,000 in 2020 compared to 2019 which represented 85.3% of the
decrease in sales and marketing expenses.
In the direct selling segment, sales and marketing expense for the three months
ended March 31, 2020 decreased by 17.3% to approximately $3,074,000 from
$3,715,000 for the same period last year. The decrease included lower
stock-based compensation of $466,000 in 2020 compared to 2019 which represented
72.8% of the decrease in sales and marketing expenses. The remaining decrease
was primarily due to decreases in expenses related to conventions and
distributor events, wages and benefits related to temporary labor costs,
partially offset by an increase in marketing expenses related to the rewards
points programs.
In the commercial coffee segment, sales and marketing costs for the three months
ended March 31, 2020 increased by 26.1% to approximately $367,000 from $291,000
for the same period last year. The increase was primarily due to higher
marketing expenses.
In the commercial hemp segment, sales and marketing costs for the three months
ended March 31, 2020 increased to approximately $32,000 from $13,000 for the
same period last year which represented a partial quarter of sales and marketing
expense.
General and Administrative
For the three months ended March 31, 2020, total general and administrative
expense decreased to approximately $8,940,000 from $19,881,000 for the three
months ended March 31, 2019. The decrease was primarily due to lower stock-based
compensation and equity-based compensation for services of $10,546,000 and
$1,170,000, respectively, in 2020 compared to 2019.
In the direct selling segment, general and administrative expense for the three
months ended March 31, 2020 decreased to approximately $6,192,000 from
$16,459,000 for the same period last year. The decrease was primarily due to
lower stock-based compensation and equity-based compensation for services of
$9,127,000 and $1,170,000, respectively, in 2020 compared to 2019. The remaining
decrease was primarily the result of the year-over-year reduction in the change
in the fair value of the contingent acquisition debt of $361,000 in 2020
compared to 2019, which reduced expenses.
In the commercial coffee segment, general and administrative costs for the three
months ended March 31, 2020 decreased to $840,000 from $2,892,000 for the same
period last year. The decrease was primarily due to the year-over-year reduction
in costs in 2020 compared to 2019 including stock-based compensation of
$1,432,000 and profit-sharing expense of $358,000.
In the commercial hemp segment, general and administrative costs for the three
months ended March 31, 2020 increased to $1,908,000 from $530,000 for the same
period last year which represented a partial quarter of general and
administrative expense. The decrease was primarily due to higher costs related
to equity-based compensation for services of $325,000, salaries and professional
fees.
Operating Loss
For the three months ended March 31, 2020, our operating loss decreased by
approximately $5,264,000 to $6,677,000 as compared to $11,941,000 for the three
months ended March 31, 2019. The decrease in our operating loss was primarily
due to the lower stock-based compensation and equity-based compensation for
services and the lower revenue and other operating expenses in 2020 compared to
2019.
Other Income (Expense), net
For the three months ended March 31, 2020, net other income increased by
$890,000 to $869,000 as compared to $21,000 of net other expense for the three
months ended March 31, 2019. The change was due to higher net interest expense
and the change in the fair value of derivative liabilities.
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Net interest expense decreased by $887,000 for the three months ended March 31,
2020 to $620,000, compared to $1,507,000 for the three months ended March 31,
2019. Interest income for the three months ended March 31, 2020 and 2019 was
$113,000 and $5,000, respectively.
The change in fair value of derivative liabilities increased by $3,000 for the
three months ended March 31, 2020 to $1,489,000 in other income compared to
$1,486,000 for the three months ended March 31, 2019. Various factors are
considered in the pricing models we use to value the warrants including our
current stock price, the remaining life of the warrants, the volatility of our
stock price, and the risk-free interest rate. Future changes in these factors
may have a significant impact on the computed fair value of the Company's
derivative liabilities. As such, we expect future changes in the fair value of
the warrants and may vary significantly from period to period (see Notes 8 & 9
to the condensed consolidated financial statements).
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry-forwards. Deferred tax assets and liabilities are
measured using statutory tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities from a change in tax
rates is recognized in income in the period that includes the effective date of
the change. At December 31, 2019, we evaluated the realizability of the deferred
tax asset, based upon achieved and estimated future results and through
consideration of all positive and negative evidences and have determined that it
is more likely than not that the deferred tax assets will not be realized. A
valuation allowance remains on the U.S. state and foreign tax attributes that
are likely to expire before realization. At December 31, 2019, we had
approximately $75,000 in refundable credits, and we expect that a substantial
portion will be refunded between 2020 and 2021. As such, we do not have a
valuation allowance relating to the refundable AMT credit carryforward. We
recognized an income tax benefit of $17,000 which is our estimated federal,
state and foreign income tax benefit for the three months ended March 31, 2020.
The difference between the effective tax rate and the federal statutory rate of
21% is due to the permanent differences, change in valuation allowance, state
taxes (net of federal benefit), and foreign tax rate differential.
Net Loss
For the three months ended March 31, 2020, the Company reported a net loss of
$5,791,000 as compared to $12,260,000 for the three months ended March 31, 2019.
The primary reason for the decrease in net loss when compared to the prior
period was due to the decrease in operating loss of $5,264,000.
Adjusted EBITDA
EBITDA (earnings before interest, income taxes, depreciation and amortization)
as adjusted to remove the effect of stock-based compensation expense,
equity-based compensation for services expense, amortization of debt discounts
and issuance costs, and the change in the fair value of the derivatives, or
"Adjusted EBITDA," was a loss of $4,098,000 for the three months ended March 31,
2020 compared to earnings of $2,606,000 for the same period last year.
Management believes that Adjusted EBITDA, when viewed with our results under
GAAP and the accompanying reconciliations, provides useful information about our
period-over-period growth. Adjusted EBITDA is presented because management
believes it provides additional information with respect to the performance of
our fundamental business activities and is also frequently used by securities
analysts, investors and other interested parties in the evaluation of comparable
companies. We also rely on Adjusted EBITDA as a primary measure to review and
assess the operating performance of our company and our management team.
Adjusted EBITDA is a non-GAAP financial measure. We calculate adjusted EBITDA by
taking net income, and adding back the expenses related to interest, income
taxes, depreciation, amortization, stock-based compensation expense,
equity-based compensation for services expense, amortization of debt discounts
and issuance costs, and the change in the fair value of the warrant derivative,
as each of those elements are calculated in accordance with GAAP. Adjusted
EBITDA should not be construed as a substitute for net income (loss) (as
determined in accordance with GAAP) for the purpose of analyzing our operating
performance or financial position, as Adjusted EBITDA is not defined by GAAP.
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A reconciliation of our adjusted EBITDA to net loss for the three months ended
March 31, 2020 and 2019 is included in the table below (in thousands):
Three Months Ended
March 31,
2020 2019
Net loss $ (5,791 ) $ (12,260 )
Add/Subtract:
Interest, net 620 1,507
Income tax provision (benefit) (17 ) 298
Depreciation 673 475
Amortization 620 670
EBITDA (loss) (3,895 ) (9,310 )
Add/Subtract:
Stock-based compensation 260 11,344
Equity-based compensation for services 689 1,859
Amortization of debt discounts and issuance costs 337 199
Change in the fair value of derivatives (1,489 ) (1,486 )
Adjusted EBITDA (loss) $ (4,098 ) $ 2,606Liquidity and Capital Resources
Sources of Liquidity
At March 31, 2020 we had cash and cash equivalents of approximately $3,243,000
as compared to cash and cash equivalents of $4,463,000 at December 31, 2019.
Cash Flows
Cash used in operating activities. Net cash used in operating activities for the
three months ended March 31, 2020 and 2019 was $681,000 and $4,831,000,
respectively. Net cash used in operating activities in 2020 consisted of a net
loss of $5,791,000, partially offset by $3,994,000 in changes in operating
assets and liabilities and net non-cash operating expenses of $1,116,000. Net
cash used in operating activities in 2019 consisted of a net loss of $12,260,000
and $6,072,000 in changes in operating assets and liabilities, partially offset
by net non-cash operating expenses of $13,501,000.
Net non-cash operating expenses in 2020 included $1,293,000 in depreciation and
amortization, $260,000 in stock-based compensation, $689,000 in equity-based
compensation for services, $337,000 in amortization of debt discounts, and
$33,000 related to the increase in inventory reserves, $15,000 related to the
loss on disposal of property and equipment, $112,000 for an allowance for notes
receivables, $568,000 in non-cash operating lease expense, partially offset by
$1,489,000 related to the change in fair value of warrant derivative liability,
$30,000 related to the decrease in the allowance for accounts receivable,
$311,000 for an allowance related to the over issuance of shares which was
recorded as other receivable, and $361,000 related to the change in fair value
of contingent acquisition debt.
Net non-cash operating expenses in 2019 included $1,145,000 in depreciation and
amortization, $11,344,000 in stock-based compensation expense, $1,859,000 in
equity-based compensation for services, $199,000 in amortization of debt
discounts, $281,000 in stock issuance cost related to true-up shares and
$159,000 in increase in inventory reserves, partially offset by $1,486,000
related to the change in fair value of warrant derivative liability.
Changes in operating assets and liabilities in 2020 were attributable to
decreases in working capital, primarily related to changes in accounts
receivable of $17,000, inventory of $70,000, prepaid expenses and other current
assets of $416,000, other assets of $166,000, operating lease liabilities of
$367,000, and other long-term liabilities of $1,678,000. Increases in working
capital primarily related to changes in the income tax receivable of $8,000,
accounts payable of $1,884,000, accrued distributor compensation of $1,378,000,
deferred revenues of $1,230,000 and accrued expenses and other liabilities of
$1,812,000.
Changes in operating assets and liabilities in 2019 were attributable to
decreases in working capital, primarily related to changes in accounts
receivable of $3,369,000, inventory of $1,283,000, prepaid expenses and other
current assets of $111,000, deferred revenues of $44,000 and accrued expenses
and other liabilities of $2,173,000. Increases in working capital primarily
related to changes in accounts payable of $54,000 and accrued distributor
compensation of $854,000.
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Cash used in investing activities. Net cash used in investing activities for the
three months ended March 31, 2020 was $1,082,000 as compared to $2,716,000 for
the three months ended March 31, 2019. Net cash used in investing activities in
2020 consisted of $300,000 in payments made towards the construction of a large
mill in Nicaragua and the remaining represented other purchases of property and
equipment. Net cash used in investing activities in 2019 consisted of $1,350,000
in payments made towards the construction of a large mill in Nicaragua, $500,000
in cash paid related to the acquisition of Khrysos, offset by cash acquired of
$75,000 and other purchases of property and equipment.
Cash provided by financing activities. Net cash provided by financing activities
for the three months ended March 31, 2020 was $520,000 as compared to $7,106,000
for the three months ended March 31, 2019. Net cash provided by financing
activities in 2020 consisted of $1,000,000 net proceeds from issuance of notes,
$233,000 of net proceeds from the issuance of equity through our preferred stock
offering, and $14,000 of net proceeds from the line of credit partially offset
by $184,000 in payments related to financing lease obligations, $46,000 in
payments to reduce notes payable, $109,000 in payments related to contingent
acquisition debt and $388,000 in dividends paid. Net cash provided by financing
activities in 2019 consisted of $6,017,000 of net proceeds from the issuance of
equity through our preferred stock offerings and convertible notes, $1,353,000
from the exercise of stock options and warrants, $102,000 from at-the-market
issuance of shares and $176,000, of net proceeds from the line of credit
partially offset by $35,000 in payments to reduce notes payable, $128,000 in
payments related to contingent acquisition debt, $368,000 in payments related to
capital lease financing obligations and $11,000 in dividends paid.
Future Liquidity Needs
The accompanying condensed consolidated financial statements have been prepared
and presented on a basis assuming we will continue as a going concern. We have
sustained significant losses during the three months ended March 31, 2020 and
2019 of $5,791,000 and $12,260,000, respectively. Net cash used in operating
activities was $681,000 and $4,831,000 for the three months ended March 31, 2020
and 2019, respectively. Our cash and cash equivalents totaled $3,243,000 at
March 31, 2020. We do not currently believe that our existing cash resources are
sufficient to meet our anticipated needs over the next twelve months from the
date hereof. Based on our current cash levels and our current rate of cash
requirements, we will need to raise additional capital and will need to further
reduce our expenses from current levels. These factors raise substantial doubt
about our ability to continue as a going concern.
Historically, we have financed our operations primarily through revenue
generated from sales of our products and the public and private sales of our
securities and we expect to continue to seek to obtain required capital in a
similar manner. We have spent, and expect to continue to spend, a substantial
amount of funds in connection with implementing our business strategy.
Additionally, we may seek to access the public or private equity markets when
conditions are favorable due to our long-term capital requirements. If we are
unable to obtain additional capital (which is not assured at this time), our
long-term business plan may not be met, and we may not be able to fulfill our
debt obligations. Our ability to raise capital through the sale of securities
may be limited by the rules of the SEC and Nasdaq that place limits on the
number and dollar amount of securities that may be sold. We do not have any
commitments from third parties for funding. A failure otherwise to raise
additional funds when needed in the future could result in us being unable to
complete planned operations, or forced to delay, discontinue or curtail product
development, forego sales and marketing efforts, and forego licensing in
attractive business opportunities. There can be no assurances that we will be
able to raise the funds needed on favorable terms, if at all.
In January 2022, we entered into the second amendment to the Crestmark loan and
security agreement which reduced the maximum overall borrowing limit on the line
of credit to $3,000,000. Under the second amendment to the Crestmark loan and
security agreement, the line of credit may not exceed an amount which is the
lesser of (a) $3,000,000 or (b) the sum of up (i) to 85% of the value of the
eligible accounts; plus, (ii) the lesser of $1,000,000 or 50% of eligible
inventory or 50% of the amount calculated in (i) above.
In February 2022, we received a notice of default related to the loan and
security agreement from Crestmark Bank. The default includes our failure to
provide quarterly financial statements for the quarters ended September 30, 2021
and December 31, 2021, as set forth in the loan agreement.
In April 2022, we entered into a forbearance agreement with Crestmark Bank. The
agreement provides that Crestmark Bank agreed to forbear from collection action
under the loan documents until the termination date of June 30, 2022, provided
we are in compliance with the terms of the forbearance agreement. At the filing
date of this Quarterly Report on Form 10-Q, we were not in compliance with the
term of the forbearance agreement.
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We do not believe that our existing cash resources are sufficient to meet our
anticipated needs over the next twelve months from the date hereof. We are also
considering additional alternatives, including, but not limited to equity
financings and debt financings. Depending on market conditions, we cannot be
sure that additional capital will be available when needed or that, if
available, it will be obtained on terms favorable to us or to our stockholders.
Failure to raise additional funds from the issuance of equity securities and
failure to implement cost reductions could adversely affect our ability to
operate as a going concern. There can be no assurance that any cost reductions
implemented will correct our going concern issue. The financial statements do
not include any adjustments that might be necessary from the outcome of this
uncertainty.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements at March 31, 2020.
Contractual Obligations
At March 31, 2020, our total purchase obligations are related to our commercial
coffee segment and were approximately $8,957,000 compared to $4,219,000 at
December 31, 2019. The increase was primarily due to the addition of new
contracts entered into after December 31, 2019.
There were no material changes from the other contractual obligations disclosed
in our most recent annual report.
Critical Accounting Estimates
The unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the U.S. ("GAAP"),
which require us to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the unaudited condensed
consolidated financial statements and revenues and expenses during the periods
reported. Actual results could differ from those estimates. Information with
respect to our critical accounting estimates which we believe could have the
most significant effect on our reported results and require subjective or
complex judgments by management is contained in Item 7, Management's Discussion
and Analysis of Financial Condition and Results of Operations, of our Annual
Report on Form 10-K for the year ended December 31, 2019.
Recent Accounting Pronouncements
Recent accounting pronouncements are disclosed in Note 1 to the accompanying
condensed consolidated financial statements of this Quarterly Report on Form
10-Q.
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