UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q/A
(Amendment No. 1)
 
 
[X]
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended March 31, 2019
 
 
[   ]
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission file number: 001-38116
 
YOUNGEVITY INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
90-0890517
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
2400 Boswell Road, Chula Vista, CA
 
91914
(Address of Principal Executive Offices)
 
(Zip Code)
 
Registrant’s Telephone Number, Including Area Code:  (619) 934-3980
 
           Not applicable         
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
 
Securities registered pursuant to Section 12(b) of the Act: None
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
 
 
 
 
Securities registered pursuant to Section 12(g) of the Act:
 
Common Stock, $0.001 par value
9.75% Series D Cumulative Redeemable Perpetual Preferred Stock, $0.001 par value
 
 
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [  ] No [X]
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes []  No [X]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
[ ]
Accelerated filer
[ ]
Non-accelerated filer
[X]
Smaller reporting company
[X]
 
 
Emerging growth company
[ ]
 
 
 
 
If an emerging growth company indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  [ ] 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [ ]  No [X]
 
As of May 16, 2019, the issuer had 28,890,671 shares of its Common Stock, par value $0.001 per share, issued and outstanding.


 
 
 
EXPLANATORY NOTE
 
 
 
On October 13, 2020, the Audit Committee of the Board of Directors (the “Board”) of Youngevity International, Inc., (together with its subsidiaries, the “Company”, “we”, “our” or “us”), following discussion with management, determined that the unaudited condensed consolidated financial statements (the “Previously Issued Financial Statements”) presented in the Company’s Quarterly Report for the quarterly periods ended March 31, 2019, June 30, 2019 and September 30, 2019 filed with the Securities and Exchange Commission (the “SEC”) should no longer be relied upon as a result of the following error:
 
       During the three months ended March 31, 2019 certain revenues related to green coffee sales, within the Company’s commercial coffee segment, that were recognized at gross should have been recorded at net.
 
During the Company’s 2019 annual audit, it was determined that the Company had not fairly valued certain assets acquired in its acquisition of Khrysos Global, Inc., as of the closing date. As a result, the Company is restating its financial statements related to its commercial hemp segment detailed below for the following error:
 
During the three months ended March 31, 2019, the fair value of certain fixed assets acquired in the acquisition of Khrysos Global, Inc., and the share price valuation for the common stock issued as consideration for the acquisition were not fairly valued as of the closing date.
 
A description of the restatement is presented in Note 2 under the caption Restatement of previously reported unaudited condensed consolidated financial statements.
 
Accordingly, the Company is filing this Amendment No. 1 (this “Form 10–Q/A”) to amend our Quarterly Report on Form 10–Q for the quarterly period ended March 31, 2019, originally filed with the Securities and Exchange Commission (the “SEC”) on May 20, 2019 (the “Original Filing”), to reflect the amendment and restatement of our Unaudited Condensed Consolidated Balance Sheet at March 31, 2019, Unaudited Condensed Consolidated Statement of Operations for the three months ended March 31, 2019, Unaudited Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2019 and the related notes thereto and related disclosures as of March 31, 2019.  This Form 10–Q/A also amends certain other items in the Original Filing, as listed in “Items Amended in This Filing” below.
 
As required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, new certifications by the Company’s principal executive officer and principal financial officer are filed as exhibits 31.1, 31.2, 32.1 and 32.2 to this Form 10-Q/A.
 
Background and Effects of the Restatement
 
On October 16, 2020, the Company filed a Current Report on Form 8-K under Item 4.02 with the Securities and Exchange Commission relating to Previously Issued Financial Statements as described below. As indicated in the Current Report on Form 8-K under Item 4.02, the Company determined that a restatement was necessary due to a change in the accounting treatment of its revenue derived from its green coffee sales, which had been accounted for on a gross basis and is now being accounted for on a net basis reflecting the deduction of cost of revenue related to such revenue. During the Company’s 2019 annual audit, the Company reassessed its accounting for revenue derived from its CLR Roasters LLC., (“CLR”) commercial coffee segment, specifically the 2019 green coffee sales program, for sales made by the Company to its joint venture partner, H&H Coffee Group Export Corp. (“H&H Export”), which was the provider of the “wet” green coffee and the buyer of the processed coffee for the three months ended March 31, 2019.
 
Based on its assessment, management has determined that for green coffee sales made by CLR to its joint venture partner, H&H Export, for sales originally recorded at gross (revenue recorded without reduction for cost to purchase the inventory) should have recorded these sales at net. See Note 1, to the condensed consolidated financial statements under “Other Relationship Transactions” for further discussion related to H&H Export.
 
 
-i-
 
 
On February 15, 2019, the Company and Khrysos Industries, Inc., closed its acquisition of Khrysos Global, Inc., detailed further in Note 5 to the unaudited condensed consolidated financial statements below. In conjunction with the Company’s 2019 annual audit the Company concluded that certain fixed assets acquired in the acquisition and the share price valuation for the common stock issued as consideration were not fairly valued as of the closing date including; i) $1,127,000 related to the certain fixed assets, and ii) $1,351,000 related to a change in the fair value of common stock issuance resulting in an increase to goodwill of $2,478,000 acquired and an adjusted aggregate purchase price of $15,894,000.  In addition, this Form 10-Q/A has added to Note 12, to the accompanying notes to the condensed consolidated financial statements disclosure that includes the disclosure of capital expenditures recorded as the result of the acquisition of Khrysos Global Inc., reflecting the change in the fair value of the fixed assets from approximately $2,260,000 to $1,133,000.
 
Accordingly, this Form 10–Q/A restates the Company’s unaudited condensed consolidated financial statements; i) Unaudited Condensed Consolidated Balance Sheet at March 31, 2019, ii) Unaudited Condensed Consolidated Statement of Operations for the three months ended March 31, 2019, iii) Unaudited Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2019, and iv) the Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2019.
  
For a description of the effect of the restatement as of March 31, 2019 and for the three months ended March 31, 2019, see “Note 2. Restatement of Previously Reported Unaudited Condensed Consolidated Financial Statements” to the Company’s unaudited condensed consolidated financial statements in “Item 1. Financial Statements” contained herein.  In connection with the restatement of the Company’s condensed consolidated financial statements in this Form 10–Q/A, management determined that material weaknesses exist in the Company’s internal control over financial reporting and that the Company’s disclosure controls and procedures were ineffective during this reporting period. For a description of the material weaknesses identified by management and managements implemented and planned remediations for those material weaknesses, please see “Item 4. Controls and Procedures” contained herein.
 
Items Amended in This Filing
 
This Form 10–Q/A sets forth the Original Filing, in its entirety, as amended to reflect the restatement. No attempt has been made in this Form 10–Q/A to modify or update other disclosures presented in the Original Filing to reflect events occurring after the original filing date, except as required to reflect the effects of the restatement.
 
This Form 10–Q/A should be read in conjunction with our filings made with the SEC subsequent to the filing of the Original Filing.
 
The following items have been amended as a result of this restatement:
 
Part I
 
Item 1. Financial Statements;
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations;
 
Item 4. Controls and Procedures;
 
Our Principal Executive Officer and Principal Financial Officer are providing currently dated certifications in connection with this Form 10–Q/A.  These certifications are filed as Exhibits 31.1, 31.2, 32.1 and 32.2.  
 
Part II
 
Item 1A. Risk Factors;
Item 6. Exhibits
 
 
 
 
-ii-
 
 
YOUNGEVITY INTERNATIONAL, INC.
TABLE OF CONTENTS
 
 
 
Page
 
 
PART I. FINANCIAL INFORMATION
 
 
  
 
Item 1.
Financial Statements
1
 
Condensed Consolidated Balance Sheets as of March 31, 2019 (unaudited) & December 31, 2018
1
 
Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018 (unaudited)
2
 
Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2019 and 2018 (unaudited)
3
 
Condensed Consolidated Statements of Stockholders' Equity – Three months ended March 31, 2019 and 2018 (unaudited)
4
 
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 (unaudited)
6
 
Notes to Condensed Consolidated Financial Statements (unaudited)
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
44
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
54
Item 4.
Controls and Procedures
54
 
 

 
PART II. OTHER INFORMATION

 
  

Item 1.
Legal Proceedings
56
Item 1A.
Risk Factors
56
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
57
Item 3.
Defaults Upon Senior Securities
57
Item 4.
Mine Safety Disclosures
57
Item 5.
Other Information
57
Item 6.
Exhibits
58
Signatures
 
59
 
 
 
 
 
-iii-
 
 
PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
Youngevity International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
 
 
 
As of
 
 
 
March 31,
2019
 
 
December 31,
2018
 
ASSETS
 
(Unaudited) (Restated)*
 
 
 
 
Current Assets
 
 
 
 
 
 
       Cash and cash equivalents
 $2,540 
 $2,879 
       Accounts receivable trade (Note 1)
  7,706 
  4,028 
       Income tax receivable
  75 
  74 
       Inventory
  24,164 
  21,776 
       Advances (Note 1)
  - 
  5,000 
       Notes receivable
  5,000 
  - 
       Prepaid expenses and other current assets
  4,891 
  5,263 
Total current assets
  44,376 
  39,020 
 
    
    
Property and equipment, net
  19,729 
  15,105 
Operating lease right-of-use assets
  5,509 
  - 
Deferred tax assets
  148 
  148 
Intangible assets, net
  23,919 
  15,377 
Goodwill
  13,154 
  6,323 
Other assets – notes receivable
  949 
  - 
Total assets
 107,784 
 $75,973 
 
    
    
LIABILITIES AND STOCKHOLDERS' EQUITY
    
    
 
    
    
Current Liabilities
    
    
Accounts payable
 8,861 
 $8,478 
Accrued distributor compensation
  4,143 
  3,289 
Accrued expenses
  6,462 
  6,582 
Deferred revenues
  2,268 
  2,312 
Line of credit
  2,432 
  2,256 
Other current liabilities
  535 
  1,912 
Operating lease liabilities, current portion
  745 
  - 
Finance lease liabilities, current portion
  978 
  1,168 
Notes payable, current portion
  158 
  141 
Convertible notes payable, current portion
  681 
  647 
Warrant derivative liability
  5,369 
  9,216 
Contingent acquisition debt, current portion
  792 
  795 
Total current liabilities
  33,424 
  36,796 
 
    
    
Operating lease liabilities, net of current portion
  4,764 
  - 
Finance lease liabilities, net of current portion
  927 
  1,107 
Notes payable, net of current portion
  10,378 
  7,629 
Convertible notes payable, net of current portion
  1,981 
  - 
Contingent acquisition debt, net of current portion
  7,341 
  7,466 
Total liabilities
  58,815 
  52,998 
 
    
    
Commitments and contingencies (Note 1)
    
    
 
    
    
Stockholders’ Equity
    
    
Preferred Stock, $0.001 par value: 5,000,000 shares authorized
    
    
    Convertible Preferred Stock, Series A - 161,135 shares issued and outstanding at March 31, 2019 and December 31, 2018
  - 
  - 
    Convertible Preferred Stock, Series B – 129,437 shares issued and outstanding at March 31, 2019 and December 31, 2018
  - 
  - 
Common Stock, $0.001 par value: 50,000,000 shares authorized; 28,890,671 and 25,760,708 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively
  29 
  26 
Additional paid-in capital
  244,906 
  206,757 
Accumulated deficit
  (196,023)
  (183,763)
Accumulated other comprehensive income (loss)
  57 
  (45)
    Total stockholders’ equity
  48,969 
  22,975 
 Total Liabilities and Stockholders’ Equity
 107,784 
 $75,973 
 
* The Unaudited Condensed Consolidated Balance Sheet as of March 31, 2019 has been restated. See Note 2.
   
See accompanying notes to condensed consolidated financial statements. 
 
 
-1-
 
 
Youngevity International, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except share and per share amounts)
 
 
 
Three Months Ended
March 31,
 
 
 
2019
(Unaudited)
 
 
2018
 
 
 
  (Restated)*
 
 
 
 
Revenues
 $41,192 
 $42,994 
Cost of revenues
  14,343 
  17,982 
Gross profit
  26,849 
  25,012 
Operating expenses
    
    
Distributor compensation
  14,890 
  15,578 
Sales and marketing
  4,019 
  3,499 
General and administrative
  19,881 
  5,911 
Total operating expenses
  38,790 
  24,988 
Income (loss) from Operations
  (11,941)
  24 
Interest expense, net
  (1,507)
  (1,712)
Change in fair value of warrant derivative liability
  1,486 
  712 
Extinguishment loss on debt
  - 
  (1,082)
Total other expense
  (21)
  (2,082)
Net loss before income taxes
  (11,962)
  (2,058)
Income tax provision
  298 
  250 
Net Loss
  (12,260)
  (2,308)
Preferred stock dividends
  (14)
  (3)
Net Loss Available to Common Stockholders
 $(12,274)
 $(2,311)
 
    
    
Net loss per share, basic
 $(0.45)
 $(0.12)
Net loss per share, diluted
 $(0.49)
 $(0.13)
 
    
    
Weighted average shares outstanding, basic
  27,577,576 
  19,744,144 
Weighted average shares outstanding, diluted
  28,025,172 
  19,758,402 
 
* The Unaudited Condensed Consolidated Statement of Operations for the three months ended March 31, 2019 has been restated. See Note 2.
  
See accompanying notes to condensed consolidated financial statements.
  
 
-2-
 
 
Youngevity International, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
 
 
 
Three Months Ended
March 31,
 
 
 
2019
 
 
 
2018
 
 
 
 
 
 
 
 
Net loss
 $(12,260)
 $(2,308)
Foreign currency translation
  102 
  201 
Total other comprehensive income
  102 
  201 
Comprehensive loss
 $(12,158)
 $(2,107)
 
See accompanying notes to condensed consolidated financial statements. 
  
 
-3-
 
 
 Youngevity International, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Stockholders' Equity
(In thousands, except shares)
 
 
 
 
Series A
Preferred Stock
 
 
 
Series B
Preferred Stock
 
 
 
Common Stock
 
 
 
Additional
Paid-in Capital
 
 
Accumulated
Other
Comprehensive
 
 
 
Accumulated
 
 
 
Total
Stockholders' Equity
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
(Restated)*
 
 
Loss
 
 
Deficit
 
 
(Restated)*
 
Balance at December 31, 2018
  161,135 
 $- 
  129,437 
 $- 
  25,760,708 
 $26 
 $206,757 
 $(45)
 $(183,763)
 $22,975 
Net loss
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (12,260)
  (12,260)
Foreign currency translation adjustment
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  102 
  - 
  102 
Issuance of common stock from at-the-market offering and exercise of stock options and warrants, net
  - 
  - 
  - 
  - 
  309,636 
  1 
  1,454 
  - 
  - 
  1,455 
Issuance of common stock for services
  - 
  - 
  - 
  - 
  75,000 
  - 
  417 
  - 
  - 
  417 
Issuance of common stock in private offering, net of issuance costs
  - 
  - 
  - 
  - 
  255,000 
  - 
  1,750 
  - 
  - 
  1,750 
Issuance of common stock for acquisition of Khrysos
  - 
  - 
  - 
  - 
  1,794,972 
  1 
  13,999 
  - 
  - 
  14,000 
Issuance of common stock for debt financing, net of issuance costs
  - 
  - 
  - 
  - 
  40,000 
  - 
  350 
  - 
  - 
  350 
Issuance of common stock for true-up shares
  - 
  - 
  - 
  - 
  44,599 
  - 
  281 
  - 
  - 
  281 
Issuance of common stock for convertible note financing, net of issuance costs
  - 
  - 
  - 
  - 
  61,000 
  - 
  293 
  - 
  - 
  293 
Issuance of common stock related to purchase of land - H&H
  - 
  - 
  - 
  - 
  153,846 
  - 
  1,200 
  - 
  - 
  1,200 
Issuance of common stock related to purchase of trademark - H&H
  - 
  - 
  - 
  - 
  100,000 
  - 
  750 
  - 
  - 
  750 
Issuance of common stock related to advance for working capital (note receivable) net of settlement of debt
  - 
  - 
  - 
  - 
  295,910 
  1 
  2,308 
  - 
  - 
  2,309 
Release of warrant liability upon exercise of warrants
  - 
  - 
  - 
  - 
  - 
  - 
    866 
  - 
  - 
    866 
Release of warrant liability upon reclassification of liability to equity
  - 
  - 
  - 
  - 
  - 
  - 
  1,494 
  - 
  - 
  1,494 
Warrant issued upon vesting for services
  - 
  - 
  - 
  - 
  - 
  - 
  1,656 
  - 
  - 
  1,656 
Dividends on preferred stock
  - 
  - 
  - 
  - 
  - 
  - 
  (14)
  - 
  - 
  (14)
Stock based compensation expense
  - 
  - 
  - 
  - 
  - 
  - 
  11,344 
  - 
  - 
  11,344 
Balance at March 31, 2019
  161,135 
 $- 
  129,437 
 $- 
  28,890,671 
 $29 
 $244,906 
 $57 
 $(196,023)
 $48,969 
 
 * The Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2019 has been restated. See Note 2.
  
 
-4-
 
 
Youngevity International, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Stockholders' Equity
(In thousands, except shares)
 
 
 
 Series A
Preferred Stock
 
 
 Series B
Preferred Stock
 
 
 
Common Stock
 
 
 Additional
Paid-in
 
 
Accumulated
Other Comprehensive
 
 
 
Accumulated
 
 
Total
Stockholders'
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Loss
 
 
Deficit
 
 
Equity
 
Balance at December 31, 2017
  161,135 
 $- 
  - 
 $- 
  19,723,285 
 $20 
 $171,405 
 $(281)
 $(163,693)
 $7,451 
Net loss
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (2,308)
  (2,308)
Foreign currency translation adjustment
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  201 
  - 
  201 
Issuance of Series B preferred stock, net of issuance cost
  - 
  - 
  381,173 
  - 
  - 
  - 
  3,289 
  - 
  - 
  3,289 
Issuance of common stock pursuant to the exercise of stock options and warrants
  - 
  - 
  - 
  - 
  437 
  - 
  2 
  - 
  - 
  2 
Issuance of common stock for services
  - 
  - 
  - 
  - 
  5,000 
  - 
  27 
  - 
  - 
  27 
Issuance of common stock for conversion of Notes – 2017 Notes
  - 
  - 
  - 
  - 
  1,577,033 
  1 
  6,542 
  - 
  - 
  6,545 
Dividends on preferred stock
  - 
  - 
  - 
  - 
  - 
  - 
  (3)
  - 
  - 
  (3)
Stock based compensation expense
  - 
  - 
  - 
  - 
  - 
  - 
  237 
  - 
  - 
  237 
Balance at March 31, 2018
  161,135 
 $- 
  381,173 
 $- 
  25,305,755 
 $21 
 $181,501 
 $(80)
 $(166,001)
 $15,441 
 
See accompanying notes to condensed consolidated financial statements.
  
 
-5-
 
 
Youngevity International, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
 (In thousands)
 
 
 
Three Months Ended
March 31,
 
 
 
2019
 
 
2018
 
Cash Flows from Operating Activities:
 
(Restated)*
 
 
 
 
Net loss
 $(12,260)
 $(2,308)
Adjustments to reconcile net loss to net cash used in operating activities:
    
    
Depreciation and amortization
  1,145 
  1,259 
Stock-based compensation expense
  11,344 
  237 
Amortization of debt discounts and issuance costs
  199 
  543 
Change in fair value of warrant derivative liability
  (1,486)
  (712)
Change in fair value of contingent acquisition debt
  - 
  (213)
Changes in inventory reserve
  159 
  - 
Extinguishment loss on debt
  - 
  1,082 
Equity issuance for services
  1,859 
  27 
Stock issuance for true-up shares
  281 
  - 
Deferred taxes
  - 
  137 
Changes in operating assets and liabilities, net of effect from business combinations:
    
    
Accounts receivable
  (3,369)
  (1,231)
Inventory
  (1,283)
  (1,139)
Prepaid expenses and other current assets
  (111)
  (484)
Accounts payable
  54 
  794 
Accrued distributor compensation
  854 
  259 
Deferred revenues
  (44)
  1,302 
Accrued expenses and other liabilities
  (2,173)
  (1,075)
Income taxes receivable
  - 
  95 
Net Cash Used in Operating Activities
  (4,831)
  (1,427)
 
    
    
Cash Flows from Investing Activities:
    
    
Acquisitions, net of cash acquired
  (425)
  (50)
Purchases of property and equipment
  (2,291)
  (106)
Net Cash Used in Investing Activities
  (2,716)
  (156)
 
    
    
Cash Flows from Financing Activities:
    
    
Proceeds from issuance of promissory notes, net of offering costs
  3,750 
  - 
Proceeds from private placement of common stock, net of offering costs
  2,267 
  3,289 
Proceeds from at-the-market-offering and exercise of stock options and warrants, net
  1,455 
  3 
Proceeds net of repayment on line of credit
  176 
  770 
Payments of notes payable
  (35)
  (58)
Payments of contingent acquisition debt
  (128)
  (10)
Payments of finance leases
  (368)
  (232)
Payments of dividends 
  (11)
  - 
Net Cash Provided by Financing Activities
  7,106 
  3,762 
 
    
    
Foreign Currency Effect on Cash
  102 
  201 
Net (decrease) increase in cash and cash equivalents
  (339)
  2,380 
Cash and Cash Equivalents, Beginning of Period
  2,879 
  673 
Cash and Cash Equivalents, End of Period
 $2,540 
 $3,053 
 
    
    
Supplemental Disclosures of Cash Flow Information
    
    
Cash paid during the period for:
    
    
Interest
 $1,034 
 $1,191 
Income taxes
 $- 
 $44 
 
    
    
Supplemental Disclosures of Noncash Investing and Financing Activities
    
    
Purchases of property and equipment funded by finance leases
 $- 
 $664 
Purchases of property and equipment funded by mortgage agreements
 $450 
 $- 
Fair value of stock issued for services (Note 11)
 $417 
 $- 
Fair value of stock issued for property and equipment (land)
 $1,200 
 $- 
Fair value of stock issued for purchase of intangibles (tradename)
 $750 
 $- 
Fair value of stock issued for note receivable, net of debt settlement
 $2,309 
 $- 
Fair value of stock issued in connection with the acquisition of Khrysos Global, Inc. (Note 5)
 $14,000 
 $- 
Dividends declared but not paid at the end of period (Note 11)
 $14 
 $- 
Acquisitions of net assets in exchange for contingent debt, net of purchase price adjustments
 $- 
 $1,877 
Fair value of warrants issued in connection with the Series B Preferred Stock Offering
 $- 
 $75 
Conversion of 2017 Notes to Common Stock
 $- 
 $7,254 
 
* The Unaudited Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2019 has been restated. See Note 2.
 
See accompanying notes to condensed consolidated financial statements.
  
 
-6-
 
 
Youngevity International, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
 
Note 1. Basis of Presentation and Description of Business
 
Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such rules and regulations.
 
Youngevity International, Inc. (the “Company”) consolidates all wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
 
The statements presented as of 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 engaged in coffee roasting and distribution (specializing in gourmet coffee), mill processing of green coffee, and sales of green coffee. The commercial hemp segment manufactures proprietary systems to provide end-to-end extraction and processing that allow for the conversion of hemp feed stock into hemp oil and hemp extracts. The determination that the Company has three reportable segments is based upon the guidance set forth in Accounting Standards Codification (“ASC”) Topic 280, “Segment Reporting.”
 
 
 
 
 
-7-
 
 
During the three months ended March 31, 2019, the Company derived approximately 81.1% of its revenue from its direct selling segment and approximately 18.7% of its revenue from its commercial coffee segment. Commercial hemp segment revenues during the current quarter represented 0.2% 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.
  
 
 
-8-
 
 
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.
 
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 7 below.)
 
 
 
-9-
 
 
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 and the balance on the promissory note is zero.
 
Other Relationship Transactions
 
Hernandez, Hernandez, Export Y Company and H&H Coffee Group Export Corp.
 
The Company’s 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. As part of the 2014 Siles acquisition, CLR engaged the owners of H&H, Alain Piedra Hernandez (“Mr. Hernandez”) and Marisol Del Carmen Siles Orozco (“Ms. Orozco”), as employees to manage Siles.
 
H&H is a sourcing agent that purchases raw green coffee beans from the local producers in Nicaragua and supplies CLR’s mill with unprocessed green coffee for processing. CLR does not have a direct relationship with the local producers and is dependent on H&H to negotiate agreements with local producers for the supply and provide to CLR’s mill raw unprocessed green coffee to CLR in a timely and efficient manner. Substantially all the green coffee processed through the Siles mill was coffee assigned to CLR for processing. In addition, during 2018, CLR sold green coffee beans to H&H Coffee Group Export Corp., (“H&H Export”), a Florida based company which is affiliated with H&H. In consideration for H&H's sourcing of green coffee for processing within CLR’s mill, CLR and H&H share in the green coffee profit from milling operations.
 
CLR made purchases from H&H of approximately $2,576,000 of green coffee for the three months ended March 31, 2019, for use in the Company’s Miami roasting facilities. There were no purchases of green coffee from H&H to be sold to other third parties during the three months ended March 31, 2019.
 
CLR made purchases from H&H of approximately $3,734,000 of green coffee for the three months ended March 31, 2018, for use in the Company’s Miami roasting facilities and for use in selling processed green coffee to third parties.
 
During the three months ended March 31, 2019, CLR recorded net revenues from processing services of approximately $4,826,000. There was no processing service revenue during the three months ended March 31, 2018.
 
During the three months ended March 31, 2018, CLR recorded the sale of processed green coffee beans, to H&H Export as gross revenue of $2,443,000. There were no processed green coffee bean sales, to H&H Export during the three months ended March 31, 2019.
 
 
 
-10-
 
 
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 4, below).
 
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company enters into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.
 
 
 
-11-
 
 
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.
 
 
 
-12-
 
 
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) No. 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. Subtopic 350-40 clarifies the accounting for implementation costs of a hosting arrangement that is a service contract and aligns that accounting, regardless of whether the arrangement conveys a license to the hosted software. The amendments in this update are effective for reporting periods beginning after December 15, 2019, with early adoption permitted. The Company does not expect this new guidance to have a material impact on its condensed consolidated financial statements.
 
 
 
-13-
 
 
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.
 
 
 
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In February 2016, FASB established Topic 842, Leases, by issuing ASU No. 2016-02, Leases (Topic 842) which required lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; ASU No. 2018-11, Targeted Improvements; ASU No. 2018-20, Narrow-Scope Improvements for Lessors; and ASU 2019-01, Codification Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The amendments were adopted by the Company on January 1, 2019. A modified retrospective transition approach is required, applying the standard to all leases existing at the date of initial application. The Company elects to use its effective date as its date of initial application. Consequently, financial information will not be updated, and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. The new standard provides a number of optional practical expedients in transition. The Company elected the “package of practical expedients”, which permits the Company not to reassess under the new standard prior conclusions about lease identification, lease classification and initial direction costs. In addition, the Company elected the practical expedient to use hindsight when determining lease terms.  The practicable expedient pertaining to land easement is not applicable to the Company. The Company continues to assess all of the effects of adoption, with the most significant effect relating to the recognition of new ROU assets and lease liabilities on the Company’s balance sheet for real estate operating leases.  The Company adopted the provisions of this guidance on January 1, 2019 and accordingly recognized additional operating liabilities of approximately $5,509,000 with corresponding ROU assets of the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases.
 
Following the expiration of the Company’s Emerging Growth Company filing status (“EGC”) on December 31, 2018 the Company adopted the following accounting pronouncements effective January 1, 2018.
 
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), to supersede nearly all existing revenue recognition guidance under GAAP. Topic 606 also requires new qualitative and quantitative disclosures, including disaggregation of revenues and descriptions of performance obligations. The Company adopted the provision of this guidance using the modified retrospective approach. The Company has performed an assessment of its revenue contracts as well as worked with industry participants on matters of interpretation and application and has not identified any material changes to the timing or amount of its revenue recognition under Topic 606. The Company’s accounting policies did not change materially as a result of applying the principles of revenue recognition from Topic 606 and are largely consistent with existing guidance and current practices applied by the Company. (See Note 4, below.)
 
Note 2. Restatement of previously reported unaudited condensed consolidated financial statements
 
Background and Effects of the Restatement
 
During the Company’s 2019 annual audit, the Company reviewed revenues related to CLR specifically the 2019 green coffee sales program, for sales made by the Company to its joint venture partner, H&H Coffee Group Export Corp. (“H&H Export”). These sales were originally recorded at gross, along with the respective cost of revenue.
 
As part of the review, the Company assessed whether the 2019 green coffee sales to H&H Export depicted the transfer of promised goods or services to H&H Export in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The following five steps were applied to review if the core revenue recognition principles were met as such the Company concluded it had not met all the criteria when applying these steps:
 
Step 1: Identify the contract with the customer
 
Step 2: Identify the performance obligations in the contract
 
Step 3: Determine the transaction price
 
Step 4: Allocate the transaction price to the performance obligations in the contract
 
Step 5: Recognize revenue when the company satisfies a performance obligation
 
 
 
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During this review process the Company focused on identifying the performance obligations in the contracts with H&H Export (the provider of the “wet” green coffee and the buyer of the processed coffee). The Company’s assessment indicated that according to the underlying terms and conditions of the contracts that CLR entered into with H&H Export, that CLR had been assigned the green coffee beans as coffee was delivered to its mill processing facility. Assignment of the coffee is defined as taking of physical possession of the green coffee for the purpose of processing the green coffee. Under the assignment CLR was responsible for insuring all reasonable and necessary actions to ensure the coffee beans are safeguarded during processing at the Company’s coffee mill. CLR, however, does not take ownership and does not incur financial risk associated with the coffee as it is delivered to its mill for the purpose of processing. Based on the above assessment, management has determined that when CLR provides the processed green coffee to H&H export, the goods or services provided to H&H Export is the performance obligation to provide milling services for the green coffee. As such, the Company is the agent for the milling services.
 
Management has also determined that since the Company does not control the green coffee beans at the point of delivery to the mill, and that legal title to the green coffee beans is transferred momentarily, before the green coffee beans are sold back to H&H Export, that the Company is therefore an agent in sales transactions of green coffee beans to H&H Export.
  
Therefore, management has determined that for green coffee sales made by the Company to its joint venture partner, H&H Export, the Company should have recorded these sales at net of costs to purchase inventory, which reflects the value of the performance obligation to provide milling services. For the quarter ended March 31, 2019, the Company is restating its revenue for coffee sold to H&H Export at net.
 
On February 15, 2019, the Company and Khrysos Industries, Inc., closed its acquisition of Khrysos Global, Inc., detailed further in Note 5 to the unaudited condensed consolidated financial statements below. In conjunction with the Company’s 2019 annual audit the Company concluded that certain fixed assets acquired in the acquisition and the share price valuation for the common stock issued as consideration were not fairly valued as of the closing date including; i) $1,127,000 related to the certain fixed assets, and ii) $1,351,000 related to a change in the fair value of common stock issuance resulting in an increase to goodwill of $2,478,000 acquired and an adjusted aggregate purchase price if $15,894,000.
 
The tables below summarize the effects of the restatement on our (i) unaudited condensed consolidated balance sheet at March 31, 2019; (ii) unaudited condensed consolidated statement of operations for the three months ended March 31, 2019; and (iii) unaudited condensed consolidated statement of cash flows for the three months ended March 31, 2019. A summary of the effect of the restatement on the unaudited condensed consolidated statement of changes to stockholders’ equity for the three months ended March 31, 2019 are not presented because the impact to additional paid-in-capital are reflected below in the unaudited condensed consolidated balance sheet summaries.
 
 
 
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Summary of Restatement – Unaudited Condensed Consolidated Balance Sheet
 
The effects of the restatement on the Company’s unaudited condensed consolidated balance sheet are as follows:
 
 
 
March 31, 2019
 
 
 
Previously Reported
 
 
Adjustments
 
 
Restated
 
ASSETS
 
 
 
 
 
 
 
 
 
Current Assets
 
 
 
 
 
 
 
 
 
       Cash and cash equivalents
 $2,540 
 $- 
 $2,540 
       Accounts receivable, trade
  21,629 
  (13,923)
  7,706 
       Income tax receivable
  75 
  - 
  75 
       Inventory
  46,805 
  (22,641)
  24,164 
       Notes receivable
  5,000 
  - 
  5,000 
       Prepaid expenses and Other current assets
  4,891 
  - 
  4,891 
Total current assets
  80,940 
  (36,564)
  44,376 
 
    
    
    
Property and equipment, net
  20,856 
  (1,127)
  19,729 
Operating lease right-of-use assets
  5,509 
  - 
  5,509 
Deferred tax assets
  148 
  - 
  148 
Intangible assets, net
  23,919 
  - 
  23,919 
Goodwill
  10,676 
  2,478 
  13,154 
Other assets – notes receivable
  949 
  - 
  949 
Total assets
 $142,997 
 (35,213)
 107,784 
 
    
    
    
LIABILITIES AND STOCKHOLDERS' EQUITY
    
    
    
 
    
    
    
Current Liabilities
    
    
    
Accounts payable
 $22,784 
 (13,923)
 8,861 
Accrued distributor compensation
  4,143 
  - 
  4,143 
Accrued expenses
  29,103 
  (22,641)
  6,462 
Deferred revenues
  2,268 
  - 
  2,268 
Line of credit
  2,432 
  - 
  2,432 
Other current liabilities
  535 
  - 
  535 
Operating lease liabilities, current portion
  745 
  - 
  745 
Finance lease liabilities, current portion
  978 
  - 
  978 
Notes payable, current portion
  158 
  - 
  158 
Convertible notes payable, current portion
  681 
  - 
  681 
Warrant derivative liability
  5,369 
  - 
  5,369 
Contingent acquisition debt, current portion
  792 
  - 
  792 
Total current liabilities
  69,988 
  (36,564)
  33,424 
 
    
    
    
Operating lease liabilities, net of current portion
  4,764 
  - 
  4,764 
Finance lease liabilities, net of current portion
  927 
  - 
  927 
Notes payable, net of current portion
  10,378 
  - 
  10,378 
Convertible notes payable, net of current portion
  1,981 
  - 
  1,981 
Contingent acquisition debt, net of current portion
  7,341 
  - 
  7,341 
Total liabilities
  95,379 
  (36,564)
  58,815 
 
    
    
    
Commitments and contingencies (Note 1)
    
    
    
 
    
    
    
Stockholders’ Equity
    
    
    
Preferred Stock, $0.001 par value: 5,000,000 shares authorized
  - 
  - 
  - 
    Convertible Preferred Stock, Series A - 161,135 shares issued and outstanding at March 31, 2019 and December 31, 2018
  - 
  - 
  - 
    Convertible Preferred Stock, Series B – 129,437 shares issued and outstanding at March 31, 2019 and December 31, 2018
  - 
  - 
  - 
Common Stock, $0.001 par value: 50,000,000 shares authorized; 28,890,671 and 25,760,708 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively
  29 
  - 
  29 
Additional paid-in capital
  243,555 
  1,351 
  244,906 
Accumulated deficit
  (196,023)
  - 
  (196,023)
Accumulated other comprehensive loss
  57 
  - 
  57 
    Total stockholders’ equity
  47,618 
  1,351 
  48,969 
 Total Liabilities and Stockholders’ Equity
 $142,997 
 (35,213)
 107,784 
 
 
 
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Summary of Restatement – Unaudited Condensed Consolidated Statement of Operations
 
 The effects of the restatement on our unaudited condensed consolidated statement of operations are as follows:
 
 
 
Three Months Ended March 31, 2019
 
 
 
Previously Reported
 
 
Adjustments
 
 
Restated
 
Revenues
 $56,300 
 $(15,108)
 $41,192 
Cost of revenues
  29,451 
  (15,108)
  14,343 
Gross profit
  26,849 
  - 
  26,849 
Operating expenses
    
    
    
Distributor compensation
  14,890 
  - 
  14,890 
Sales and marketing
  4,019 
  - 
  4,019 
General and administrative
  19,881 
  - 
  19,881 
Total operating expenses
  38,790 
  - 
  38,790 
Loss from Operations
  (11,941)
  - 
  (11,941)
Interest expense, net
  (1,507)
  - 
  (1,507)
Change in fair value of warrant derivative liability
  1,486 
  - 
  1,486 
Total other expense, net
  (21)
  - 
  (21)
Net loss before income taxes
  (11,962)
  - 
  (11,962)
Income tax provision
  298 
  - 
  298 
Net loss
  (12,260)
  - 
  (12,260)
Preferred stock dividends
  (14)
  - 
  (14)
Net Loss Available to Common Stockholders
 $(12,274)
 $- 
 $(12,274)
 
    
    
    
Net loss per share, basic
 $(0.45)
 $- 
 $(0.45)
Net loss per share, diluted
 $(0.49)
 $- 
 $(0.49)
 
    
    
    
Weighted average shares outstanding, basic
  27,577,576 
  - 
  27,577,576 
Weighted average shares outstanding, diluted
  28,025,172 
  - 
  28,025,172 
 
 
 
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Summary of Restatement – Unaudited Condensed Consolidated Statement of Cash Flows
 
The effect of the restatement on our unaudited condensed consolidated statement of cash flows are as follows:
 
 
 
Three Months Ended March 31, 2019
 
 
 
Previously Reported
 
 
Adjustments
 
 
Restated
 
 
 
 
 
 
 
 
 
 
 
Cash Flows from Operating Activities:
 
 
 
 
 
 
 
 
 
Net loss
 $(12,260)
 $- 
 $(12,260)
Adjustments to reconcile net loss to net cash used in operating activities:
    
    
    
Depreciation and amortization
  1,145 
  - 
  1,145 
Stock-based compensation expense
  11,344 
  - 
  11,344 
Amortization of debt discounts and issuance costs
  199 
  - 
  199 
Change in fair value of warrant derivative liability
  (1,486)
  - 
  (1,486)
Change in inventory reserve
  159 
  - 
  159 
Equity issuance for services
  1,859 
  - 
  1,859 
Stock issuance for true-up shares
  281 
  - 
  281 
Changes in operating assets and liabilities, net of effect from business combinations:
    
    
    
Accounts receivable
  (17,292)
  13,923 
  (3,369)
Inventory
  (23,924)
  22,641 
  (1,283)
Prepaid expenses and other current assets
  (111)
  - 
  (111)
Accounts payable
  13,977 
  (13,923)
  54 
Accrued distributor compensation
  854 
  - 
  854 
Deferred revenues
  (44)
  - 
  (44)
Accrued expenses and other liabilities
  20,468 
  (22,641)
  (2,173)
Net Cash Used in Operating Activities
  (4,831)
  - 
  (4,831)
 
    
    
    
Cash Flows from Investing Activities:
    
    
    
Acquisitions, net of cash acquired
  (425)
  - 
  (425)
Purchases of property and equipment
  (2,291)
  - 
  (2,291)
Net Cash Used in Investing Activities
  (2,716)
  - 
  (2,716)
 
    
    
    
Cash Flows from Financing Activities:
    
    
    
Proceeds from issuance of promissory notes, net of offering costs
  3,750 
  - 
  3,750 
Proceeds from private placement of common stock, net of offering costs
  2,267 
  - 
  2,267 
Proceeds from at-the-market-offering and exercise of stock options and warrants, net
  1,455 
  - 
  1,455 
Proceeds net of repayment on line of credit
  176 
  - 
  176 
Payments of notes payable
  (35)
  - 
  (35)
Payments of contingent acquisition debt
  (128)
  - 
  (128)
Payments of finance leases
  (368)
  - 
  (368)
Payments of dividends 
  (11)
  - 
  (11)
Net Cash Provided by Financing Activities
  7,106 
  - 
  7,106 
Foreign Currency Effect on Cash
  102 
  - 
  102 
Net decrease in cash and cash equivalents
  (339)
  - 
  (339)
Cash and Cash Equivalents, Beginning of Period
  2,879 
  - 
  2,879 
Cash and Cash Equivalents, End of Period
 $2,540 
 $- 
 $2,540 
 
    
    
    
Supplemental Disclosures of Cash Flow Information
    
    
    
Cash paid during the period for:
    
    
    
Interest
 $1,034 
 $- 
 $1,034 
Income taxes
 $- 
 $- 
 $- 
 
    
    
    
Supplemental Disclosures of Noncash Investing and Financing Activities
    
    
    
Purchases of property and equipment funded by finance leases
 $- 
 $- 
 $- 
Purchases of property and equipment funded by mortgage agreements
 $450 
 $- 
 $450 
Fair value of stock issued for services (Note 11)
 $417 
 $- 
 $417 
Fair value of stock issued for property and equipment (land)
 $1,200 
 $- 
 $1,200 
Fair value of stock issued for purchase of intangibles (tradename)
 $750 
 $- 
 $750 
Fair value of stock issued for note receivable, net of debt settlement
 $2,309 
 $- 
 $2,309 
Fair value of stock issued in connection with the acquisition of Khrysos Global, Inc. (Note 5) (1)
 $12,649 
 $1,351 
 $14,000 
Dividends declared but not paid at the end of period (Note 11)
 $14 
 $- 
 $14 
Acquisitions of net assets in exchange for contingent debt, net of purchase price adjustments
 $- 
 $- 
 $- 
Fair value of warrants issued in connection with the Series B Preferred Stock Offering
 $- 
 $- 
 $-