YGYI

YOUNGEVITY INTERNATIONAL, INC.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Youngevity International, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except share amounts)

See accompanying notes to condensed consolidated financial statements. 

Youngevity International, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Operations

(In thousands, except share and per share amounts)

See accompanying notes to condensed consolidated financial statements.

Youngevity International, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

See accompanying notes to condensed consolidated financial statements. 

Youngevity International, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Stockholders' Equity

(In thousands, except shares)

Youngevity International, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Stockholders' Equity

(In thousands, except shares)

Youngevity International, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)

See accompanying notes to condensed consolidated financial statements.

Youngevity International, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Description of Business and Basis of Presentation

Description of Business

Youngevity International, Inc. (the “Company”) operates 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 and (iii) the commercial hemp segment where the Company manufactures 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.

Information on the operations of the Company’s three segments is as follows:

In the following text, the term “the Company” refers collectively to the Company and its subsidiaries.

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 condensed consolidated financial statements presented at March 31, 2020 and for the three months ended March 31, 2020 and 2019 are unaudited. In the opinion of management, these unaudited condensed consolidated 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 Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on June 25, 2021. The results for interim periods are not necessarily indicative of the results for the entire year.

Summary of Significant Accounting Policies

A summary of the Company’s significant accounting policies consistently applied in the preparation of the accompanying condensed consolidated financial statements follows:

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. The commercial hemp segment manufactures proprietary systems to provide end-to-end extraction and processing that allow for the conversion of hemp feed stock into hemp oil and hemp extracts. The determination that the Company has three reportable segments is based upon the guidance set forth in Accounting Standards Codification (“ASC”) Topic 280, “Segment Reporting.” 

During the three months ended March 31, 2020, the Company derived approximately 87.7% of its revenue from its direct selling segment, approximately 11.4% of its revenue from its commercial coffee segment and approximately 0.9% from the commercial hemp segment. During the three months ended March 31, 2019, the Company derived approximately 81.1% of its revenue from its direct selling segment, approximately 18.7% of its revenue from its commercial coffee segment and approximately 0.2% from the commercial hemp segment.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense for each reporting period. Estimates are used in accounting for, among other things, allowances for doubtful accounts, deferred taxes and related valuation allowances, fair value of derivative liabilities, uncertain tax positions, loss contingencies, fair value of options granted under the Company’s stock and equity-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 condensed consolidated financial statements. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected prospectively in the period they occur.

Liquidity and Going Concern

The accompanying condensed consolidated financial statements have been prepared and presented on a basis assuming the Company will continue as a going concern. The Company has sustained significant net losses during the 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 approximately $681,000 and $4,831,000 for the three months ended March 31, 2020 and 2019, respectively.

Management has assessed the Company’s 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 the Company 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 the Company’s 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 the Company’s ability to continue as a going concern.

The Company has and continues to take actions to alleviate the cash used in operations. During the three months ending March 31, 2020, the Company reported total revenue of $35,531,000 a decrease of approximately 13.7% compared to the same period a year ago. The Company continues to focus on revenue growth, but the Company cannot make assurances that revenues will grow. Additionally, the Company has 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.

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 the Company’s ability to properly staff and maintain its domestic and international warehousing operations due to stay-at-home orders issued within various locations where the Company operates warehouse and shipping operations. The Company 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. The Company 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 also impacted the Company’s ability to obtain some ingredients and packaging as well as ship products in some markets. The Company’s supply chain and logistics incurred some interruptions and cost impacts to date, and the Company could experience more significant interruptions and cost impacts. The Company’s suppliers of raw material and supplies have and could continue to be impacted by geopolitical events, such as the war in Ukraine, thus interrupting the Company’s supply chain. Additionally, the Company’s 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 the Company’s sales and operations and will likely continue to negatively affect the Company’s business and financial results. The Company is 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 the Company’s 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 the Company’s office or other workplace, or due to quarantines. COVID-19 illness could also impact members of the Company’s 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.

The Company continues 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 the Company or to its 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.

Revenue Recognition

The Company recognizes revenue from product sales when the following five steps are completed: i) Identify the contract with the customer; ii) Identify the performance obligations in the contract; iii) Determine the transaction price; iv) Allocate the transaction price to the performance obligations in the contract; and v) Recognize revenue when (or as) each performance obligation is satisfied.

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company enters into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.

The transaction price for all sales is based on the price reflected in the individual customer's contract or purchase order.  Variable consideration has not been identified as a significant component of the transaction price for any of the Company’s 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.

Revenue recognition by segment is as follows:

Direct Selling. Direct distribution sales are made through the Company’s network (direct selling segment), which is a web-based global network of customers and distributors. The Company’s independent sales force markets a variety of products to an array of customers, through friend-to-friend marketing and social networking. The Company considers itself to be an e-commerce company whereby personal interaction is provided to customers by its independent sales network. Sales generated from direct distribution includes; health and wellness, beauty product and skin care, scrap booking and story booking items, packaged food products and other service-based products.

Revenue is recognized when the Company satisfies its performance obligations under the contract. The Company recognizes revenue by transferring the promised products to the customer, with revenue recognized at shipping point, the point in time the customer obtains control of the products. The majority of the Company’s contracts have a single performance obligation and are short term in nature. Sales taxes in domestic and foreign jurisdictions are collected from customers and remitted to governmental authorities, all at the local level, and are accounted for on a net basis and therefore are excluded from revenues.

Commercial Coffee - Roasted Coffee. The Company engages in the commercial sale of roasted coffee through CLR, which is sold under a variety of private labels through major national sales outlets and to customers including cruise lines and office coffee service operators, and under its own Café La Rica brand, Josie’s Java House Brand, Javalution brands and Café Cachita as well as through its distributor network within the direct selling segment.

Revenue is recognized when the title and risk of loss is passed to the customer under the terms of the shipping arrangement, typically, FOB shipping point. At this point the customer has a present obligation to pay, takes physical possession of the product, takes legal title to the product, bears the risks and rewards of ownership, and as such, revenue will be recognized at this point in time. Sales taxes in domestic and foreign jurisdictions are collected from customers and remitted to governmental authorities, all at the local level, and are accounted for on a net basis and therefore are excluded from revenues.

Commercial Coffee - Green Coffee. The commercial coffee segment includes the sale of green coffee beans, which are sourced from the Nicaraguan rainforest.

Revenue is recognized when the title and risk of loss is passed to the customer under the terms of the shipping arrangement, typically, FOB shipping point. At this point the customer has a present obligation to pay, takes physical possession of the product, takes legal title to the product, bears the risks and rewards of ownership, and as such, revenue will be recognized at this point in time. Revenues where the Company sells green coffee beans that it has milled and where the Company has determined it is the agent with regard to the green coffee beans is recorded at net or recorded to reflect only the milling services provided. Sales taxes in domestic and foreign jurisdictions are collected from customers and remitted to governmental authorities, all at the local level, and are accounted for on a net basis and therefore are excluded from revenues.

Commercial Hemp. In the commercial hemp segment, the Company develops, manufactures, and sells equipment and related services to customers which enable them to extract CBD oils from hemp stock. The Company provides hemp growers, feedstock suppliers, and CBD crude oil producers the use of equipment, intellectual capital, production consultancy, tolling services, and wholesale CBD channel sales capabilities. The Company is also engaged in hemp-based CBD extraction technology including tolling processing which converts hemp crude oil to hemp extracts such as full spectrum distillate, and cannabinoid isolate (CBD, cannabigerol or CBG, cannabinol or CBN). The Company offers customers turnkey manufacturing solutions in extraction services and end-to-end processing systems. In addition, the Company provides a broad range of capabilities in regard to formulation, quality control, and testing standards with our CBD products, including potency analysis for its supply partners of hemp derived CBD products. The Company follows all guidelines for Current Good Manufacturing Practices ("CGMP") and our hemp extracts are processed, produced, and tested throughout the manufacturing process to confirm that the cannabinoid content meets strict company standards.

Revenue is recognized when the title and risk of loss is passed to the customer under the terms of the shipping arrangement, typically, FOB shipping point. At this point the customer has a present obligation to pay, takes physical possession of the product, takes legal title to the product, bears the risks and rewards of ownership, and as such, revenue will be recognized at this point in time. Sales taxes in domestic and foreign jurisdictions are collected from customers and remitted to governmental authorities, all at the local level, and are accounted for on a net basis and therefore are excluded from revenues.

Contract Balances. Timing of revenue recognition may differ from the timing of invoicing to customers. The Company records contract assets when performance obligations are satisfied prior to invoicing.

Contract liabilities are reflected as deferred revenues and customer deposits in accrued expenses, deferred revenue, other current liabilities and other long-term liabilities on the Company’s consolidated balance sheets. Contract liabilities relate to payments invoiced or received in advance of completion of performance obligations and are recognized as revenue upon the fulfillment of performance obligations. The Company recognizes deferred revenue in its direct selling, commercial coffee and commercial coffee segments.

In January 2020, the Company introduced a rewards program in the direct selling segment where its distributors earn points awards that can be redeemed for the future product purchases. These points awards are earned by the distributors through the purchase of products or through actions and participation in non-product purchase activities. The Company records the points earned through the purchase of product by reducing revenue and creates the liability at the point of purchase. Award points earned through non-product purchasing activities are recorded as marketing expenses and creates the liability at the time the distributor performs the non-revenue activity.

The deferred revenue related to Heritage Maker’s product line obligation for points purchased by customers represents cash payments received that have not yet been redeemed for product. Revenue is recognized when customers redeem the points, and the product is shipped. Deferred revenues related to pre-enrollment in conventions and distributor events primarily related to the Company’s 2020 events. The Company does not recognize revenue until the conventions or distributor events have occurred.

The Company also records deferred revenue within its direct selling, commercial coffee and commercial hemp segments related to payments made by customers for unshipped orders.

Deferred costs relate to Heritage Makers prepaid commissions are recorded in prepaid expenses and other current assets on the Company’s consolidated balance sheets and recognized in expense at the time the related revenue is recognized.

Plantation Costs

The Company’s commercial coffee segment includes the results of Siles, which is comprised of (i) a 500-acre coffee plantation and (ii) a dry-processing facility located on 26 acres, both of which are 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. There were no deferred costs associated with the harvest at March 31, 2020. Deferred costs associated with the harvest at December 31, 2019 were approximately $350,000.

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 services from employees and non-employees. Under such provisions, cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense net of forfeitures, under the straight-line method, over the vesting period of the equity grant. Forfeitures are recorded as they occur.

The Company uses the Black-Scholes to estimate the fair value of stock options. The use of a valuation model requires the Company to make certain assumptions with respect to selected model inputs. Expected volatility is calculated based on the historical volatility of the Company’s stock price over the expected term of the option. The expected life is based on the contractual life of the option and expected employee exercise and post-vesting employment termination behavior. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of the grant.

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 condensed 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 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.

Basic and Diluted Net Loss Per Share

Basic loss per share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted loss per share is computed by dividing net loss attributable to common stockholders by the sum of the weighted-average number of common shares outstanding during the period and the weighted-average number of dilutive common share equivalents outstanding during the period, using the treasury stock method. Dilutive common share equivalents are comprised of stock options, restricted stock, warrants, convertible preferred stock and common stock associated with the Company's convertible notes based on the average stock price for each period using the treasury stock method. Potentially dilutive shares are excluded from the computation of diluted net loss per share when their effect is anti-dilutive.

In periods where a net loss is presented, all potentially dilutive securities are anti-dilutive and are excluded from the computation of diluted net loss per share. Potentially dilutive securities for the three months ended March 31, 2020 and 2019 were 11,895,578 and 12,882,194, respectively.

The calculation of diluted loss per share requires that, to the extent the average market price of the underlying shares for the reporting period exceeds the exercise price of the warrants and the presumed exercise of such securities are dilutive to loss per share for the period, an adjustment to net loss used in the calculation is required to remove the change in fair value of the warrants, net of tax from the numerator for the period. Likewise, an adjustment to the denominator is required to reflect the related dilutive shares, if any, under the treasury stock method. During the three months ended March 31, 2019, the Company recorded a valuation gain on the fair value of the warrant derivative liability net of tax of approximately $1,409,000 which had a dilutive impact on the loss per share.

Recently Issued and Adopted Accounting Pronouncements

The Company does not believe that any recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the Company’s financial statements. During the three months ended March 31, 2020, the Company did not adopt any accounting pronouncements.

Note 2. Acquisitions and Business Combinations

During 2019, the Company entered into two acquisitions which are detailed below. The acquisitions were conducted to allow the Company to enter into the hemp market and expand the Company’s distributor network within the direct selling segment, enhance and expand its product portfolio, and diversify its product mix. As a result of the Company’s business combinations, the Company’s distributors and customers will have access to the acquired company’s products and acquired company’s distributors and customers will gain access to products offered by the Company. 

As such, the major purpose for the business combinations was to increase revenue and profitability. The acquisitions were structured as asset purchases which resulted in the recognition of certain intangible assets.

During the three months ended March 31, 2020, the Company did not have any acquisitions.

2019 Acquisitions

BeneYOU

On October 31, 2019, the Company entered into an asset purchase agreement with an effective date of November 1, 2019, with BeneYOU, LLC, a Utah limited liability company (“BeneYOU”), and Ryan Anderson (the “BeneYOU Representing Party”), for the Company to acquire certain assets of BeneYOU to including all of the outstanding equity of BeneYOU Holding, LLC, a Utah limited liability company (“BeneYOU Holding”), collectively “BeneYOU”. In accordance with the asset purchase agreement, the Company also acquired BeneYOU’s customer and distributor organization lists, all intellectual property, product formulations, products, product packaging, product registrations, licenses, marketing materials, sales tools and swag, and all saleable inventory. BeneYOU’s flagship brand Jamberry has an extensive line of nail products with a core competency in social selling, and two other brands including Avisae which focuses on the gut health and the M.Global brand of products that includes hydration products.

The Company is obligated to make monthly payments based on a percentage of the BeneYOU distributor revenue derived from sales of the Company’s products and a percentage of royalty revenue derived from sales of BeneYOU products until the earlier of the date that is ten years from the closing date or such time as the Company has paid to BeneYOU aggregate cash payments of the BeneYOU distributor revenue and royalty revenue equal to the maximum aggregate purchase price of $3,500,000. In addition, the Company paid an acquisition liability payment of $200,000 on the closing date, which reduced the maximum aggregate purchase price to $3,300,000.

The contingent consideration’s estimated fair value at the date of acquisition was approximately $2,648,000 as determined by management using a discounted cash flow methodology. The acquisition related costs, such as legal costs and other professional fees were minimal and expensed as incurred.

The purchase agreement contains customary representations, warranties and covenants of the Company, BeneYOU and the BeneYOU Representing Party. Subject to certain customary limitations the BeneYOU Representing Party have agreed to indemnify the Company and BeneYOU against certain losses related to, among other things, breaches of the BeneYOU Representing Party’s representations and warranties, certain specified liabilities and the failure to perform covenants or obligations under the purchase agreement.

The Company recorded the fair value at the date of acquisition of the acquired tangible and intangible assets and liabilities as follows (in thousands):

The following table summarizes the fair values of the assets acquired and liabilities assumed in November 2019 (in thousands):

The reported fair value of intangible assets acquired of $1,839,000 was determined through the use of a third-party valuation firm using various income and cost approach methodologies. Specifically, the intangibles identified in the acquisition were trademarks and trade name, distributor organization, customer relationships and non-compete agreement and are being amortized over their estimated useful life of 5 years, 9 years, 5 years and 4 years, respectively. The straight-line method is being used and is believed to approximate the timeline within which the economic benefit of the underlying intangible asset will be realized.

Goodwill of $669,000 was recognized as the excess purchase price over the acquisition-date fair value of net assets acquired. Goodwill is estimated to represent the synergistic values expected to be realized from the combination of the two businesses. The goodwill is expected to be deductible for tax purposes.

The pro-forma effect assuming the business combination with BeneYOU discussed above had occurred at the beginning of 2019 is not presented as the information was not available.

Khrysos Global, Inc.

On February 12, 2019, the Company and KII entered into an asset and equity purchase agreement (the “AEPA”) with Khrysos Global, and Leigh Dundore and Dwayne Dundore (collectively, the “Khrysos Representing Party”), for KII to acquire substantially all 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.

The aggregate consideration payable for the assets of Khrysos Global and the equity of INXL and INXH of $16,000,000 is to be paid as set forth under the terms of the AEPA and allocated between Khrysos Global and Leigh Dundore in such manner as they determine at their discretion.

At closing on February 15, 2019, Khrysos Global and the Khrysos Representing Party received an aggregate of 1,794,972 shares of the Company’s common stock which had a value of $14,000,000 for the purposes of the AEPA and $500,000 in cash. The fair value of the common stock calculated as part of the acquisition valuation was approximately $14,000,000. In addition, the Company agreed to pay the sellers $1,500,000 in cash towards the AEPA of which $1,000,000 was paid to Khrysos Global and the Khrysos Representing Party during 2019. The remaining cash payment of $500,000 was not paid at the filing date herewith as the Company continues to evaluate the terms of the acquisition agreement in conjunction with the termination of the KII President, noted below. At March 31, 2020 and December 31, 2019, the Company’s remaining liability of $500,000 was outstanding and recorded as accrued expenses on the condensed consolidated balance sheet.

The AEPA contains customary representations, warranties and covenants of the Company, Khrysos Global and the Khrysos Representing Party. Subject to certain customary limitations Khrysos Global and the Khrysos Representing Party have agreed to indemnify the Company and KII against certain losses related to, among other things, breaches of the Khrysos Representing Party’s representations and warranties, certain specified liabilities and the failure to perform covenants or obligations under the AEPA.

In conjunction with the acquisition and organization of KII, the Company retained Dwayne Dundore as President of KII. Previously agreed-upon equity compensation in the form of warrants that was to be provided as part of the closing to Dwayne Dundore by the Company were mutually terminated. Effective September 17, 2020, Dwayne Dundore was no longer employed with KII or the Company.

The Company has estimated fair value at the date of acquisition of the acquired tangible and intangible assets and liabilities as follows (in thousands):

The following table summarizes the estimated and as adjusted fair values of the assets acquired and liabilities assumed in February 2019 (in thousands):

The reported fair value of intangible assets acquired in the amount of $8,461,000 was determined through the use of a third-party valuation firm using various income and cost approach methodologies. Specifically, the intangibles identified in the acquisition were trademarks and trade name, customer relationships and non-compete agreement. The trademarks and trade name, customer relationships and non-compete agreement are being amortized over their estimated useful life of 8 years, 4 years and 6 years, respectively. The straight-line method is being used and is believed to approximate the timeline within which the economic benefit of the underlying intangible asset will be realized. In connection with the Company’s annual impairment test in 2019, the net book value of intangible assets of $8,461000 was determined to be impaired. (See Note 5)

Goodwill of $6,831,000 was recognized as the excess purchase price over the acquisition-date fair value of net assets acquired. In connection with the Company’s annual impairment test in 2019, the full amount of goodwill recognized was determined to be impaired.

The costs related to the acquisition are included in legal and accounting fees and were expensed as incurred.

The pro-forma effect assuming the business combination with KII discussed above had occurred at the beginning of 2019 is not presented as the information was not available. 

Note 3.  Related Party Transactions

Hernandez, Hernandez, Export Y Company and H&H Coffee Group Export Corp.

The Company’s wholly-owned subsidiary, CLR, is associated with Hernandez, Hernandez, Export Y Company (“H&H”), a Nicaragua company, through sourcing arrangements to procure Nicaraguan grown green coffee beans. As part of the 2014 Siles acquisition, CLR engaged the owners of H&H, Alain Piedra Hernandez (“Mr. Hernandez”) and Marisol Del Carmen Siles Orozco (“Ms. Orozco”), as employees to manage Siles.

H&H is a sourcing agent that purchases raw green coffee beans from the local producers in Nicaragua and supplies CLR’s mill with unprocessed green coffee for processing. CLR does not have a direct relationship with the local producers and is dependent on H&H to negotiate agreements with local producers for the supply and provide to CLR’s mill raw unprocessed green coffee to CLR in a timely and efficient manner. During the three months ended March 31, 2019, CLR’s largest customer for green coffee beans was H&H Coffee Group Export Corp. (“H&H Export”), a company related to 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.

During the three months ended March 31, 2020, CLR had purchases from H&H and H&H Export of approximately $991,000 and $271,000, respectively. CLR made purchases of green coffee from H&H of approximately $2,576,000 during the three months ended March 31, 2019.

During the three months ended March 31, 2020 and 2019, CLR recorded net revenues from green coffee milling and processing services of approximately $168,000 and $4,826,000 respectively, from H&H Export.

At March 31, 2020 and December 31, 2019, CLR's accounts receivable balances for customer related revenue from H&H Export was $8,707,000, of which the full amounts were past due at the respective periods. As a result, the Company reserved $7,871,000 as bad debt related to the accounts receivable balances for both periods, which was net of collections through December 31, 2020.

At March 31, 2020, the following balances were recorded from transactions with H&H:

H&H Finance Agreement 

In March 2020, CLR entered into a Finance, Security and ARAP Monetization Agreement (the “H&H Finance Agreement”) with H&H Export Y CIA. LTDA and H&H Export (collectively, the “H&H Export Group”). The H&H Finance Agreement was designed to provide the Company with access to a continued supply of unprocessed green coffee beans for the 2020 growing season and a solution for funding of the continued operations of the Company’s green coffee distribution business. Pursuant to the Agreement, the H&H Export Group had agreed to allow a Nicaraguan agency (the “Nicaraguan Agency”) to advance on behalf of the H&H Export Group, approximately $22,000,000 of the $30,100,000 of accounts receivable owed by H&H Export to CLR for its purchase of processed green coffee during the 2019 season. The Nicaraguan Agency also entered into a $46,500,000 credit facility with the H&H Export Group to provide funding for the H&H Export Group’s future coffee purchases of unprocessed green coffee from independent producers. Of the 2020 sales amounts to be billed by CLR for future coffee purchases of processed coffee, CLR was to be paid an additional amount, at a rate of $0.225 per pound of processed green coffee shipped to customers, to be applied to the remaining outstanding 2019 accounts receivable balance owed by H&H Export to CLR. Until such time as the entire accounts receivable balance is paid in full, H&H Export has agreed not take any profit interest. However, given the COVID crisis’ impact on the 2020 growing season and the continued delay in full payment of the 2020 receivable balances, management considered H&H Export accounts receivable impaired at March 31, 2020. Subsequent to the H&H Finance Agreement, CLR adopted the recognition of recording revenues at net for sales between CLR and H&H Export.

In March 2021, CLR entered into a master relationship agreement with the owners of H&H in order to memorialize the various agreements and modifications to those agreements. (See Note 13)

H&H Export Note Receivable

In December 2018, CLR advanced $5,000,000 to H&H Export to provide services in support of a five-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.  In March 2019, this advance was converted to a $5,000,000 loan agreement as a note receivable and bears interest at 9.00% 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. In October 2019, CLR and H&H Export amended the March 2019 agreement in terms of the maturity date such that all outstanding principal and interest was due and payable at the end of the 2020 harvest (or when the 2020 season’s harvest was exported and collected), but never to be later than November 30, 2020.

Management reviewed the security against the loan and the impact of the underlying COVID crisis and determined that the full amount of the note receivable including interest of approximately $5,452,000 and $5,340,000 was not collected at March 31, 2020 and December 31, 2019, respectively, and therefore the full amounts were recognized as an allowance for collectability at the end of each respective period.

Mill Construction Agreement between CLR and H&H

In January 2019, to accommodate CLR’s green coffee purchase contract, CLR entered into a mill construction agreement with H&H and H&H Export, Mr. Hernandez and Ms. Orozco (together with H&H, 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 “Matagalpa 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. 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 (collectively the “Matagalpa Mill”) 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, which is included in construction in process within property and equipment, net on the Company's consolidated balance sheets, 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, the Company issued 295,910 shares of common stock to H&H Export to pay for certain working capital, construction and other payables. In connection with the issuance, the Company 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 reviewed the amount due in conjunction with the impact of the underlying COVID crisis and has determined that the full receivable balances were more than likely to be uncollected at March 31, 2020 and December 31, 2019, and therefore the full amount was recognized as an allowance for collectability at the respective periods.

Amended 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 and profit-sharing expense for the three months ended March 31, 2019 was $243,000, which was included in accrued expenses on the Company’s balance sheets.  

Other Agreements between CLR, H&H and H&H Export

In January 2019, H&H Export sold to CLR its espresso brand Café Cachita in consideration of the issuance of 100,000 shares of the Company’s common stock. The shares of common stock issued were valued at $7.50 per share.

In May 2017, CLR entered a settlement agreement, as amended, with Mr. Hernandez who was issued a warrant 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 CLR to H&H as relates to a sourcing and supply agreement with H&H and H&H Export. The warrants were outstanding at both March 31, 2020 and December 31, 2019 and expired in May 2020.

Other Related Party Transactions 

Richard Renton

Richard Renton was a member of the board of directors until February 11, 2020 and owns and operates WVNP, Inc., a supplier of certain inventory items sold by the Company.  The Company made purchases from WVNP Inc. of approximately $56,000 and $8,000 for the three months ended March 31, 2020 and 2019, respectively. In addition, Mr. Renton is a distributor of the Company and was paid distributor commissions of $81,000 and $94,000 for the three months ended March 31, 2020 and 2019, respectively.

Carl Grover (Estate of Carl Wilford Grover)

Carl Grover was the sole beneficial owner of in excess of 5% of the Company’s outstanding common shares at March 31, 2020 and December 31, 2019.

At March 31, 2020 and December 31, 2019, the balance of the borrowing, net of debt discounts, from the credit agreement the Company entered into with Mr. Grover in December 2018 was approximately $4,294,000 and $4,085,000, respectively. (See Note 6)

In July 2019, Mr. Grover acquired 600,242 shares of the Company's common stock upon the partial exercise at $4.60 per share of a 2014 warrant to purchase 782,608 shares of common stock held by him. In connection with such exercise, the Company received approximately $2,761,000 from Mr. Grover, issued to Mr. Grover 50,000 shares of restricted common stock as an inducement fee and agreed to extend the expiration date of the July 2014 warrant held by him to December 15, 2020, and the exercise price of the warrant was adjusted to $4.75 with respect to 182,366 shares of common stock remaining for exercise thereunder.

Paul Sallwasser

Mr. Paul Sallwasser is a member of the board directors, and prior to joining the Company’s board of directors he acquired in the Company’s 2014 private placement a note in the principal amount of $75,000 convertible into 10,714 shares of common stock and a warrant exercisable for 14,673 shares of common stock. Mr. Sallwasser additionally acquired in the Company’s 2017 private placement a note in the principal amount of $38,000 convertible into 8,177 shares of common stock and a warrant issued to purchase 5,719 shares of common stock. Mr. Sallwasser also acquired, as part of the 2017 private placement in exchange for the 2015 note that he acquired in the Company’s 2015 private placement, an additional 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.

In March 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. Mr. Sallwasser’s 2017 warrants of to purchase an aggregate 6,262 shares of common stock expire between July and August during 2020.

In August 2019, Mr. Sallwasser acquired 14,673 shares of the Company's common stock upon the exercise of his 2014 warrant. In connection with the exercise, Mr. Sallwasser applied approximately $67,000 of the proceeds of his 2014 note due to him from the Company as consideration for the warrant exercise. The warrant exercise proceeds to the Company would have been approximately $67,000. The Company paid the balance owed to him under his 2014 note including accrued interest of approximately $8,000.

At March 31, 2020 and 2019, Mr. Sallwasser owned 76,924 shares of common stock and options to purchase an aggregate of 116,655 shares of common stock, which are exercisable.

Daniel Mangless

Daniel Mangless became a beneficial owner of in excess of 5% of the Company’s outstanding common stock upon consummation of a securities purchase agreement transaction in March 2020.

In February 2019, the Company entered into a securities purchase agreement with Mr. Mangless pursuant to which the Company sold 250,000 shares of common stock at an offering price of $7.00 per share. Pursuant to the purchase agreement, the Company also issued Mr. Mangless a three-year warrant to purchase 250,000 shares of common stock at an exercise price of $7.00. The Company received proceeds of $1,750,000 from the stock offering. (See Note 10)

In June 2019, the Company entered into a second securities purchase agreement with Mr. Mangless pursuant to which the Company sold 250,000 shares of common stock at an offering price of $5.50 per share. The Company received proceeds of $1,375,000 from the stock offering. (See Note 10)

In March 2020, the Company entered into a securities purchase agreement with Mr. Mangless, pursuant to which the Company issued a senior secured promissory note in the principal amount of $1,000,000 which matured in December 2020. In addition, the Company issued 50,000 shares of common stock in connection with this senior secured promissory note. (See Note 6 and 10)

In April 2021, the Company entered into a settlement agreement with Mr. Mangless related to the payment schedule of the senior secured promissory note issued in March 2020. In addition, as part of the settlement agreement the Company issued Mr. Mangless 1,000,000 shares of common stock. (See Note 13)

In February 2021, Mr. Mangless liquated some of his Youngevity common stock and is no longer a beneficial owner of in excess of 5% of the outstanding shares of common stock. (See Note 13)

2400 Boswell LLC

2400 Boswell, LLC (“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 Company acquired 2400 Boswell from an immediate member of the Company’s Chief Executive Officer in 2013. (See Note 6)

JJL Equipment Holding, LLC

In connection with the acquisition of Khrysos Global, the Company held a deposit from JJL Equipment Holding, LLC (“JJL Equipment”) for an equipment purchase of approximately $230,000 and $233,000 on March 31, 2020 and December 31, 2019, respectively. Leigh Dundore is a member and part owner of JJL Equipment. The deposit is to be applied to future machinery and equipment orders from JJL Equipment and was recorded in other current liabilities in the consolidated balance sheet.

Youngevity Be the Change Foundation

Youngevity Be the Change Foundation (the “Youngevity Foundation”) was formed in 2013 as a 501 c 3 charitable organization. The Company’s Chief Executive Officer and its President and Chief Investment Officer both serve as officers and directors of the Youngevity Foundation, as well as the Company’s Chief Operating Officer and the wife of the Chief Investment Officer who both serve as a director of the Youngevity Foundation. During the three months ended March 31, 2020 and 2019, the Company recorded a liability for future contributions of $24,000 and $20,000, respectively, to the Youngevity Foundation. At March 31, 2020 and December 31, 2019, the liability representing future contributions to be made to the Youngevity Foundation by the Company was $381,000 and $357,000, respectively, and was included in current liabilities on the Company’s consolidated balance sheets. The Company did not make any contribution during the three months ended March 31, 2020 and 2019.

Daniel Briskie and Maida Briskie

Daniel Briskie and Maida Briskie, the father and mother of the Company’s Chief Investment Officer, entered into note purchase agreements in the principal amount of $25,000 in September 2014 related to the Company’s private placement offering in 2014.  In September 2019, the Company entered into an agreement with Daniel Briskie and Maida Briskie to extend the maturity date of their 2014 PIPE Note for one year. At March 31, 2020 and December 31, 2019, the balance of the loan was $25,000. (See Note 7).

Douglas Briskie

Douglas Briskie, the brother of the Company’s Chief Investment Officer, entered into note purchase agreements in the principal amount of $50,000 in August 2014 related to the Company’s private placement offering in 2014. The note was paid in full in August 2019. (See Note 7).

Note 4. Revenues

The following table summarizes disaggregated revenue by segment (in thousands):

Contract Balances  

On March 31, 2020 and December 31, 2019, deferred revenues were approximately $5,535,000 and $3,569,000, respectively. Deferred revenues in the direct selling segment related to customer deposits were $1,925,000 and $1,626,000 on March 31, 2020 and December 31, 2019, respectively. Deferred revenues in the direct selling segment related to the rewards program that began at the beginning of 2020 were $1,146,000 on March 31, 2020. Deferred revenues in the direct selling segment related to Heritage Makers were $1,688,000 and $1,795,000 on March 31, 2020 and December 31, 2019, respectively. Deferred revenues related to convention and distributor events were $158,000 and $148,000 on March 31, 2020 and December 31, 2019, respectively.

Deferred revenues in the commercial coffee segment related to customer deposits were $618,000 on March 31, 2020. The commercial coffee segment did not have a deferred revenue balance at December 31, 2019.

The commercial hemp segment did not have a deferred revenue balance at March 31, 2020 or December 31, 2019.

The following table summarizes the classification of deferred revenues balances on the balance sheets (in thousands):

Of the deferred revenue balance on December 31, 2019, the Company recognized revenue of approximately $369,000 from the Heritage Makers product line and the remaining balance from the Company’s convention and distributor events during the three months ended March 31, 2020.

At March 31, 2020 and December 31, 2019, the balance in deferred costs related to prepaid commissions from Heritage Makers was approximately $227,000 and $254,000, respectively.

Note 5.  Selected Consolidated Balance Sheet Information

Accounts Receivable, net

On March 31, 2020 and December 31, 2019, CLR's accounts receivable balance for customer related revenue by H&H Export was approximately $8,707,000, of which the full amounts were past due at the respective periods. As a result, the Company reserved $7,871,000 as bad debt related to the accounts receivable balances for both periods, which was net of collections through December 31, 2020.

Inventory, net

Inventories consist of the following (in thousands):

Property and Equipment, net

Property and equipment consist of the following (in thousands):

Depreciation expense totaled approximately $673,000 and $475,000 for the three months ended March 31, 2020 and 2019, respectively.

Operating and Financing Leases

The Company’s operating and financing lease assets and liabilities recognized within its consolidated balance sheets were classified as follows (in thousands):

The weighted-average remaining lease term and weighted-average discount rate used to calculate the present value of lease liabilities are as follows:

Operating and finance lease costs were as follows (in thousands):

Intangible Assets

Intangible assets consist of the following (in thousands):

Amortization expense related to intangible assets was approximately $620,000 and $670,000 for the three months ended March 31, 2020 and 2019, respectively.

At March 31, 2020 and December 31, 2019, approximately $1,649,000 in trademarks from business combinations have been identified as having indefinite lives.

Goodwill

Goodwill activity by reportable segment consists of the following (in thousands):

Note 6.  Notes Payable and Other Debt

Credit Note

In December 2018, CLR entered into a credit agreement with Mr. Grover pursuant to which CLR borrowed $5,000,000 from Mr. Grover and in exchange issued to him a $5,000,000 credit note (the “Credit Note”). In addition, Siles, as guarantor, executed a separate guaranty agreement. The Credit Note is secured by CLR’s green coffee inventory, subordinate to certain debt owed to Crestmark Bank and pari passu with certain holders of notes issued by the borrowers of the company in 2014. At both March 31, 2020 and December 31, 2019, the outstanding principal balance of the Credit Note was $5,000,000.

The Credit Note accrues interest at a rate of 8.00% per annum and in accordance with the Credit Note is paid quarterly. The credit note contains customary events of default including the Company or Siles failure to pay its obligations, commencing bankruptcy or liquidation proceedings, and breach of representations and warranties. Upon the occurrence of an event of default, the unpaid balance of the principal amount of the Credit Note together with all accrued but unpaid interest thereon, may become, or may be declared to be, due and payable by Mr. Grover and shall bear interest from the due date until such amounts are paid at the rate of 10.00% per annum. In connection with the credit agreement, the Company issued to Mr. Grover a four-year warrant to purchase 250,000 shares of its common stock, exercisable at $6.82 per share, and a four-year warrant to purchase 250,000 shares of its common stock, exercisable at $7.82 per share.

In connection with the Credit Note, the Company also entered into an advisory agreement with a third party not affiliated with Mr. Grover, pursuant to which the Company agreed to pay to the advisor a 3.00% fee on the transaction with Mr. Grover and issued to the advisor’s designee a four-year warrant to purchase 50,000 shares of the Company’s common stock, exercisable at $6.33 per share.

The Company recorded debt discounts of approximately $1,469,000 related to the fair value of warrants issued in the transaction and $175,000 of transaction issuance costs both of which are amortized to interest expense over the life of the Credit Note. The Company recorded amortization of approximately $209,000 and $154,000 related to the debt discount and issuance cost during the three months ended March 31, 2020 and 2019, respectively. At March 31, 2020 and December 31, 2019, the combined remaining balance of the debt discounts and issuance cost was approximately $706,000 and $915,000, respectively.

In December 2020, the Credit Note became payable and due in accordance with its terms. CLR did not make the payment due upon the maturity date of the Credit Note. At the filing date of this Quarterly Report on Form 10-Q, the Company was in default of the terms of settlement of the Credit Note and the Credit Note remains outstanding; however no formal demand for repayment has been made.

2019 Promissory Notes

In March 2019, the Company entered into a two-year secured promissory note (the “2019 Promissory Notes”) with two accredited investors that had a substantial pre-existing relationship with the Company pursuant to which the Company raised cash proceeds in the aggregate of $2,000,000. The 2019 Promissory Notes bear interest at a rate of 8.00% per annum and interest is paid quarterly in arrears with all principal and unpaid interest due at maturity on March 18, 2021. The 2019 Promissory Notes are secured by all equity in KII. At both March 31, 2020 and December 31, 2019, the outstanding principal balance of the 2019 Promissory Notes was $2,000,000.

In conjunction with the 2019 Promissory Notes, the Company also issued 40,000 shares of the Company’s common stock and five-year warrants to purchase 40,000 shares of the Company’s common stock. (See Note 10)

The Company recorded debt discounts of approximately $212,000 related to transaction issuance costs and $139,000 related to the fair value of warrants issued in the transaction both of which are amortized to interest expense over the life of the 2019 Promissory Notes. The Company recorded amortization of approximately $43,000 and $5,000 related to the debt discount and issuance cost related to the 2019 Promissory Notes during the three months ended March 31, 2020 and 2019, respectively. At March 31, 2020 and December 31, 2019, the combined remaining balance of the debt discount and issuance costs was approximately $185,000 and $228,000, respectively.

In February 2021, the Company entered into amendment agreements extending the 2019 Promissory Notes and increasing the interest rate. At the filing date, the Company was in default of the terms of the amended agreements. (See Note 13)

Mangless Note

In March 2020, the Company entered into a securities purchase agreement with Daniel Mangless pursuant to which the Company issued a senior secured promissory note in the principal amount of $1,000,000 (the “Mangless Note”) which matured in December 2020, bearing interest at 18.00% per annum. In December 2020, the Company defaulted on the settlement of the Mangless Note.

The Mangless Note provided the Company with an option to prepay at any time without permission or penalty. The Mangless Note is secured pursuant to the terms of a pledge and security agreement, entered into by the Company and CLR with Mr. Mangless, whereby the Mangless Note is secured by a first priority lien granted by CLR in its rights under the pledge and security agreement, by and between H&H, H&H Export and CLR to receive certain payments (the “Mangless Pledge and Security Agreement”).

In addition, the Company issued 50,000 shares of common stock in connection with Mangless Note. (See Note 10)

The Company recognized debt discounts of approximately $65,000 resulting from the allocated portion of offering proceeds to the separable common stock issuance. The debt discount was amortized to interest expense over the term of the Mangless Note. During the three months ended March 31, 2020, the Company recorded approximately $2,000 of amortization related to the debt discounts. At March 31, 2020, the remaining balance of the debt discount was approximately $63,000.

In April 2021, the Company entered into a settlement agreement with Mr. Mangless related to the payment schedule of the Mangless Note issued in March 2020. In addition, as part of the settlement agreement the Company issued Mr. Mangless 1,000,000 shares of common stock. (See Note 13)

2400 Boswell Mortgage Note

The Company’s mortgage for its corporate office and warehouse in Chula Vista, California, is payable over 25 years with an interest rate set at the prime rate plus 2.50%. The lender will adjust the interest rate on the first calendar day of each change period. The Company and its Chief Executive Officer and Chairman and Chief Operating Officer are guarantors of the mortgage. On March 31, 2020 and December 31, 2019, the interest rate was 7.25% and 7.50%, respectively. On March 31, 2020 and December 31, 2019, the balance on the mortgage was approximately $3,122,000 and $3,143,000, respectively.

The Company’s corporate office’s mortgage qualified for the mortgage payment program for a period of six months under the Small Business Administration (“SBA”) lenders program. (See Note 13)

Khrysos Mortgage Notes

In conjunction with the Company’s acquisition of Khrysos Global, the Company assumed an interest only mortgage for properties located in Mascotte, Florida in the amount of $350,000 and interest paid monthly at a rate of 8.00% per annum. In September 2021, the mortgage was amended to extend the maturity date by one year to the earlier of September 2022 or the date of the sale of the property. In addition, the Company assumed a mortgage of approximately $177,000 for properties located in Clermont, Florida with all unpaid principal due in June 2023 and interest paid monthly at a rate of 7.00% per annum.

At March 31, 2020 and December 31, 2019, the aggregate outstanding principal balance on the mortgages was approximately $521,000 and $528,000, respectively.

In February 2019, KII purchased a 45-acre tract of land in Groveland, Florida for $750,000. The Company paid $300,000 as a down payment and assumed a mortgage of $450,000. All unpaid principal was due in February 2024 and interest was paid monthly at a rate of 6.00% per annum. At March 31, 2020 and December 31, 2019, the remaining mortgage balance was approximately $437,000 and $440,000, respectively.

In February 2021, the Company determined that KII’s original plan for use of certain properties was not viable for its future as KII had shifted its focus back to its primary core business of extraction of cannabinoids and the production of products for sale with the cannabinoids. As a result, the Khrysos Mortgage Notes were subsequently sold. (See Note 13)

Lending Agreements

In July 2018, the Company entered into lending agreements with three separate entities and received loans in the total amount of $1,907,000, net of loan fees to be paid back over an eight-month period on a monthly basis. Payments were made monthly and comprised of principal and accrued interest with an effective interest rate between 15% and 20%.  The loans were paid in full in the first quarter of 2019.

M2C Purchase Agreement

In March 2007, the Company entered into an agreement to purchase certain assets of M2C Global, Inc., a Nevada corporation, for $4,500,000. The agreement required payments totaling $500,000 in three installments during 2007, followed by monthly payments in the amount of 10.00% of the sales related to the acquired assets until the entire note balance is paid. On March 31, 2020 and December 31, 2019, the carrying value of the liability was approximately $1,016,000 and $1,027,000, respectively.

Other Notes

The Company’s other notes relate to loans for commercial vans at CLR in the amount of $66,000 and $71,000 on March 31, 2020 and December 31, 2019, respectively, which expire at various dates through 2023.

Line of Credit

The Company’s loan and security agreement with Crestmark Bank (“Crestmark”) provides for a line of credit related to accounts receivables resulting from sales of certain products that includes borrowings to be advanced against acceptable eligible inventory related to CLR. Under the loan and security agreement the maximum overall borrowing limit on the line of credit is $6,250,000. The line of credit may not exceed an amount which is the lesser of (a) $6,250,000 or (b) the sum of up (i) to 85% of the value of the eligible accounts; plus, (ii) the lesser of $1,000,000 or 50% of eligible inventory or 50% of the amount calculated in (i) above, plus (iii) the lesser of $250,000 or eligible inventory or 75% of certain specific inventory identified within the agreement.

The agreement contains certain financial and nonfinancial covenants with which the Company must comply to maintain its borrowing availability and avoid penalties. At the filing date of this Quarterly Report on Form 10-Q, the Company was not in compliance with the covenants under the terms of the agreement.

In January 2022, the Company 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. In February 2022, the Company received a notice of default related to the loan and security agreement from Crestmark. In April 2022, The Company entered into a forbearance agreement with Crestmark. (See Note 13)

The outstanding principal balance of the line of credit bears interest based upon a 360-day year with interest charged for each day the principal amount is outstanding including the date of actual payment. The interest rate is a rate equal to the prime rate plus 2.50% with a floor of 6.75%. On March 31, 2020 and December 31, 2019, the interest rate was 6.75% and 7.25%, respectively. In addition, other fees are incurred for the maintenance of the loan in accordance with the agreement. Other fees may be incurred in the event the minimum loan balance of $2,000,000 is not maintained. The agreement was effective beginning in November 2017 and will continue to be effective until June 30, 2022, the termination date agreed upon in the forbearance agreement entered in April 2022.

The Company and Stephan Wallach entered into a corporate guaranty and personal guaranty, respectively, with Crestmark guaranteeing payments in the event that the Company’s commercial coffee segment CLR were to default. In addition, David Briskie, the Company’s president and chief financial officer, personally entered into a guaranty of validity representing the Company’s financial statements so long as the indebtedness is owed to Crestmark, maintaining certain covenants and guarantees.

The Company’s outstanding line of credit liability with Crestmark was approximately $2,025,000 and $2,011,000 at March 31, 2020 and December 31, 2019, respectively.

Note 7. Convertible Notes Payable

Total convertible notes payable, net of debt discount outstanding consisted of the amount set forth in the following table (in thousands):

Unamortized debt discounts and issuance costs are included with convertible notes payable, net of debt discount on the consolidated balance sheets.

2019 PIPE Notes

Between February and July 2019, the Company closed five tranches related to the 2019 private placement debt offering, pursuant to which the Company offered for sale up to $10,000,000 in principal amount of notes (the “2019 PIPE Notes”), with each investor receiving 2,000 shares of common stock for each $100,000 invested.

The Company entered into subscription agreements with thirty-one accredited investors, that had a substantial pre-existing relationship with the Company, pursuant to which the Company issued the 2019 PIPE Notes in the aggregate principal amount of $3,090,000. Each 2019 PIPE Note matures 24 months after issuance, bears interest at a rate of 6.00% per annum which is paid quarterly, 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. At March 31, 2020 and December 31, 2019, the 2019 PIPE Notes remained outstanding.

Upon issuance of the 2019 PIPE Notes, the Company recognized debt discounts of approximately $671,000, resulting from the allocated portion of offering proceeds to the separable common stock issuance. The debt discount will be amortized to interest expense over the term of the 2019 PIPE Notes. During the three months ended March 31, 2020, the Company recorded approximately $84,000 of amortization related to the debt discounts. At March 31, 2020 and December 31, 2019, the remaining balance of the debt discount was approximately $331,000 and $415,000, respectively.

In February and March 2021, the 2019 PIPE Notes that were maturing were extended by one year by way of an amendment with certain note holders of an aggregate $2,440,000 in principal amount. At the filing date of this Quarterly Report on Form 10-Q, the Company was in default of the terms of settlement set forth in the amendments. (See Note 13) 

2014 PIPE Notes

Between July and September 2014, the Company entered into note purchase agreements (the “2014 PIPE Note” or “2014 PIPE Notes”) related to its private placement offering (the “2014 private placement”) with seven accredited investors pursuant to which the Company raised aggregate gross proceeds of $4,750,000 and sold units consisting of five year senior secured convertible 2014 PIPE Notes in the aggregate principal amount of $4,750,000 that were convertible into 678,568 shares of the Company’s common stock, at a conversion price of $7.00 per share, and warrants to purchase 929,346 shares of common stock at an exercise price of $4.60 per share. The 2014 PIPE Notes bear interest at a rate of 8.00% per annum and interest was paid quarterly in arrears.

The Notes are secured by Company pledged assets and rank senior to all debt of the Company other than certain senior debt that has been previously identified as senior to the convertible notes. Additionally, Stephan Wallach, the Company’s Chief Executive Officer, has also personally guaranteed the repayment of the Notes, subject to the terms of a Guaranty Agreement executed by him with the investors. In addition, Mr. Wallach has agreed not to sell, transfer or pledge 1.5 million shares of the common stock that he owns so long as his personal guaranty is in effect.

In September 2019, the Company extended the maturity date of one holder of a 2014 PIPE Note with a balance of $25,000 for one year, with interest being paid under the original terms of 8.00% per annum and interest paid quarterly in arrears. At March 31, 2020 and December 31, 2019, the outstanding balance of the 2014 PIPE Note was $25,000. All other 2014 PIPE Notes have been settled.

In 2014, the Company initially recorded debt discounts of $4,750,000 related to the beneficial conversion feature and related detachable warrants. The beneficial conversion feature discount and the detachable warrants discount are amortized to interest expense over the life of the 2014 PIPE Notes. The unamortized debt discounts recognized with the debt exchange was approximately $679,000. The Company recorded approximately $31,000 of amortization of the debt discounts during the three months ended March 31, 2019. At December 31, 2019, the debt discounts relating to the 2014 PIPE Notes were fully amortized.

In 2014, the Company paid approximately $490,000 in expenses including placement agent fees relating to issuance costs with the 2014 private placement. The unamortized issuance costs recognized with the debt exchange was approximately $63,000. The issuance costs were amortized to interest expense over the term of the 2014 PIPE Notes. The Company recorded approximately $3,000 of amortization of the issuance costs during the three months ended March 31, 2019. At December 31, 2019, all issuance costs relating to the 2014 private placement and debt exchange were fully amortized.

Note 8. Derivative Liability

Warrants

The estimated fair value of the outstanding warrant derivative liabilities was $53,000 and $1,542,000 at March 31, 2020 and December 31, 2019, respectively.

Increases or decreases in the fair value of the derivative liability are included as a component of total other expense in the accompanying consolidated statements of operations for the respective period. The changes to the derivative liability for warrants resulted in a decrease of $1,489,000 and $1,486,000 for the three months ended March 31, 2020 and 2019, respectively.

The estimated fair value of the warrants was computed at March 31, 2020 and December 31, 2019 using the Monte Carlo option pricing model with the following assumptions:

In addition, management assessed the probabilities of future financing assumptions in the valuation models.

Note 9.   Fair Value of Financial Instruments

The following table details the fair value measurement within the fair value hierarchy of the Company’s financial instruments, which includes the Level 3 liabilities (in thousands):