Youngevity International, Inc. - Annual Report: 2019 (Form 10-K)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

[X]	Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2019

 

OR

 

[  ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 For the transition period from_______ to______

 

Commission file number 000-54900

 

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

 

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–
N/A		N/A		N/A

 

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

Series B Convertible Preferred Stock

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ]  No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ]  No [X]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 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, a 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 [X]	Non-accelerated filer [  ]	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 standard provided pursuant to Section 13(a) of the Exchange Act. [ ]

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of Act). Yes [  ]  No [X]

 

The aggregate market value of all of the common stock held by non-affiliates of the registrant as of June 28, 2019, the last business day of the registrant's recently completed second quarter, was $83,002,648 based upon $5.70, the closing stock price reported on the Nasdaq Capital Market on that date.

 

The number of shares of registrant's common stock outstanding on June 22, 2021 was 33,975,126.

 

Documents incorporated by reference: None.

 

 

YOUNGEVITY INTERNATIONAL, INC.

ANNUAL REPORT ON FORM 10-K

FISCAL YEAR ENDED DECEMBER 31, 2019

 

TABLE OF CONTENTS

 

PART I
Item 1.	Business	1
Item 1A.	Risk Factors	17
Item 1B.	Unresolved Staff Comments	43
Item 2.	Properties	43
Item 3.	Legal Proceedings	44
Item 4.	Mine Safety Disclosures	44
PART II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	45
Item 6.	Selected Financial Data	46
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	46
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	64
Item 8.	Financial Statements and Supplementary Data	64
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosures	65
Item 9A.	Controls and Procedures	65
Item 9B.	Other Information	67
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	68
Item 11.	Executive Compensation	72
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	76
Item 13.	Certain Relationships and Related Transactions, and Director Independence	78
Item 14.	Principal Accountant Fees and Services	83
PART IV
Item 15.	Exhibits and Financial Statement Schedules	84
Item 16.	Form 10-K Summary	84
SIGNATURES		90

 

 

 

 

YOUNGEVITY INTERNATIONAL, INC.

ANNUAL REPORT ON FORM 10-K

FISCAL YEAR ENDED DECEMBER 31, 2019

 

PART I

 

Item 1. Business

 

Special Note Regarding Forward-Looking Statements

 

This Annual Report on Form 10-K (this “Annual Report”) contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties. The forward-looking statements are contained principally in Part I, Item 1. “Business,” Part I, Item 1A. “Risk Factors,” and Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but are also contained elsewhere in this Annual Report. Forward looking-statements can be identified by, among other things, the use of forward-looking language, such as the words “plans,” “intends,” “believes,” “expects,” “anticipates,” “estimates,” “projects,” “potential,” “may,” “will,” “would,” “could,” “should,” “seeks,” or “scheduled to,” or other similar words, the negative of these terms, other variations of these terms or comparable language, or by discussion of strategy or intentions. These statements are based on management’s current beliefs, expectations, and assumptions and are subject to a number of risks and uncertainties, many of which are difficult to predict and generally beyond our control, that could cause actual results to differ materially from those expressed, projected or implied in or by the forward-looking statements. These risks and uncertainties should be considered carefully, and readers are cautioned not to place undue reliance on such forward-looking statements. As such, no assurance can be given that the future results covered by the forward-looking statements will be achieved. All information in this Annual Report on Form 10-K is as of December 31, 2019, unless otherwise indicated. The Company does not intend to update this information to reflect events after the date of this Annual Report on Form 10-K.

 

You should refer to Item 1A. “Risk Factors” section of this Annual Report for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Annual Report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We do not undertake any obligation to update any forward-looking statements.

 

Unless the context requires otherwise, references to “we,” “us,” “our,” and “Youngevity,” refer to Youngevity International, Inc. and its subsidiaries.

 

Summary Risk Factors

 

The following is a summary of the key risks relating to the Company. A more detailed description of each of the risks as well as other risks can be found below in Item 1A. Risk Factors.

 

RISKS RELATING TO OUR BUSINESS

 

 

RISKS RELATED TO OUR DIRECT SELLING BUSINESS

 

 

RISKS RELATED TO OUR COMMERCIAL COFFEE BUSINESS

 

 

RISKS RELATED TO OUR COMMERCIAL HEMP BUSINESS

 

 

RISKS ASSOCIATED WITH INVESTING IN OUR COMPANY AND OUR SECURITIES

 

 

Overview

 

Youngevity, formerly AL International, Inc., founded in 1996, 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 we manufacture 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. During the year ended December 31, 2018, we operated in two business segments, our direct selling segment, and our commercial coffee segment. During the first quarter of 2019, through the acquisition of the assets of Khrysos Global, Inc. we added the commercial hemp as a third business segment to our operations as further discussed below.

 

 

 

Information on the operations of our three segments is as follows:

● Our direct selling segment is operated through three domestic subsidiaries, AL Global Corporation, 2400 Boswell LLC, and Youngevity Global LLC, and twelve foreign subsidiaries; Youngevity Australia Pty. Ltd., Youngevity NZ, Ltd., Youngevity Mexico S.A. de CV, Youngevity Russia, LLC, Youngevity Israel, Ltd., Youngevity Europe SIA (Latvia), Youngevity Colombia S.A.S, Youngevity International Singapore Pte. Ltd., Mialisia Canada, Inc., Youngevity Global LLC, Taiwan Branch, Youngevity Global LLC, Philippine Branch and Youngevity International (Hong Kong). We also operate in Indonesia, Malaysia, and Japan through our sales force of independent distributors.

 

 

 

Non-reliance of Previously Issued Financial Statements

 

On October 16, 2020 the Company filed a notice of non-reliance on previously issued financial statements with the Securities and Exchange Commission (“SEC”), reporting the Company’s Audit Committee determined that the unaudited condensed consolidated financial statements for the quarters ended March 31, 2019, June 30, 2019 and September 30, 2019 contained in the Company’s quarterly reports on Form 10-Q previously filed with the SEC on May 20, 2019, August 14, 2019 and November 18, 2019 should no longer be relied upon. Similarly, related press releases, earnings releases, and investor communications describing the Company’s unaudited condensed consolidated financial statements for those periods should no longer be relied upon. As a result, the Company intends to file a restatement related to these periods as soon as practicable. The intended restatements are related to the Company’s commercial coffee segment and the commercial hemp segment, further details are summarized below:

 

Commercial Coffee Segment

 

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”) and for sales recorded to major independent customers. These sales were originally recorded at gross (revenue recorded without reduction for cost to purchase the inventory).

 

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. For sales made to major independent customers, the Company assessed whether revenue was recognizable.

 

For both reviews, the following five steps were applied to review if the core revenue recognition principles were meet:

 

 

 

 

 

During this review process the Company focused on identifying the performance obligations in the contracts with H&H Export. The Company’s review indicated that per the underlying terms and conditions of the contracts entered into with H&H Export, (the provider of the “wet” green coffee and the buyer of the processed coffee), that CLR is assigned the green coffee beans as coffee is 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 is responsible for insuring all reasonable and necessary actions to ensure the coffee beans are safeguarded during processing at the Company’s coffee mill. CLR does not take ownership and does not incur financial risk associated with the coffee as it is delivered to its mill. Based on the above assessment, management has concluded that CLR does not control the green coffee before it is provided to H&H Export, at the point of sale to H&H Export.

 

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 year ended December 31, 2019, the Company is reporting its revenue for coffee when sold to H&H Export at net.

With regard to sales made to major independent customers, the Company focused on if recognition of revenue thresholds were met and if the company had satisfied its performance obligation and could reasonably expect payment for fulling these performance obligations. The Company determined that for certain sales to major customers, these thresholds were not met, and therefore revenue should not have been recognized.

The Company intends to restate its quarterly reports on Form 10-Q for the three months ended March 31, 2019, three and six months ended June 30, 2019, and for the three and nine months ended September 30, 2019 related to this change in revenue recognition. (See Note 3 under “Other Related Party Transactions” for further discussion related to H&H Export.).

 

Commercial Hemp Segment

 

In conjunction with the Company’s 2019 annual audit the Company concluded that certain fixed assets acquired in the acquisition of KII and the share price valuation for the common stock issued as consideration were not fairly valued as of the closing date February 12, 2019 which resulted in a decrease to the net assets acquired including; a) $1,127,000 related to the certain fixed assets, and b) $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. The Company intends to restate its quarterly reports on Form 10-Q for the three months ended March 31, 2019, three and six months ended June 30, 2019, and for the three and nine months ended September 30, 2019. (See Note 2 under “Khrysos Global, Inc.” for further discussion regarding this acquisition.)

 

Segment Information

 

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 and the sale and processing of green coffee beans. 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.

 

During the year ended December 31, 2019, we derived approximately 86.1% of our revenue from our direct sales, approximately 13.3% of our revenue from our commercial coffee sales and approximately 0.6% from the commercial hemp segment. During the year ended December 31, 2018, we derived approximately 85.5% of our revenue from our direct sales and approximately 14.5% of our revenue from our commercial coffee sales.

 

Direct Selling Segment. In the direct selling segment, we sell health and wellness, beauty product and skin care, scrap booking and story booking items, packaged food products and other service-based products on a global basis and more recently our Hemp FX™ hemp-derived cannabinoid (“CBD”) product line and offer a wide range of products through an international direct selling network. Our direct sales are made through our network, which is a web-based global network of customers and distributors. Our independent sales force markets a variety of products to an array of customers, through friend-to-friend marketing and social networking. We consider our Company to be an e-commerce company whereby personal interaction is provided to customers by our independent sales network. Initially, our focus was solely on the sale of products in the health, beauty, and home care market through our marketing network; however, we have since expanded our selling efforts to include a variety of other products in other markets. Our direct selling segment offers approximately 5,500 products to support a healthy lifestyle including:    

 

● Nutritional Supplements		● Skincare and Cosmetics		● Home and Garden
● Weight Management		● Nail and Beauty		● Pet Care
● Health and Wellness		● Gourmet Coffee		● Digital Products
● Lifestyle Products		● Packaged Foods		● Telecare Health Services
● Apparel and Accessories		● Hemp-derived CBD Products		● Business Lending

 

Since 2012, we have expanded our operations through a series of acquisitions of the assets and equity of 24 direct selling companies including their product lines and sales forces. We have also substantially expanded our distributor base by merging the assets that we have acquired under our web-based independent distributor network, as well as providing our distributors with additional new products to add to their product offerings.

 

 

 

Commercial Coffee Segment. In the commercial coffee segment, we engage in the commercial sale of roasted coffee products and distribution of green coffee beans, through CLR, our wholly-owned subsidiary which was established in 2001. During the year ended December 31, 2019, we derived approximately 5.4% of our coffee revenue from our green coffee sales, 32.8% from our milling and processing services and approximately 61.8% of our coffee revenue from our roasted coffee sales.

 

We own a traditional coffee roasting business that sells roasted coffee products under its own Café La Rica brand, Josie’s Java House brand, Javalution brands, and Café Cachita. CLR produces and sells a variety of private labels through major national sales outlets and to major customers including cruise lines and office coffee service operators, as well as through our direct selling business. CLR produces and markets a unique line of coffees with health benefits under the JavaFit® brand which is sold directly to consumers. In April 2017, CLR reached an agreement with Major League Baseball's Miami Marlins to feature CLR’s Café La Rica Gourmet Espresso coffee as the “Official Cafecito of the Miami Marlins” at Marlins Park in Miami, Florida. The current agreement with the Miami Marlins is through the 2021 baseball season. In January 2019, CLR acquired the Café Cachita brand of espresso and in February 2019 we announced the expansion of our Café Cachita brand of espresso into retail stores throughout Southeastern Grocers.  The new distribution footprint now includes all Winn Dixie, Bi-Lo, Fresco Y Mas, Save Mart, and Harveys stores. In June 2019, we announced all-store distribution for CLR’s Javalution™ Hemp Infused Coffee Brand, with orders shipping on the east coast to Save Mart during the end of the first quarter of 2020 and continue to ship orders to Save Mart throughout 2020 and now 2021.

 

Our roasting facility located in Miami, Florida, is 50,000 square feet and is SQF Level 2 certified, which is a stringent food safety process that verifies the coffee bean processing plant and distribution facility is in compliance with Certified HACCP (Hazard Analysis, Critical Control Points) food safety plans.

 

In March 2014, we expanded our commercial coffee segment and started our new green coffee distribution business with CLR’s acquisition of Siles, located in Matagalpa, Nicaragua. Siles includes “La Pita,” a dry-processing facility on approximately 26 acres of land and “El Paraiso,” a coffee plantation consisting of approximately 500 acres of land and thousands of coffee plants which produces 100 percent Arabica coffee beans that are shade grown, Organic, Rainforest Alliance Certified™ and Fair Trade Certified™. The plantation and dry-processing facility allow CLR to control the coffee production process from field-to-cup. The dry-processing plant allows CLR to produce and sell green coffee to major coffee suppliers in the United States (the “U.S.”) and around the world.

 

As part of the 2014 Siles acquisition, CLR engaged the owners of H&H Coffee Group Export Corp. (“H&H Export”) and Hernandez, Hernandez, Export Y Compania Limitada (“H&H”), Alain Piedra Hernandez (“Mr. Hernandez”) and Marisol Del Carmen Siles Orozco (“Ms. Orozco”), as employees to manage Siles and entered into an operating agreement with them that provides for the sharing of profits and losses generated by Siles after certain conditions are met. CLR has made improvements to the land and facilities since 2014. Additionally, CLR has contracted with H&H who is an agent of the local producers in Nicaragua to supply unprocessed green coffee, to our mill. We do not grow the green coffee that we process and sell and instead the green coffee that we process and sell originates with local producers in Nicaragua. We do not have a direct relationship with the local producers and are dependent on H&H, who serves as an agent and assigns the unprocessed green coffee beans acquired from local producers to our mill, insuring that our mill has a supply of raw green coffee on a timely and efficient manner. During the year ended December 31, 2019, all of the unprocessed green coffee processed through our mill was assigned from H&H.

 

CLR acquires processed green coffee beans from H&H Export, who releases the processed green coffee beans and invoices CLR for those processed green coffee beans as CLR sells processed green coffee to major coffee suppliers in the U.S. and around the world. CLR, from time to time will also supply H&H Export with milling services that ultimately provide H&H Export with processed green coffee. As CLR does not control the green coffee prior to transferring control to H&H Export, these transactions are recognized as milling services. The goods or services provided to H&H Export for these transactions is the performance obligation to provide milling services for the green coffee.

 

In January 2019, to accommodate CLR’s green coffee purchase contract, CLR entered into an agreement with H&H, H&H Export, Mr. Hernandez and Ms. 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 “Matagalpa Property”) to be owned 50% by the Nicaraguan Partner and 50% by CLR. In consideration for the land acquisition we issued to H&H Export, 153,846 shares of our 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 Matagalpa Mill will accommodate CLR’s green coffee contract commitments. For the year ended December 31, 2019 and 2018, CLR made payments of $2,150,000 and $900,000, respectively, towards the Matagalpa Mill project. At December 31, 2019, CLR contributed a total of $3,050,000 towards the Matagalpa Mill project, in addition $391,117 was paid for operating equipment and the Nicaraguan Partner contributed a total of $1,922,000. CLR’s remaining portion of $1,650,000 was paid during 2020, including an additional $912,606 related to operating equipment. As of the date of this filing, the Matagalpa Mill is in construction and was not ready for full operations.

 

 

Commercial Hemp Segment. In the commercial hemp segment, we are a manufacturer of commercial hemp-based CBD extraction and post-processing equipment, and end-to-end processor of CBD isolate, distillate, water soluble isolate and water-soluble distillate. We develop, manufacture, and sell equipment and related services to customers which enable them to extract CBD oils from hemp stock. We provide 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. We are also engaged in hemp-based CBD extraction technology including tolling processing which converts hemp biomass to hemp extracts such as CBD oil, distillate, and isolate. We offer customers turnkey manufacturing solutions in extraction services and end-to-end processing systems. In addition, we own a laboratory testing facility that provides us with a broad range of capabilities in regard to formulation, quality control, and testing standards with our CBD products, including potency analysis for our supply partners of hemp derived CBD products.

 

Acquisitions

 

Direct Selling Segment. We have expanded our operations through a series of acquisitions of the assets of other direct selling companies including their product lines and sales forces. We have also substantially expanded our distributor base by merging the assets that we have acquired under our web-based independent distributor network, as well as providing our distributors with additional new products to add to their product offerings. 

 

Set forth below is information regarding each of our direct selling segment acquisitions during 2019 and 2018.

 

BeneYOU, LLC. In November 2019, we acquired certain assets of BeneYOU, LLC., (“BeneYOU”). BeneYOU is a nutritional and beauty product company that brings customers and distributors of Jamberry, Avisae and M.Global. BeneYOU’s, flagship brand Jamberry has an extensive line of nail products with a core competency in social selling whereas Avisae focuses on the gut health, and M.Global delivers hydration products. We are obligated to make monthly payments based on a percentage of the BeneYOU’s distributor revenue derived from sales of our products and a percentage of royalty revenue derived from sales of BeneYOU’s products until the earlier of the date that is five years from the closing date or such time as we have paid to BeneYOU aggregate cash payments of the BeneYOU distributor revenue and royalty revenue equal to a predetermined maximum aggregate purchase price. (See Note 2 to the consolidated financial statements.)

 

Doctor’s Wellness Solutions Global LP (ViaViente). In March 2018, we acquired certain assets of Doctor’s Wellness Solutions Global LP (“ViaViente”). ViaViente is the distributor of The ViaViente Miracle, a highly concentrated, energizing whole fruit puree blend that is rich in antioxidants and naturally occurring vitamins and minerals. We are obligated to make monthly payments based on a percentage of the ViaViente distributor revenue derived from sales of our products and a percentage of royalty revenue derived from sales of ViaViente’s products until the earlier of the date that is five years from the closing date or such time as the we have paid to ViaViente aggregate cash payments of the ViaViente distributor revenue and royalty revenue equal to a predetermined maximum aggregate purchase price. (See Note 2 to the consolidated financial statements.)

 

Nature Direct. In February 2018, we acquired certain assets and assumed certain liabilities of Nature Direct. Nature Direct, is a manufacturer and distributor of essential oil based nontoxic cleaning and care products for personal, home and professional use. We are obligated to make monthly payments based on a percentage of the Nature Direct distributor revenue derived from sales of our products and a percentage of royalty revenue derived from sales of the Nature Direct products until the earlier of the date that is twelve years from the closing date or such time as we have paid to Nature Direct aggregate cash payments of the Nature Direct distributor revenue and royalty revenue equal to a predetermined maximum aggregate purchase price. (See Note 2 to the consolidated financial statements.)

 

 

 

Set forth below is information regarding each of our direct selling segment acquisitions since 2012.

 

Business		Date of Acquisition		Product Categories
BeneYOU, LLC		November 1, 2019		Nutritional supplements and beauty products
ViaViente		March 1, 2018		Nutritional supplements
Nature Direct		February 12, 2018		Essential oil based nontoxic cleaning and care products for personal, home and professional use
BeautiControl, Inc.		December 13, 2017		Cosmetic and skin care products
Future Global Vision, Inc.		November 6, 2017		Nutritional supplements and automotive fuel additive products
Sorvana International, LLC (FreeLife International, Inc.)		July 1, 2017		Health and wellness products
Ricolife, LLC		March 1, 2017		Teas
Bellavita Group, LLC		March 1, 2017		Health and beauty products
Legacy for Life, LLC		September 1, 2016		Nutritional supplements
Nature’s Pearl Corporation		September 1, 2016		Nutritional supplements and skin care products
Renew Interest, LLC (SOZO Global, Inc.)		July 29, 2016		Nutritional supplements and skin care products
South Hill Designs Inc.		January 20, 2016		Jewelry
PAWS Group, LLC		July 1, 2015		Pet treats
Mialisia & Co., LLC		June 1, 2015		Jewelry
JD Premium LLC		March 4, 2015		Dietary supplement company
Sta-Natural, LLC		February 23, 2015		Vitamins, minerals and supplements for families and their pets
Restart Your Life, LLC		October 1, 2014		Dietary supplements
Beyond Organics, LLC		May 1, 2014		Organic food and beverages
Good Herbs, Inc.		April 28, 2014		Herbal supplements
Biometics International, Inc.		November 19, 2013		Liquid supplements
GoFoods Global, LLC		October 1, 2013		Packaged foods
Heritage Markers, LLC		August 14, 2013		Digital products
Livinity, Inc.		July 10, 2012		Nutritional products
GLIE, LLC (DBA True2Life)		March 20, 2012		Nutritional supplements

 

Commercial Hemp Segment. In February 2019, KII, our wholly-owned subsidiary, acquired 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.  KII offers various rental, sales, and service programs of their extraction and processing systems. (See Note 2 & Note 14 to the consolidated financial statements.)

 

Products and Services

 

We employ certain web enabled systems to increase distributor support, which allows distributors to run their business more efficiently and allows us to improve our order-processing accuracy. In many countries, distributors can utilize the internet to manage their business electronically, including order submission, order tracking, payment, and two-way communications. In addition, distributors can further build their own business through personalized web pages provided by us, enabling them to sell a complete line of our products online. Self-paced online training is also available in certain markets, as well as up-to-the-minute news, about us.

 

 

 

In the U.S. and selected other markets, we also market our products through the following consumer websites: 

 

●	www.youngevity.com	●	www.beneyou.com
●	www.ygyi.com	●	www.clrroasters.com
●	www.heritagemakers.com	●	www.javalution.com
●	www.hempfx.com	●	www.khrysosglobal.com

 

Information contained on our websites are not incorporated by reference into, and do not form any part of, this Annual Report on Form 10-K. We have included the website address as a factual reference and do not intend it to be an active link to the website.

 

Direct Selling Segment. We offer approximately 5,500 products to support a healthy lifestyle. All of these products, which are sold through our direct selling network, can be categorized into eight verticals: (i) Health & Nutrition, (ii) Home & Family, (iii) Food & Beverage, (iv) Spa & Beauty, (v) Fashion, (vi) Essential Oils, (vii) Photo, and (viii) Services.

 

Our flagship health & nutrition line of products include our Healthy Body Start Pak™, which includes Beyond Tangy Tangerine® (a multivitamin/mineral/amino acid supplement), Ultimate EFA Plus™ (an essential fatty acid supplement), Beyond Osteofx™ (a bone and joint health supplement), and the line of products from our acquisition of BeneYOU in November 2019. This product category is continually evaluated and updated where and when necessary. New products are introduced to take advantage of new opportunities that may become available based on scientific research and or marketing trends. Beyond Tangy Tangerine® 2.0 was added to the line to offer a second flavor and a non-GMO option to our number one selling product. The Healthy Body Start Pak™ comes in a variety of options to target specific health concerns or goals. In addition, we offer many other products under our health & nutrition line.

 

In 2018, we introduced our Hemp FX™ hemp-derived CBD product line which is included with our Health and Nutrition line of products. We currently offer seven products in this line, each containing a proprietary blend of hemp-derived CBD oil, herbs, minerals, and antioxidants. All products under the Hemp FXTM line contain oil derived from hemp containing less than 0.3% THC on a dry weight basis at the point of extraction. The products are manufactured domestically and sold by our distributors in the 48 states that have not prohibited sales of products containing CBD. See the risk factor “New legislation or regulations which impose substantial new regulatory requirements on the manufacture, packaging, labeling, advertising and distribution and sale of hemp-derived products could harm our business, results of operations, financial condition and prospects” for a discussion regarding certain risks specific to these products.

 

Our home and family line of products include our For Tails Only™ line of pet products, Nature Direct product line of environmentally safe products for the home, Hydrowash™ an environmentally safe cleaner, Bloomin Minerals™, a line of plant and soil revitalizers, scrape booking products for the family through our Memories for Life brand of products and many other products for the home and family.

 

Our food & beverage line of products include nutrient rich energy drinks, probiotic chocolates, and organic gourmet coffee. We offer through our direct selling our CLR brands of coffee. Our flagship weight management program is marketed as the Healthy Body Challenge, a program that involves three phases: detoxification, transformation, and the healthy lifestyle phase. Each phase includes recommended products. During the transformation phase, we recommend the Ketogenic 30-Day Burst, consisting of the Slender FX™ Keto products to support fat loss. In addition, we offer many other products for the food & beverage line.

 

Our spa & beauty line of products offered through our Youngevity® Mineral Makeup™, Soul Purpose, Beyond Organic, Simple Corp, Jamberry, and other brands which include makeup & nail products, skin & hair care products for both women and men, bath products. In addition, we offer many other products for our spa & beauty line of products.

 

Our fashion line of products includes our MK Collaboration line of fashion and jewelry accessories to complement our nutritional and makeup products. With the acquisition of BeneYOU in November 2019, Mialisia in 2015, and the licensing agreement we entered into with South Hill Designs (a proprietary jewelry company that sells customized lockets and charms) in 2016, we have further expanded our jewelry line and our distributors have access to offering more variety and appealing to a broader consumer base.

 

 

 

Our essential oils line of products includes our own Youngevity formulas. We offer a unique line of essential oil blends including bath salts.

 

Our photo line of products includes our Heritage Makers line which allows customers and distributors to create and publish a number of products utilizing their personal photos, Our Memories For Life products for scrapbooking and memory keepsake and Anthology DIY by Lisa Bearnson, a creative new approach to start to finish do-it-yourself projects. Heritage Makers provides ongoing access to Studio, a user friendly, online program, where a person can make one of a kind keepsake; storybooks, photo gifts and more, using Heritage Makers rich library of digital art and product templates. Products available include storybooks, digital scrapbooking, cards, and photo gifts.

 

Our services are offered through David Allen Capital and include business lending, telecare health services, discount services for travel and entertainment and various other service type products.

 

Commercial Coffee Segment. CLR operates a traditional coffee roasting business which includes the JavaFit® product line which is available to our network of direct marketers. Javalution, through its JavaFit Brand, develops products in the relatively new category of fortified coffee. JavaFit fortified coffee is a blend of roasted ground coffee and various nutrients and supplements.

 

Our JavaFit line of coffee is only sold through our direct selling network. CLR produces and sells coffee under its own brands, as well as under a variety of private labels through major national retailers, various office coffee and convenience store distributors, to wellness and retirement centers, to a number of cruise lines and cruise line distributors, and direct to the consumer through sales of the JavaFit Brand to our direct selling division.

 

In addition, CLR produces coffee under several company owned brands including: Café La Rica, Café Alma, Josie’s Java House, Javalution Urban Grind, Javalution Daily Grind, and Javalution Royal Roast. These brands are sold to various internet and traditional brick and mortar retailers including WalMart®, WinnDixie, Jetro, American Grocers, Publix, Home Goods, Marshalls, Bi-Lo, Fresco Y Mas, Harveys, Save Mart and T.J. Maxx®.

 

During 2015 CLR invested in the KCup® coffee equipment and capabilities and began the production of the KCup® line of single-serve coffee products. In addition, we registered our own YCup® trademark for Youngevity identification to expand the business brand name.

 

In April 2017, CLR reached an agreement with Major League Baseball's Miami Marlins to feature CLR’s Café La Rica Gourmet Espresso coffee as the “Official Cafecito of the Miami Marlins” at Marlins Park in Miami, Florida. The current agreement with the Miami Marlins, which was recently renewed, is through the 2021 baseball season. In January 2019, CLR acquired the Café Cachita brand of espresso and in February 2019 we announced the expansion of our Café Cachita brand of espresso into retail stores throughout Southeastern Grocers.

 

CLR’s green coffee business provides for the sale of green coffee beans to other importer and distributors who sell to the roasters of coffee beans from Nicaragua and providing milling services to H&H.

 

Our CLR products offered include:

 

●	100% Colombian Premium Blend	●	Italian Espresso
●	House Blend	●	Decaffeinated Coffee
●	Dark Roast	●	Halfcaff 50/50 blend Espresso
●	Flavored Coffees	●	Green Coffee Beans
●	Espresso	●	Organic Coffees
●	Hemp Derived Cannabidiol Coffee	●	Select Water Decaffeinated

 

Commercial Hemp Segment. Our commercial hemp segment is a provider of hemp-based CBD oil, isolate and distillate and offers a variety of products and services. We manufacture hemp-based CBD extraction equipment and CBD oil refiners and provide end-to-end processing of oil from hemp biomass. In addition, we offer proprietary system rentals and leases to provide extraction services, including post processing, and laboratory testing services with capabilities regarding formulation, quality control, genetic seed development, cloning, and testing standards with our CBD products. We also produce tinctures, balms, bath bombs, creams, ointments, in various potencies, as well as Javalution™ Hemp Infused Coffee Brand CBD coffee for CLR.

 

 

 

Distribution

 

Direct Selling Segment. We presently sell products domestically in 50 states and internationally, with operations in the U.S. and currently fourteen international distribution centers. For the years ended December 31, 2019 and 2018 approximately 14% of our revenue were derived from sales outside the U.S. We primarily sell our products to the ultimate consumer through the direct selling channel. Our distributors are required to pay a onetime enrollment fee and receive a welcome kit specific to that country region that consists of forms, policy and procedures, selling aids, and access to our distributor website, prior to commencing services for us as a distributor. Distributors are independent contractors and not our employees. Distributors earn a profit by purchasing products directly from us at a discount from a published brochure price and selling them to their customers, the ultimate consumer of our products. We generally have no arrangements with end users of our products beyond the distributors, except as described below.

 

A distributor may contact customers directly, selling primarily through our online or printed brochures, which highlight new products and special promotions for each of our sales campaigns. In this sense, the distributor, together with the brochure, is the “store” through which our products are sold. A brochure introducing new sales campaigns is frequently produced and our websites and social networking activity take place on a continuous basis. Generally, distributors and customers forward orders using the internet, mail, telephone, or fax and payments are processed via credit card or other acceptable forms of payment at the time an order is placed. Orders are processed, and the products are assembled primarily at our distribution center in Chula Vista, California and delivered to distributors, distribution centers and customers through a variety of local, national and international delivery companies.

 

Introducing new distributors and the training of the new distributors are the primary responsibilities of key independent distributors supported by our marketing home office staff. The independent distributors are independent contractors compensated exclusively based on total sales of products achieved by their down-line distributors and customers. Although the independent distributors are not paid a fee for recruiting or introducing additional distributors, they have the incentive to recruit and onboard additional distributors to increase their opportunities for increasing their total product sales and related sales commissions. Acquisitions of other direct selling businesses and personal contacts, including recommendations from current distributors, and local market advertising constitute the primary means of obtaining new distributors and customers. Distributors also can earn bonuses based on the net sales of products made by distributors they have recruited and trained in addition to discounts earned on their own sales of our products. This program can be unlimited based on the level achieved in accordance with the compensation plan that can change from time to time at our discretion. The primary responsibilities of sales leaders are the prospecting, appointing, training and development of their down-line distributors and customers while maintaining a certain level of their own sales.

 

Commercial Coffee Segment. Our coffee segment is operated by CLR. The segment operates a coffee roasting plant and distribution facility located in Miami, Florida. The 50,000-square foot plant contains two commercial grade roasters and four commercial grade grinders capable of roasting 10 million pounds of coffee annually. The plant contains a variety of packaging equipment capable of producing two-ounce fractional packs, vacuum sealed brick packaging for espresso, various bag packaging configurations ranging from eight ounces up to a five-pound bag package. The coffee segment’s single-serve K-Cup filling equipment can produce 35 million K-Cups annually of our own brands and private label orders. 

 

Commercial Hemp Segment. Our commercial hemp segment, located in central Florida, includes an 82,000 square foot hemp processing and manufacturing facility in Orlando, Florida, to house its processing hemp derived products and finished goods manufacturing facility. The Orlando facility holds the post processing equipment and the extensive power systems. In addition to the Orlando facility, KII owns a laboratory testing facility located in Clermont, Florida, that provides capabilities in regard to formulation, quality control, and testing standards with CBD products. In addition, KII owns a production shop located in Mascotte, Florida. In 2021, KII 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, currently the Clermont, Florida property is for sale. The Mascotte, Florida property is expected to be listed for sale by the end of 2021. KII, expects to continue to lease the Orlando, Florida. (See Note 2 & Note 14 to the consolidated financial statements.)

 

Seasonality and Back Orders

 

Our business in both the direct selling and commercial coffee segment can experience weaker sales during the summer months; however, based on recent experience, seasonality has not been material to our operating results.  Our business in the commercial hemp segment has not experienced effects of seasonality in its operating results, however due to the price fluctuations of biomass the hemp segment can experience fluctuations in costs of sales. We have not experienced significant back orders in any of our segments.

 

 

 

Promotion and Marketing

 

Direct Selling Segment. Sales promotion and sales development activities are directed at assisting distributors through sales aids such as brochures, product samples, demonstration product videos and live training sessions. To support the efforts of distributors to reach new customers, specially designed sales aids, promotional pieces, customer flyers, radio and print advertising are used. In addition, we seek to motivate our distributors using special incentive programs that reward superior sales performance. Periodic sales meetings with our independent distributors are conducted by our home office staff. The meetings are designed to keep distributors abreast of product line changes, explain sales techniques and provide recognition for sales performance.

 

Several merchandising techniques are used, including the introduction of new products, the use of combination offers, the use of trial sizes and samples, and the promotion of products packaged as gift items. In general, for each sales campaign, a distinctive brochure or flyer is published, in which new products are introduced and selected items are offered as special promotions or are given prominence in the brochure. A key current priority for our merchandising is to continue the use of pricing and promotional models to enable a deeper, fact-based understanding of the role and impact of pricing within our product portfolio.

 

Commercial Coffee Segment. Sales promotion and sales development primarily take place via the CLR in-house team. CLR works diligently to be sure that CLR is invited to participate in the request-for-proposal process that comes up each year on major coffee contracts. CLR's in-house sales team consists of five people that devote the majority of their time to obtaining new business. CLR has established a direct store distribution route that it utilizes to market, promote and ship its Café La Rica and Josie’s Java House brands. Various promotion strategies and advertisements in retail circulars are utilized to support the brands being marketed through the direct store distribution route. 

 

The versatility of the plant supports a diverse customer base. The coffee segment is a large supplier to the hospitality market with a great focus prior to the COVID-19 pandemic on serving the cruise line industry. A major revenue producing area is the private label market where the Company produces coffee for various retailer owned private brands. The segment supplies coffee and equipment to retirement communities, services the office coffee service segment, and markets through distributors to the convenient store market; CLR also markets its own brands of coffee to various retailers. Our CLR owned brands that are currently on retail shelves includes Café La Rica and the Josie’s Java House of brands.

 

The commercial coffee segment also includes our green coffee business. CLR is engaged in coffee roasting and distribution, specializing in gourmet coffee and the sale of processed green coffee beans and providing mill processing services of unprocessed green coffee beans. CLR is supplied with unprocessed green coffee beans direct from the plantation in Nicaragua, Central America and the nearby farms, extracts green coffee beans from the procured coffee cherries through the process of drying in the sun or the process of pulping, fermentation, washing and drying of the coffee beans and sells processed coffee beans to other coffee distributors. With the addition of the Nicaragua plantation and dry-processing facility we have further expanded our coffee segment with the ability to process green coffee not only for our own use but also provide this service to other coffee growers. CLR also purchases green coffee beans from our non-Nicaragua sources as well.

 

Commercial Hemp Segment. Sales promotion and sales development for hemp-related products and services primarily take place via in-house sales teams. The in-house sales teams are divided into three groups that primarily promote products and services at various regional and national trade shows as well as through potential clients provided by sales representatives.

 

Suppliers

  

Direct Selling Segment. We purchase raw materials from numerous domestic and international suppliers. To achieve certain economies of scale, best pricing and uniform quality, we rely primarily on a few principal suppliers. Other than the coffee products produced through CLR, all our products are manufactured by independent suppliers.

 

Sufficient raw materials were available during the year ended December 31, 2019 and we believe they will continue to be. We monitor the financial condition of certain suppliers, their ability to supply our needs, and the market conditions for these raw materials. We believe we will be able to negotiate similar market terms with alternative suppliers if needed. Though with the impact of COVID-19, subsequent to 2019 as result of the pandemic we have experienced a decline in availability of products and associated time delays from our suppliers.

 

 

 

For the year ended December 31, 2019, the direct selling segment made purchases from two vendors, Global Health Labs, Inc. and Michael Schaeffer, LLC, that individually comprised more than 10% of total segment purchases and in aggregate approximated 41% of total segment purchases. For the year ended December 31, 2018, the direct selling segment made purchases from two vendors, Global Health Labs, Inc. and Purity Supplements, that individually comprised more than 10% of total segment purchases and in aggregate approximated 41% of total segment purchases.

 

Commercial Coffee Segment.  We primarily obtain green coffee from Nicaragua. We primarily utilize H&H as an outside broker to supply our mill with unprocessed green coffee. H&H is the outside brokers that provides the largest supply of our unprocessed green coffee. For large contracts, CLR works to negotiate a price lock with its suppliers to protect CLR and its customers from price fluctuations that take place in the commodities market.

 

We also produce green coffee from CLR’s own plantation it acquired in Nicaragua in 2014. We do not believe that CLR is substantially dependent upon nor exposed to any significant concentration risk related to purchases from any single vendor, given the availability of alternative sources from which we may purchase inventory. The supply and price of coffee are subject to high volatility. Supply and price of all coffee grades are affected by multiple factors, such as weather, pest damage, politics, competitive pressures, the relative value of the U.S. currency and economics in the producing countries. To achieve certain economies of scale, best pricing and uniform quality, we rely primarily on a few principal suppliers, namely, Rothfos Corporation and H&H.

 

For the year ended December 31, 2019, the commercial coffee segment made purchases of green coffee beans from four vendors, INTL FC Stone Merchant Services, Rothfos Corporation, Sixto Packaging and the Serengeti Trading Co., that individually comprised more than 10% of total segment purchases and in aggregate approximated 73% of our total segment purchases. For the year ended December 31, 2018, the commercial coffee segment made purchases of processed green coffee beans from two vendors, H&H and Rothfos Corporation, which individually comprised more than 10% of total segment purchases and in aggregate approximated 83% of total segment purchases.

 

Commercial Hemp Segment. We purchase raw materials from numerous domestic suppliers to produce hemp-CBD oil, isolate and distillate as well as to manufacture hemp extraction equipment. To achieve certain economies of scale, best pricing, and uniform quality, we rely primarily on a few principal suppliers.

 

For the year ended December 31, 2019 the commercial hemp segment made purchases from two vendors, BioProcessing Corp. Ltd. and Xtraction Services, Inc., that individually comprised more than 10% of total segment purchases and in aggregate approximated 47% of total segment purchases.

 

Intellectual Property

 

We have developed, and we use registered trademarks in our business, particularly relating to our corporate and product names. We own several trademarks that are registered with the U.S. Patent and Trademark Office and we also own trademarks in Canada, Australia, New Zealand, Singapore, Mexico, and Russia. Registration of a trademark enables the registered owner of the mark to bar the unauthorized use of the registered trademark in connection with a similar product in the same channels of trade by any third-party in the respective country of registration, regardless of whether the registered owner has ever used the trademark in the area where the unauthorized use occurs. 

 

We also claim ownership and protection of certain product names, unregistered trademarks, and service marks under common law. Common law trademark rights do not provide the same level of protection that is afforded by the registration of a trademark. In addition, common law trademark rights are limited to the geographic area in which the trademark is used. We believe these trademarks, whether registered or claimed under common law, constitute valuable assets, adding to recognition of our brands and the effective marketing of our products. We intend to maintain and keep current all our trademark registrations and to pay all applicable renewal fees as they become due. The right of a trademark owner to use its trademarks, however, is based on a number of factors, including their first use in commerce, and trademark owners can lose trademark rights despite trademark registration and payment of renewal fees. We therefore believe that these proprietary rights have been and will continue to be important in enabling us to compete, and if for any reason we were unable to maintain our trademarks, our sales of the related products bearing such trademarks could be materially and negatively affected. See “Risk Factors”.

 

We own certain intellectual property, including trade secrets that we seek to protect, in part, through confidentiality agreements with employees and other parties. Most of our products are not protected by patents and therefore such agreements are often our only form of protection.  Even where these agreements exist, there can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known to or independently developed by competitors. Our proprietary product formulations are generally considered trade secrets but are not otherwise protected under intellectual property laws.

 

 

 

We intend to protect our legal rights concerning intellectual property by all appropriate legal action. Consequently, we may become involved from time to time in litigation to determine the enforceability, scope, and validity of any of the foregoing proprietary rights. Any patent litigation could result in substantial cost and divert the efforts of management and technical personnel.

 

Industry

 

We are engaged in three industries, the direct selling industry, the coffee industry, and the hemp industry.

 

Direct Selling Segment. Direct selling is a business distribution model that allows a company to market its products directly to consumers by means of independent contractors and relationship referrals. Independent, unsalaried salespeople, referred to as distributors, represent us and are awarded a commission based upon the volume of product sold through each of their independent business operations.

 

The World Federation of Direct Selling Association reported in its June 2019 Global Sales by Product Category - 2018 report that the fastest growing product category in 2018 was wellness followed by cosmetics & personal care, representing approximately 64% of total retail sales. Wellness products include weight-loss products and dietary supplements.

 

The Direct Selling Association reported in its 2019 Growth & Outlook Report that retail sales through the direct selling channel in the U.S. for 2018 grew in two of the industry’s largest product categories of wellness and services, representing 35.6% and 22.6% of retail sales respectively. Strong macro-economic metrics like the gross domestic product, overall retail sales, and consumer sentiment helped fuel direct sales growth in these key categories, as well the industry overall. In addition, the Direct Selling Association estimated direct selling retail sales in the U.S. were $35.4 million in 2018 and estimated growth of 1-3% per year through 2021. 

 

Commercial Coffee Segment. Our coffee segment includes coffee bean roasting, mill processing and the sales of green coffee beans. Our roasting facility, located in Miami, Florida, procures coffee primarily from Central America. Our green coffee business primarily procures coffee beans from Nicaragua by way of growing our own coffee beans and milling unprocessed green coffee beans that we will later purchase as processed green coffee beans. CLR sells coffee to domestic and international customers, both green and roasted coffee.

 

The U.S. Department of Agriculture (the “USDA”) reported in its December 2019 Coffee: World Markets and Trade” report for 2019/2020 that world coffee production is forecasted to be 169.3 million bags, 5.3 million bags lower than the previous year. Global consumption for 2020 is forecasted at 166.4 million bags. The report further indicated that for 2020, Central America and Mexico are forecasted to contribute 19.1 million bags of coffee beans of which nearly half of the exports are destined to the European Union, followed by about one-third to the U.S. The U.S. imports the second-largest amount of coffee beans worldwide and is forecasted at 26.2 million bags in 2020, 1 million bags lower than last year.

 

Commercial Hemp Segment. Our commercial hemp segment provides hemp extraction technology and equipment and related services to customers which enable them to extract CBD oils from hemp stock.

 

The 2018 Farm Bill, as further discussed in the government regulations section below, brought immense change to the industrial hemp industry, legalizing the cultivation of hemp and opening opportunities for a brand-new CBD industry. With the move of hemp from the controlled substances list to an agricultural commodity, numerous companies entered the CBD space, including large retailers. The Hemp Industry Daily reported that CBD sales in the U.S. in 2019 were estimated at approximately $1.1 billion and would grow up to $7.5 billion by 2023, a compounded annual growth rate of over 46%.

 

Competition

 

Direct Selling Segment. The diet fitness and health food industries, as well as the food and drink industries in general, are highly competitive, rapidly evolving, and subject to constant change. The number of competitors in the overall diet, fitness, health food, and nutraceutical industries is virtually endless. We believe that existing industry competitors are likely to continue to expand their product offerings. Moreover, because there are few, if any, substantial barriers to entry, we expect that new competitors are likely to enter the “functional foods” and nutraceutical markets and attempt to market “functional food” or nutraceutical coffee products similar to our products, which would result in greater competition. We cannot be certain that we will be able to compete successfully in this extremely competitive market.

 

 

 

We face competition from competing products in each of our lines of business, in both the domestic and international markets. Worldwide, we compete against products sold to consumers by other direct selling and direct sales companies and through the Internet, and against products sold through the mass market and prestige retail channels. We also face increasing competition in our developing and emerging markets.

 

Within the direct selling channel, we compete on a regional and often country-by-country basis, with our direct selling competitors. There are also a number of direct selling companies that sell product lines similar to ours, some of which also have worldwide operations and compete with us globally. We compete against large and well-known companies that manufacture and sell broad product lines through various types of retail establishments such as General Foods and Nestlé. In addition, we compete against many other companies that manufacture and sell in narrower product lines sold through retail establishments. This industry is highly competitive, and some of our principal competitors in the industry are larger than we are and have greater resources than we do. Competitive activities on their part could cause our sales to suffer. We have many competitors in the highly competitive energy drink, skin care and cosmetic, coffee, pet line and pharmacy card industries globally, including retail establishments, principally department stores, and specialty retailers, and direct-mail companies specializing in these products. Our largest direct sales competitors are Herbalife, Amway, USANA and NuSkin. In the energy drink market, we compete with companies such as Red Bull, Gatorade and Rock Star. Our beauty, skin care and cosmetic products compete with Avon and Bare Essentials. From time to time, we need to reduce the prices for some of our products to respond to competitive and customer pressures or to maintain our position in the marketplace. Such pressures also may restrict our ability to increase prices in response to raw material and other cost increases. Any reduction in prices as a result of competitive pressures, or any failure to increase prices when raw material costs increase, would harm profit margins and, if our sales volumes fail to grow sufficiently to offset any reduction in margins, our results of operations would suffer.

 

We are also subject to significant competition from other network marketing organizations for the time, attention, and commitment of new and existing distributors. Our ability to remain competitive depends, in significant part, on our success in recruiting and retaining distributors. There can be no assurance that our programs for recruiting and retaining distributors will be successful. The pool of individuals who may be interested in network marketing is limited in each market and it is reduced to the extent other network marketing companies successfully recruit these individuals into their businesses. Although we believe we offer an attractive opportunity for distributors, there can be no assurance that other network marketing companies will not be able to recruit our existing distributors or deplete the pool of potential distributors in a given market.

 

Commercial Coffee Segment. With respect to our coffee products, we compete not only with other widely advertised branded products, but also with private label or generic products that generally are sold at lower prices. Consumers’ willingness to purchase our products will depend upon our ability to maintain consumer confidence that our products are of a higher quality and provide greater value than less expensive alternatives. If the difference in quality between our brands and private label products narrows, or if there is a perception of such a narrowing, then consumers may choose not to buy our products at prices that are profitable for us. If we do not succeed in effectively differentiating ourselves from our competitors in specialty coffee, including by developing and maintaining our brands, or our competitors adopt our strategies, then our competitive position may be weakened and our sales of specialty coffee, and accordingly our profitability, may be materially adversely affected.

 

Commercial Hemp Segment. The market for the sale of CBD-based products is fragmented and intensely competitive. Competition within the CBD industry is intense with many well-established companies within the market and numerous start-up companies entering the market. We believe we compete based upon the quality of our products and through our competitive advantage of providing field-to-finish products and services. We expect that the quantity and composition of the competitive environment will continue to evolve as the industry matures and new customers enter the marketplace.

 

Government Regulations

 

The processing, formulation, manufacturing, packaging, labeling, advertising, and distribution of our products are subject to federal laws and regulation by one or more federal agencies, including the U.S. Food and Drug Administration (the “FDA”), the U.S. Federal Trade Commission (the “FTC”), the U.S. Consumer Product Safety Commission (the “CPSC”), the USDA, and the U.S. Environmental Protection Agency (the “EPA”). These activities are also regulated by various state, local, and international laws and agencies of the states and localities in which our products are sold. Government regulations may prevent or delay the introduction, result in current product being sold within those markets, to be barred from importation into those markets that may significantly decrease revenues and increase costs within, or require the reformulation, of our products, which could result in lost revenues and increased costs in all three of our segments. Additionally, regulatory agencies within international markets may require the Company adhere to local market registration requirements for our products that may require reformulation, labeling and warehousing controls to be established for those products that may also significantly decrease revenues or increase costs.

 

 

 

The FDA regulates, among other things, the composition, safety, labeling, and marketing of dietary supplements (including vitamins, minerals, herbs, and other dietary ingredients for human use, as well as CBD with the passage of the Farm Bill as further described below). The FDA may not accept the evidence of safety for any new dietary ingredient that we may wish to market, may determine that a particular dietary supplement or ingredient presents an unacceptable health risk, and may determine that a particular claim or statement of nutritional value that we use to support the marketing of a dietary supplement is an impermissible drug claim, is not substantiated, or is an unauthorized version of a “health claim.” Any of these actions could prevent us from marketing particular dietary supplement products or making certain claims or statements of nutritional support for them. The FDA could also require us to remove a particular product from the market. Any future recall or removal would result in additional costs to us, including lost revenues from any additional products that we are required to remove from the market, any of which could be material. Any product recalls or removals could also lead to liability, substantial costs, and reduced growth prospects.

 

With respect to FTC matters, if the FTC has reason to believe the law is being violated (e.g. failure to possess adequate substantiation for product claims), it can initiate an enforcement action. The FTC has a variety of processes and remedies available to it for enforcement, both administratively and judicially, including compulsory process authority, cease and desist orders, and injunctions. FTC enforcement could result in orders requiring, among other things, limits on advertising, consumer redress, divestiture of assets, rescission of contracts, or such other relief as may be deemed necessary. Violation of these orders could result in substantial financial or other penalties. Any action against us by the FTC could materially and adversely affect our ability to successfully market our products.

 

Additional or more stringent regulations of dietary supplements and other products have been considered from time to time. These developments could require reformulation of some products to meet new standards, recalls or discontinuance of some products not able to be reformulated, additional record-keeping requirements, increased documentation of the properties of some products, additional or different labeling, additional scientific substantiation, adverse event reporting, or other new requirements. Any of these developments could increase our costs significantly.

 

These regulations require dietary supplements to be prepared, packaged, and held in compliance with certain rules. These regulations could raise our costs and negatively impact our business. Additionally, our third-party suppliers or vendors may not be able to comply with these rules without incurring substantial expenses. If our third-party suppliers or vendors are not able to timely comply with these new rules, we may experience increased cost or delays in obtaining certain raw materials and third-party products. Also, the FDA has announced that it plans to publish guidance governing the notification of new dietary ingredients. Although FDA guidance is not mandatory, it is a strong indication of the FDA’s current views on the topic discussed in the guidance, including its position on enforcement. 

 

In December 2018, the Farm Bill became law. Among other things, this new law changed certain federal authorities relating to the production and marketing of hemp, defined as cannabis (Cannabis sativa L.), and derivatives of cannabis with extremely low (less than 0.3 percent on a dry weight basis) concentrations of the psychoactive compound delta-9-tetrahydrocannabinol (THC). These changes include removing hemp and derivatives of hemp from the Controlled Substances Act, which means that it is no longer an illegal substance under federal law. In October 2019, the USDA published its interim final rule regarding the Establishment of a Domestic Hemp Production Program which allows hemp to be grown and processed legally in the U.S. and is legal to transport in interstate commerce. Although this interim final rule became effective on the date of publication, it is still subject to comment and there is a possibility it will be modified from its current application.

 

The Farm Bill recognizes hemp as distinct from its genetic cousin, marijuana, and specifically industrial hemp has been excluded from U.S. drug laws. The Farm Bill allows for each individual state to regulate industrial hemp and industrial hemp-based products or accept the USDA rules. Although no longer a controlled substance under federal law, cannabinoids derived from industrial hemp (other than THC) are still subject to a patchwork of state regulations. We are actively monitoring the regulations and proposed regulations in each state to ensure our operations are compliant.

 

In conjunction with the enactment of the Farm Bill, the FDA released a statement about the status of CBD and the agency’s actions in the short term with regards to CBD will guide the industry. The statement noted that the Farm Bill explicitly preserved the FDA’s authority to regulate products containing cannabis or cannabis-derived compounds under the Federal Food, Drug, and Cosmetic Act and Section 351 of the Public Health Service Act. This authority allows the FDA to continue enforcing the law to protect patients and the public while also providing potential regulatory pathways for products containing cannabis and cannabis-derived compounds. The statement also noted the growing public interest in cannabis and cannabis-derived products, including CBD, and informed the public that the FDA will treat products containing cannabis or cannabis-derived compounds as it does any other FDA-regulated products meaning the products will be subject to the same authorities and requirements as FDA-regulated products containing any other substance, regardless of the source of the substance, including whether the substance is derived from a plant that is classified as hemp under the Farm Bill.

 

 

 

We are subject to federal and state consumer protection laws, including laws protecting the privacy of customer non-public information and the handling of customer complaints and regulations prohibiting unfair and deceptive trade practices. The growth and demand for online commerce has and may continue to result in more stringent consumer protection laws that impose additional compliance burdens on online companies. These laws may cover issues such as user privacy, spyware and the tracking of consumer activities, marketing e-mails and communications, other advertising and promotional practices, money transfers, pricing, product safety, content and quality of products and services, taxation, electronic contracts and other communications and information security.

 

There are an increasing number of laws and regulations being promulgated by the U.S. government, governments of individual states and governments overseas that pertain to the Internet and doing business online. In addition, a number of legislative and regulatory proposals are under consideration by federal, state, local, and foreign governments and agencies. Laws or regulations have been or may be adopted with respect to the Internet relating to:

  

●	liability for information retrieved from or transmitted over the Internet;
●	online content regulation;
●	commercial e-mail;
●	visitor privacy; and
●	taxation and quality of products and services.

 

Moreover, the applicability to the Internet of existing laws governing issues such as:

 

●	intellectual property ownership and infringement;
●	consumer protection;
●	obscenity;
●	defamation;
●	employment and labor;
●	the protection of minors;
●	health information; and
●	personal privacy and the use of personally identifiable information.

 

This area is uncertain and developing. Any new legislation or regulation or the application or interpretation of existing laws may have an adverse effect on our business. Even if our activities are not restricted by any new legislation, the cost of compliance may become burdensome, especially as different jurisdictions adopt different approaches to regulation.

 

We are also subject to laws and regulations, both in the U.S. and internationally, that are directed at ensuring that product sales are made to consumers of the products and that compensation, recognition, and advancement within the marketing organization are based on the sale of products rather than on investment in the sponsoring company. These laws and regulations are generally intended to prevent fraudulent or deceptive schemes, often referred to as “pyramid” schemes, which compensate participants for recruiting additional participants irrespective of product sales, use high pressure recruiting methods and or do not involve legitimate products. Complying with these rules and regulations can be difficult and requires the devotion of significant resources on our part.

 

Management Information, Internet and Telecommunication Systems

 

The ability to efficiently manage distribution, compensation, inventory control, and communication functions through the use of sophisticated and dependable information processing systems is critical to our success.

 

We continue to upgrade systems and introduce new technologies to facilitate our continued growth and support of independent distributor activities. These systems include: (i) an internal network server that manages user accounts, print and file sharing, firewall management, and wide area network connectivity; (ii) a leading brand database server to manage sensitive transactional data, corporate accounting and sales information; (iii) a centralized host computer supporting our customized order processing, fulfillment, and independent distributor management software; (iv) a standardized telecommunication switch and system; (v) a hosted independent distributor website system designed specifically for network marketing and direct selling companies; and (vi) procedures to perform daily and weekly backups with both onsite and offsite storage of backups.

 

Our technology systems provide key financial and operating data for management, timely and accurate product ordering, commission payment processing, inventory management and detailed independent distributor records. Additionally, these systems deliver real-time business management, reporting and communications tools to assist in retaining and developing our sales leaders and independent distributors. We intend to continue to invest in our technology systems in order to strengthen our operating infrastructure.

 

 

 

Product Returns

 

Product returns as a percentage of our net sales have been less than 2% of our annual net sales over the last two years. Our return policy in the direct selling segment provides that customers and distributors may return to us any products purchased within 30 days of their initial order for a full refund. Product damaged during shipment is replaced. Commercial coffee segment sales are only returnable if defective. Our hemp segment has minimal returns, if products are returned for quality assurances, the product will be corrected to the customers’ expectations.

 

Human Capital/Employees

 

At December 31, 2019, we had 415 employees worldwide. We believe that our success depends upon our ability to attract and retain key personnel. Although, management continually seeks to add additional talent to its work force, we believe our current personnel can meet our operating requirements in the near term. We expect that as our business grows, we may hire additional personnel to handle the increased demands on our operations and to handle some of the services that are currently being outsourced, such as brand management and sales efforts. As of May 31, 2021, we had 388 full time employees and 4 part time employees. Of the employees 315 work in our direct selling segment, 46 work in our coffee segment and 31 work in our Hemp segment.

 

Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing and integrating our existing and additional employees. We have no collective bargaining agreements with our employees and have not experienced any work stoppages. We consider our relations with our employees to be good.  We provide employee wages that are competitive and consistent with employee positions, skill levels, experience, knowledge and geographic location. The principal purposes of our equity incentive plans are to attract, retain and motivate selected employees, consultants and directors through the granting of stock-based compensation awards.

 

Emerging Growth Company

 

At December 31, 2018, we were no longer an emerging growth company under the Jumpstart Our Business Startups Act enacted in April 2012 (the “Jobs Act”). However, during 2018 we were an emerging growth company until December 31, 2018. Under the Jobs Act a company should be deemed an emerging growth company until the earliest of:

 

 

 

 

 

As an emerging growth company, we were subject to reduced public company reporting requirements and were exempt from Section 404(b) of Sarbanes Oxley. Section 404(a) requires issuers to publish information in their annual reports concerning the scope and adequacy of the internal control structure and procedures for financial reporting. This statement shall also assess the effectiveness of such internal controls and procedures. Section 404(b) requires that the registered accounting firm shall, in the same report, attest to and report on the assessment on the effectiveness of the internal control structure and procedures for financial reporting.

 

As an emerging growth company, we were also exempt from Section 14A (a) and (b) of the Exchange Act which require the shareholder approval, on an advisory basis, of executive compensation and golden parachutes.

 

We elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the Jobs Act, that allowed us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. Our financial statements for the years ended December 31, 2019 and 2018, as presented in this Annual Report, are in compliance with the public company effective dates.

  

Corporate Transactions

   

In June 2017, an amendment to our Certificate of Incorporation became effective which effectuated: (i) a 1-for-20 reverse stock split (the “Reverse Split”) of the issued and outstanding shares of common stock; (ii) a decrease in the number of shares of (a) common stock authorized from 600,000,000 to 50,000,000 and (b) preferred stock authorized from 100,000,000 to 5,000,000.

 

On July 11, 2011, AL Global Corporation, a privately held California corporation (“AL Global”), merged with and into a wholly-owned subsidiary of Javalution Coffee Company, a publicly traded Florida corporation (“Javalution”). After the merger, Javalution reincorporated in Delaware and changed its name to Youngevity International, Inc.  In connection with this merger, CLR, which had been a wholly-owned subsidiary of Javalution prior to the merger, continued to be a wholly-owned subsidiary of the public company.  AL Global Corporation was founded in 1996.

 

 

 

Our Corporate Headquarters

 

Our corporate headquarters are located at 2400 Boswell Road, Chula Vista, California 91914. This is also the location of our operations and distribution center. The facility consists of a 59,000 square foot Class A single use building that is comprised approximately 40% of office space and the balance is used for distribution.

 

Our telephone number is (619) 934-3980 and our facsimile number is (619) 934-3205.

 

Available Information

 

Our common stock, $0.001 par value is traded on the OTC Pink Market operated by OTC Markets Group (“OTC Market’s”) under the symbol “YGYI”. From June 2017 until November 2020, our common stock was traded on The Nasdaq Capital Market under the symbol “YGYI.” From June 2013 until June 2017, our common stock was traded on the OTCQX Market operated by OTC Markets under the symbol “YGYI”. Previously, the common stock was quoted on the OTC Markets OTC Pink market under the symbol “JCOF”.

 

Our 9.75% Series D Cumulative Redeemable Perpetual Preferred Stock, $0.001 par value is traded on the OTC Pink Market operated by OTC Markets “YGYIP”. From September 2019 until November 2020, our 9.75% Series D Cumulative Redeemable Perpetual Preferred Stock, was traded on The Nasdaq Capital Market under the symbol “YGYIP.”

 

Additional information about our Company is contained at our website, http://www.youngevity.com. Information contained on our website is not incorporated by reference into, and does not form any part of, this Annual Report on Form 10-K. We have included our website address as a factual reference and do not intend it to be an active link to our website. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge through the investor relations page of our internet website as soon as reasonably practicable after those reports are electronically filed with, or furnish it to, the Securities and Exchange Commission (the “SEC”). The following Corporate Governance documents are also posted on our website: Code of Business Conduct and Ethics and the Charters for the audit committee and compensation committee.

 

Item 1A. Risk Factors

 

Investing in our securities involves a high degree of risk, and you should be able to bear the complete loss of your investment. You should carefully consider the risks described below and, the other information in the documents incorporated by reference herein when evaluating our Company and our business. If any of the following risks actually occur, our business could be harmed. In such case, the trading price of our securities could decline, and investors could lose all or a part of the money paid to buy our securities.

 

RISKS RELATING TO OUR BUSINESS

 

There is substantial risk about our ability to continue as a going concern, which may hinder our ability to obtain future financing. Our auditor’s report on our consolidated financial statements contains an explanatory paragraph regarding our ability to continue as a going concern. 

 

The accompanying consolidated financial statements as of December 31, 2019 and 2018 have been prepared and presented on a basis assuming we will continue as a going concern. In addition, our independent registered public accounting firm has issued a report that includes an explanatory paragraph referring to our recurring losses from operations (anticipated continued losses in the future) and net capital deficiency that raise substantial doubt in our ability to continue as a going concern without additional capital becoming available. We have sustained significant losses of approximately $51,988,000 and $20,070,000 during the years ended December 31, 2019 and 2018, respectively. The loss for the year ended December 31, 2019 was primarily due to lower than anticipated revenues across all our segments, impairment of goodwill and long-lived intangibles related to our commercial hemp segment, allowances for bad debt related to our commercial coffee segment and significant costs related to financing events. Net cash used in operating activities was $14,337,000 and $12,352,000 for the years ended December 31, 2019 and 2018, respectively. Based on our current cash levels at December 31, 2019, our current rate of cash requirements, we will need to raise additional capital and we will need to increase revenues and significantly reduce our expenses from current levels to be able to continue as a going concern. There can be no assurance that we can raise capital upon favorable terms, if at all, or that we can significantly reduce our expenses.

 

 

 

 

We have a history of losses and there are no assurances we will report profitable operations in future periods.

 

We have sustained significant losses of approximately $51,988,000 and $20,070,000 during the years ended December 31, 2019 and 2018, respectively. For the year ended December 31, 2019, revenue from the direct selling segment and the commercial coffee segment decreased by 8.5% and 17.2%, respectively, which was partially offset by the revenue recorded from our commercial hemp segment we acquired in February 2019. In prior years, we acquired several direct selling businesses which had increased our direct selling revenue; however, during the year ended December 31, 2019, we only acquired one direct selling business. To date, we have not generated significant revenue from our commercial hemp segment and there can be no assurance that we will be able to do so in the future. Until such time, if ever, that we are successful in generating significant revenue and operating profits which are sufficient to pay our expenses it is likely we will continue to report losses in future periods. There are no assurances we will generate substantial revenues from the new businesses or that we will ever generate sufficient revenues to report profitable operations or a net profit.

 

We are dependent upon access to external sources of capital to grow our business.

 

Our business strategy contemplates future access to debt and equity financing to fund the expansion of our business. To date, revenue generated from operations has been insufficient to meet our working capital needs. The inability to obtain sufficient capital to fund the expansion of our business could have a material adverse effect on us. During the year ended December 31, 2019 and through the filing of this report, we raised aggregate of approximately $23,242,000 in gross proceeds from debt and equity financings. Our ability to raise capital through the sale of securities may be limited by the rules of the SEC that place limits on the number and dollar amount of securities that may be sold. We do not have any commitments from third parties for funding. A failure otherwise to raise additional funds when needed in the future could result in us being unable to complete planned operations, or forced to delay, discontinue or curtail product development, forego sales and marketing efforts, and forego licensing in attractive business opportunities. There can be no assurances that we will be able to raise the funds needed on favorable terms, if at all, especially in light of the fact that we will be unable to sell securities registered on our registration statement on Form S-3 until at least June 1, 2022 and thereafter we may be further limited until such time the market value of our voting securities held by non-affiliates is $75 million or more.

 

Our failure to comply with the terms of our outstanding Notes has resulted in a default under the terms of certain of the notes and, if uncured, it could potentially result in action against our pledged assets.

 

We currently have outstanding an aggregate of $10,115,000 in principal amount of outstanding Notes, which include $3,090,000 in principal amount of secured debt related to the balance of our 2019 PIPE Notes from our 2019 private placement. The 2019 PIPE Notes are secured by all of the equity we hold in KII. These PIPE Notes originally were due between February 2021 and July 2021. We have since amended 2019 PIPE Notes in the principal amount of $2,190,000 to extend due dates to between February and March 2022.  

 

We have $2,000,000 in principal amount of secured debt which related to two-year secured promissory notes we issued in March 2019 which are secured by all of the equity we hold in KII. On February 18, 2021 we entered into an amendment with the holders of these promissory notes, extending the maturity date to May 18, 2022 and increasing the interest rate to 16% paid monthly until the notes are paid in full. As an inducement for the amendment to extend the maturity date, we issued each note holder 200,000 shares of our common stock. In addition, we issued one of the note holders a two-year warrant to purchase 150,000 shares of our common stock at a price per share of $1.00.

 

In March 2020, we issued a nine-month senior secured promissory notes related to our March 2020 private placement debt offering, which is secured by certain assets in CLR. On April 7, 2021, we entered into a settlement agreement with the note holder to include an agreed upon payment schedule of principal and interest payments until the note is paid in full through January 2022. In addition, as part of the settlement agreement we have issued the note holder 1,000,000 shares of the Company’s common stock.

 

In December 2018, CLR, entered into a credit agreement with one lender pursuant to which CLR borrowed $5,000,000 from Carl Grover and in exchange issued Mr. Grover a $5,000,000 credit note. In addition, Siles, as guarantor, executed a separate Guaranty Agreement. Stephan Wallach and Michelle Wallach, our Chief Operating Officer and Director, pledged 1,500,000 shares of our common stock held by them to secure the credit note under a security agreement with Mr. Grover. The credit note matured on December 12, 2020 and of date of this filing, remains outstanding; however, no demand for repayment has been made.

 

If we fail to comply with the terms of any of our outstanding debt, including the terms of any amendment or extension of such debt, the holders of the debt could declare a default under the notes or credit agreement and if the default were to remain uncured, and any secured creditors they would have the right to proceed against the collateral secured by the loans. Any action by secured creditors to proceed against CLR assets, KII equity or our other assets would likely have a serious disruptive effect on our business operations.

 

 

 

In connection with our preparation of our financial statements, we identified material weaknesses in our internal control over financial reporting. Until the material weaknesses are remediated, and our associated disclosure controls and procedures improve, there is a risk that a material error could occur and not be detected.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”). During the preparation of our financial statements for the year ended December 31, 2019, we identified material weaknesses in our internal control over financial reporting. These material weaknesses resulted in the determination that restatements to our financial statements for the quarters ended March 31, 2019, June 30, 2019, and September 30, 2019 related to revenue recognition within our commercial coffee segment are required.

 

In addition, we determined that certain fixed assets acquired in the acquisition of Khrysos Global, Inc., and the share price valuation for the common stock issued as consideration were not fairly valued as of the closing date which resulted in a decrease to the net assets acquired. These material weaknesses resulted in the determination that restatements to our financial statements for the quarters ended March 31, 2019, June 30, 2019, and September 30, 2019 related to the accounting for acquisitions within our commercial hemp segment are required.

 

During the fourth quarter of the year ended December 31, 2018 we identified a material weakness in that our commercial coffee segment did not have proper processes and controls in place to require sufficient documentation of significant agreements and arrangements with respect to certain operations in Nicaragua. 

 

The material weaknesses we identified during the fourth quarter of the years ended December 31, 2019 and 2018 were an aggregation of the following control deficiencies commensurate with maintaining an effective control environment to absorb its most recent acquisitions and to meet the financial reporting requirements of a publicly traded company with international operations:

 

 

 

 

 

The material weaknesses identified in 2018 and in 2019 have not yet been remediated. There can be no assurances that additional material weaknesses will not occur in the future. Until the material weaknesses are remediated, and our associated disclosure controls and procedures improve, there is a risk that a material error could occur and not be detected.

 

If we are unable to assert that our internal control over financial reporting is effective, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our common stock could be adversely affected and we could become subject to litigation or investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.

 

Our inability to file timely and accurate periodic reports has caused us to incur significant additional costs and may continue to affect our stock price and our ability to meet listing requirements going forward.

 

As a public company, we are required to file annual and quarterly periodic reports containing the financial statements with the SEC within prescribed periods of time. We have not been able to and may continue to be unable to produce timely financial statements and file these financial statements as part of a periodic report in a timely manner with the SEC. Any or all of the foregoing could also result in the commencement of stockholder lawsuits against us. Any such litigation, as well as any proceedings that could in the future arise as a result of a filing delay and the circumstances which gave rise to it, may be time consuming and expensive, may divert management attention from the conduct of business, and could have a material adverse effect on the business, consolidated financial condition, and consolidated results of operations, and may expose us to costly indemnification obligations to current or former officers, directors, or other personnel, regardless of the outcome of such matter, which may not be adequately covered by insurance. In addition, we or members of our management could be subject to investigation and sanctions by the SEC and other regulatory authorities.

 

 

 

We also expect to continue to face many of the risks and challenges which were experienced during the recent extended filing delay periods, including:

 

 

 

 

 

 

 

 

Our inability to file timely and accurate periodic reports could result in us being in breach of certain terms of our bank loans.

 

As of the filing date of this Annual Report on Form 10-K, we are not in compliance with the covenants under the terms of our bank loan agreement, specifically related to the delay in our filings of our financial statements for the year ended December 31, 2019 and for the quarters ended March 31, 2020, June 30, 2020, September 30, 2020, December 31, 2020, and March 31, 2021, however we have received a waiver of such covenants. Failure to file future reports on time or further filing delays, could result in us being in default for not providing the required quarterly financial information in a timely manner and the bank could call the loan balance due immediately.

 

We cannot assure you that our common stock and preferred stock will regain listing on the Nasdaq Capital Market.

 

On February 2, 2021, The Nasdaq Stock Market LLC removed our common stock and 9.75% Series D Cumulative Redeemable Perpetual Preferred Stock from listing on The Nasdaq Capital Market effective at the opening of the trading session on February 12, 2021. We had been notified of the Nasdaq staff determination to de-list its securities on September 29, 2020 and had appealed the determination to a Nasdaq Hearing Panel on October 6, 2020. On November 18, 2020, upon review of the information provided by us, the Hearing Panel determined to deny our request to remain listed on The Nasdaq Capital Market and notified us that trading in the Company securities would be suspended on November 20, 2020. The Nasdaq Listing Council did not call the matter for review and the staff determination to delist the Company became final on January 4, 2021.

 

As a result of the delisting from the Nasdaq Capital Market, our common stock trade on the OTC Pink market operated by OTC Markets. The delisting has depressed our stock price, substantially limit liquidity of our common stock and materially adversely affect our ability to raise capital on acceptable terms. Delisting from the Nasdaq Capital Market could also continue to have other negative results, including the potential loss of confidence by suppliers and employees, the loss of institutional investor interest and fewer business development opportunities.

 

We face risks related to the intended Restatement of our previously issued financial statements for the fiscal quarters ended March 31, 2019, June 30, 2019 and September 30, 2019, and being further delayed in our complying with our SEC reporting obligations if we are unable to resume a timely filing schedule.

 

As discussed in this Annual Report on Form 10-K in Note 1 to our consolidated financial statements under “Item 8. Financial Statements and Supplementary Data” in this Report, our Audit Committee concluded that certain of our previously issued financial statements should no longer be relied upon because of certain errors in those financial statements (the “Restatement”).

 

As a result of the intended Restatement, our SEC reporting obligations have been delayed prior to the filing date of this Annual Report on Form 10-K, and we cannot assure when we will resume a timely filing schedule with respect to our future SEC reports, including our Quarterly Report on Form 10-Q for the periods ending June 30, 2021,for which there is significant risk that we will be unable to timely file. Even after we file the Quarterly Reports on Form 10-Q for the periods ending March 31, 2020, June 30, 2020, September 30, 2020 and March 31, 2021, and the Annual Report on Form 10-K for the year ended December 31, 2020, we expect to continue to face many of the risks and challenges related to the Restatement, including the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

We cannot assure that all of the risks and challenges described above will be eliminated and that lost business opportunities can be recaptured or that general reputational harm will not persist. If one or more of the foregoing risks or challenges persist, our business, operations and financial condition are likely to be materially and adversely affected.

 

The intended Restatement has caused substantial delays in filing this Annual Report on Form 10-K and our Quarterly Report on Form 10-Q for the quarters ended March 31, 2020, June 30, 2020, September 30, 2020 and March 31, 2021, and the Annual Report on Form 10-K for the year ended December 31, 2020, which may result in future delays in our SEC reporting.

 

Our ability to resume a timely filing schedule with respect to our SEC reports is subject to a number of contingencies, including whether we continue to identify errors in our consolidated financial statements and effective remediation of the identified material weaknesses in our internal control over financial reporting, including processes and training related thereto.

 

If we become delayed again in our SEC reporting obligations, investors would need to evaluate certain decisions with respect to our securities in light of a lack of current financial information. Accordingly, if in the future we are not current in our SEC reporting obligations, any investment in our securities would involve a greater degree of risk. Any such lack of current public information may have an adverse impact on investor confidence, which could lead to a reduction in our stock price and market capitalization and an increase in our cost of capital. In addition, if we become delayed again in our SEC reporting obligations, we will be precluded from registering our securities with the SEC for offer and sale. This may preclude us from raising debt or equity financing in the public markets and limit our access to the private markets and could also limit our ability to use stock options and other equity-based awards to attract, retain and provide incentives to our employees.

 

We are not currently eligible to use a registration statement on Form S-3 to register the offer and sale of securities, which may adversely affect our ability to raise future capital or complete acquisitions.

 

We are not currently eligible to register the offer and sale of our securities using a registration statement on Form S-3 and we will not become eligible until at least June 1, 2022 assuming we timely file certain periodic reports required under the Securities Exchange Act of 1934 subsequent to the date hereof and prior to such date and our public float exceeds $75,000,000 or our common stock is once again listed on a national securities exchange. There can be no assurance when we will meet these requirements, which depends upon our ability to file our periodic reports on a timely basis in the future. Should we wish to register the offer and sale of our securities to the public before we are eligible to do so on Form S-3, our transaction costs and the amount of time required to complete the transaction could increase, making it more difficult to execute any such transaction successfully and potentially having an adverse effect on our financial condition.

 

 

 

Because we have recently acquired several businesses, recently entered a new line of business and significantly increased our investment in our green coffee and hemp businesses, it is difficult to predict to what extent we will be able to maintain or improve our current level of revenues and profitability.

 

No assurances can be given as to the amount of future revenue or profits that we may generate. Until recently, our business was comprised primarily of the direct sales of Youngevity® health products. In the last five years, we completed 16 business acquisitions of companies in the direct selling line of business, substantially increasing our Youngevity® health and wellness product lines. It is too early to predict whether consumers will accept, and continue to use on a regular basis, the products we added from these new acquisitions since we have had limited recent operating history as a combined entity. In addition, in February 2019 we entered into a new business segment, our commercial hemp segment, which includes field-to-finish hemp-CBD oil, isolate, and distillate market and has required devotion of both time and capital. In addition, we continue to expand our coffee business product line with the single-serve K-Cup® manufacturing capabilities and our investment in the green coffee business. It is too early to predict the results of these investments. In addition, since each acquisition involves the addition of new distributors and new products, it is difficult to assess whether initial product sales of any new product acquired will be maintained, and if sales by new distributors will be maintained.

 

Our business is difficult to evaluate because we have recently expanded our business segments, product offerings and customer base.

 

We have recently expanded our operations, engaging in a new line of business in a fairly new industry as well as the sale of new products through new distributors. There is a risk that we will be unable to successfully integrate the newly acquired businesses with our current management and structure or obtain sufficient financing for this new business segment. Although we are based in California, several of the businesses we acquired are based in other places such as Utah and Florida, making the integration of our newly acquired businesses difficult. In addition, our dry-processing plant and coffee plantation is located overseas in the country of Nicaragua. and we further expanded our Nicaragua operations by entering into a construction agreement with our Siles operators to transfer a 45-acre tract of land in Matagalpa and an agreement to build a second mill to accommodate CLR’s 2019 green coffee contract commitments. Our estimates of capital, personnel and equipment required for our newly acquired businesses are based on the historical experience of management and businesses they are familiar with and may not be accurate. Our management has limited direct experience in operating a business of our current size as well as one that is the hemp industry.

 

Our ability to generate profit will be impacted by payments we are required to make under the terms of our acquisition agreements, the extent of which is uncertain.

 

Since many of our acquisition agreements are based on future consideration, we could be obligated to make payments that exceed expectations. Many of our acquisition agreements require us to make future payments to the sellers based upon a percentage of sales of products. The fair value of the contingent acquisition debt, which requires re-measurement each reporting period, is based on our estimates of future sales and therefore is difficult to accurately predict. Profits could be adversely impacted in future periods if adjustment of the fair value of the contingent acquisition debt is required.

 

The impact of changes in the fair value of our derivative liability associated with warrant may materially impact our results of operations in future periods.

 

Several of our warrants that we have issued require that their fair value be recorded as a derivative liability on the issuance dates.   We are obligated to reassess the obligations associated with the warrants and, in the event our estimate of the fair value of the contingent consideration changes, we will record increases or decreases in the fair value as an adjustment to earnings, which could have a material impact on our results of operations, our shareholders’ equity and the market price of our securities. In particular, changes in the market price of our common stock, which is one of the inputs used in determining the amount of the non-cash contingent liability, will result in increases or decreases in this liability and positively or negatively impact our net loss or profit for the period. Investors should not place undue reliance on the impact of these non-cash changes when evaluating our results of operations in future periods, as they have no impact on the operations of the business. 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 $5,502,000 and an increase of $4,645,000 for the years ended December 31, 2019 and 2018, respectively.

 

 

 

We may have difficulty managing our future growth.

 

Since we initiated our network marketing sales channel in fiscal 1997, our business has grown significantly. This growth has placed substantial strain on our management, operational, financial and other resources. If we are able to continue to expand our operations, we may experience periods of rapid growth, including increased resource requirements. Any such growth could place increased strain on our management, operational, financial and other resources, and we may need to train, motivate, and manage employees, as well as attract management, sales, finance and accounting, international, technical, and other professionals. Any failure to expand these areas and implement appropriate procedures and controls in an efficient manner and at a pace consistent with our business objectives could have a material adverse effect on our business and results of operations. In addition, the financing for any of future acquisitions could dilute the interests of our stockholders, resulting in an increase in our indebtedness or both. Future acquisitions may entail numerous risks, including:

 

●	difficulties in assimilating acquired operations or products, including the loss of key employees from acquired businesses and disruption to our direct selling channel;
●	diversion of management's attention from our core business;
●	adverse effects on existing business relationships with suppliers and customers; and
●	risks of entering markets in which we have limited or no prior experience.

 

Our failure to successfully complete the integration of any acquired business could have a material adverse effect on our business, financial condition, and operating results. In addition, there can be no assurance that we will be able to identify suitable acquisition candidates or consummate acquisitions on favorable terms.

 

We generate a substantial portion of our revenue from the sale of The Beyond Tangy Tangerine line, Osteo-fx line and, Ultimate EFA line of products. A decrease in sales of these products could seriously harm our business.

 

A significant portion of our revenue during the years ended December 31, 2019 and 2018, approximately 34% and 41%, respectively, was derived from sales of our Beyond Tangy Tangerine line, Osteo-fx line and Ultimate EFA line of products. Any disruption in the supply of the raw materials used for these problems, any negative press associated with these products or manufacture and sale of competitive products, could have a material adverse effect on our business.

 

Our business is subject to strict government regulations.

 

The processing, formulation, manufacturing, packaging, labeling, advertising, and distribution of our products are subject to federal laws and regulation by one or more federal agencies, including the FDA, the FTC, the CPSC, the USDA, and the EPA. These activities are also regulated by various state, local, and international laws and agencies of the states and localities in which our products are sold. Government regulations may prevent or delay the introduction, result in current product being sold within those markets, to be barred from importation into those markets that may significantly decrease revenues and increase costs within, or require the reformulation, of our products, which could result in lost revenues and increased costs to us. Additionally, regulatory agencies within international markets may require the Company adhere to local market registration requirements for our products that may require reformulation, labeling and warehousing controls to be established for those products that may also significantly decrease revenues or increase costs. For instance, the FDA regulates, among other things, the composition, safety, labeling, and marketing of dietary supplements (including vitamins, minerals, herbs, and other dietary ingredients for human use). The FDA may not accept the evidence of safety for any new dietary ingredient that we may wish to market, may determine that a particular dietary supplement or ingredient presents an unacceptable health risk, and may determine that a particular claim or statement of nutritional value that we use to support the marketing of a dietary supplement is an impermissible drug claim, is not substantiated, or is an unauthorized version of a “health claim.”

 

Any of these actions could prevent us from marketing particular dietary supplement products or making certain claims or statements of nutritional support for them. The FDA could also require us to remove a particular product from the market. Any future recall or removal would result in additional costs to us, including lost revenues from any additional products that we are required to remove from the market, any of which could be material. Any product recalls or removals could also lead to liability, substantial costs, and reduced growth prospects. With respect to FTC matters, if the FTC has reason to believe the law is being violated (e.g. failure to possess adequate substantiation for product claims), it can initiate an enforcement action. The FTC has a variety of processes and remedies available to it for enforcement, both administratively and judicially, including compulsory process authority, cease and desist orders, and injunctions. FTC enforcement could result in orders requiring, among other things, limits on advertising, consumer redress, and divestiture of assets, rescission of contracts, or such other relief as may be deemed necessary. Violation of these orders could result in substantial financial or other penalties. Any action against us by the FTC could materially and adversely affect our ability to successfully market our products.

 

 

 

Additional or more stringent regulations of dietary supplements and other products have been considered from time to time. These developments could require reformulation of some products to meet new standards, recalls or discontinuance of some products not able to be reformulated, additional record-keeping requirements, increased documentation of the properties of some products, additional or different labeling, additional scientific substantiation, adverse event reporting, or other new requirements. Any of these developments could increase our costs significantly. For example, the Dietary Supplement and Nonprescription Drug Consumer Protection Act (S.3546), which was passed by Congress in December 2006, imposes significant regulatory requirements on dietary supplements including reporting of “serious adverse events” to the FDA and recordkeeping requirements. This legislation could raise our costs and negatively impact our business. In June 2007, the FDA adopted final regulations on GMPs in manufacturing, packaging, or holding dietary ingredients and dietary supplements, which apply to the products we manufacture and sell. These regulations require dietary supplements to be prepared, packaged, and held in compliance with certain rules. These regulations could raise our costs and negatively impact our business. Additionally, our third-party suppliers or vendors may not be able to comply with these rules without incurring substantial expenses. If our third-party suppliers or vendors are not able to timely comply with these new rules, we may experience increased cost or delays in obtaining certain raw materials and third-party products. Also, the FDA has announced that it plans to publish guidance governing the notification of new dietary ingredients. Although FDA guidance is not mandatory, it is a strong indication of the FDA’s current views on the topic discussed in the guidance, including its position on enforcement.

 

See “Risks Related To Our Commercial Hemp Business” for a description of the regulatory risks specifically related our Hemp business.

 

Unfavorable publicity could materially hurt our business.

 

We are highly dependent upon consumers’ perceptions of the safety, quality, and efficacy of our products, as well as similar products distributed by other companies, including other direct selling companies. Future scientific research or publicity may not be favorable to our industry or any particular product. Because of our dependence upon consumer perceptions, adverse publicity associated with illness or other adverse effects resulting from the consumption of our product or any similar products distributed by other companies could have a material adverse impact on us. Such adverse publicity could arise even if the adverse effects associated with such products resulted from failure to consume such products as directed. Adverse publicity could also increase our product liability exposure, result in increased regulatory scrutiny and lead to the initiation of private lawsuits.

 

Product returns may adversely affect our business.

 

We are subject to regulation by a variety of regulatory authorities, including the CPSC and the FDA. The failure of our third-party manufacturers to produce merchandise that adheres to our quality control standards could damage our reputation and brands and lead to customer litigation against us. If our manufacturers are unable or unwilling to recall products failing to meet our quality standards, we may be required to remove merchandise or issue voluntary or mandatory recalls of those products at a substantial cost to us. We may be unable to recover costs related to product recalls. We also may incur various expenses related to product recalls, including product warranty costs, sales returns, and product liability costs, which may have a material adverse impact on our results of operations. While we maintain a reserve for our product warranty costs based on certain estimates and our knowledge of current events and actions, our actual warranty costs may exceed our reserve, resulting in a need to increase our accruals for warranty costs in the future.

 

In addition, selling products for human consumption such as coffee and energy drinks involve a number of risks. We may need to recall some of our products if they become contaminated, are tampered with or are mislabeled. A widespread product recall could result in adverse publicity, damage to our reputation, and a loss of consumer confidence in our products, which could have a material adverse effect on our business results and the value of our brands. We also may incur significant liability if our products or operations violate applicable laws or regulations, or in the event our products cause injury, illness or death. In addition, we could be the target of claims that our advertising is false or deceptive under U.S. federal and state laws as well as foreign laws, including consumer protection statutes of some states. Even if a product liability or consumer fraud claim is unsuccessful or without merit, the negative publicity surrounding such assertions regarding our products could adversely affect our reputation and brand image.

 

Returns are part of our business. Our return rate since the inception of selling activities has been minimal. We replace returned products damaged during shipment wholly at our cost, which historically has been negligible. Future return rates or costs associated with returns may increase. In addition, to date, product expiration dates have not played any role in product returns; however, it is possible they will increase in the future.

 

 

 

A general economic downturn, a recession globally or in one or more of our geographic regions or sudden disruption in business conditions or other challenges may adversely affect our business and our access to liquidity and capital.

 

A downturn in the economies in which we sell our products, including any recession in one or more of our geographic regions, or the current global macro-economic pressures or the effects of COVOD-19 on the economy, could adversely affect our business and our access to liquidity and capital. Recent global economic events over the past few years, including job losses, the tightening of credit markets and failures of financial institutions and other entities, have resulted in challenges to our business and a heightened concern regarding further deterioration globally. We could experience declines in revenues, profitability and cash flow due to reduced orders, payment delays, supply chain disruptions or other factors caused by economic or operational challenges. Any or all of these factors could potentially have a material adverse effect on our liquidity and capital resources, including our ability to issue commercial paper, raise additional capital and maintain credit lines and offshore cash balances. An adverse change in our credit ratings could result in an increase in our borrowing costs and have an adverse impact on our ability to access certain debt markets, including the commercial paper market.

 

Consumer spending is also generally affected by a number of factors, including general economic conditions, inflation, interest rates, energy costs, gasoline prices and consumer confidence generally, all of which are beyond our control. Consumer purchases of discretionary items, such as beauty and related products, tend to decline during recessionary periods, when disposable income is lower, and may impact sales of our products. Any economic downturn could result in customers having less money for discretionary purchases as a result of job losses, foreclosures, bankruptcies, reduced access to credit and sharply falling home prices, among other things. A downturn in the economies in which we sell our products, including any recession in one or more of our geographic regions, or the current global macro-economic pressures or the effects of COVID-19 on the economy, could adversely affect our business and our access to liquidity and capital. Recent global economic events over the past few years, including job losses, the tightening of credit markets and failures of financial institutions and other entities, have resulted in challenges to our business and a heightened concern regarding further deterioration globally. We could experience declines in revenues, profitability and cash flow due to reduced orders, payment delays, supply chain disruptions or other factors caused by economic or operational challenges. Any or all of these factors could potentially have a material adverse effect on our liquidity and capital resources, including our ability to issue commercial paper, raise additional capital and maintain credit lines and offshore cash balances. An adverse change in our credit ratings could result in an increase in our borrowing costs and have an adverse impact on our ability to access certain debt markets, including the commercial paper market.ng other things.

 

In addition, sudden disruptions in business conditions as a result of a terrorist attack similar to the events of September 11, 2001, including further attacks, retaliation and the threat of further attacks or retaliation, war, adverse weather conditions and climate changes or other natural disasters, such as Hurricane Katrina and Maria, pandemic situations or large-scale power outages can have a short or, sometimes, long-term impact on consumer spending.

 

The impact of the COVID-19 coronavirus outbreak, or similar global health concerns, could negatively impact our ability to source certain products, impact product pricing, impact our customers’ ability or that of our licensee to obtain financing or have a negative impact on our business.

 

The COVID-19 coronavirus has spread to numerous countries, including the U.S. where we conduct a majority of our business. The impact of the COVID-19 coronavirus outbreak, or similar global health concerns, has and could continue to negatively impact our ability to source certain products, impact product pricing, impact our customers' ability or that of our licensee to obtain financing or have a negative impact on our business.

 

Our use of third-party suppliers for production and shipping of certain products could be negatively impacted by the regional or global outbreak of illnesses, including the COVID-19 coronavirus outbreak. Any quarantines, the timing and length of containment and eradication solutions, travel restrictions, absenteeism by infected workers, labor shortages or other disruptions to our suppliers and their contract manufacturers or our customers would likely adversely impact our sales and operating results. In addition, a significant outbreak of epidemic, pandemic, or contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, including the U.S., resulting in an economic downturn that could affect the ability of our customers and licensees to obtain financing and therefore impact demand for our products. Order lead times could be extended or delayed, and pricing could increase. Some products or services may become unavailable if the regional or global spread were significant enough to prevent alternative sourcing. To date, the outbreak of the COVID-19 coronavirus has significantly impacted our operations, and certain of our third-party suppliers have been negatively impacted. Accordingly, we are considering alternative product sourcing in the event that product supply becomes problematic. We are unable to predict the possible future effect on our Company if COVID-19 coronavirus or another such virus continues to expand globally and throughout the U.S.

 

 

 

In addition, the outbreak of the COVID-19 coronavirus could disrupt our operations due to absenteeism by infected or ill members of management or other employees, or absenteeism by members of management and other employees who elect not to come to work due to the illness affecting others in our office or other workplace, or due to quarantines. COVID-19 illness could also impact members of our board of directors resulting in absenteeism from meetings of the directors or committees of directors, and making it more difficult to convene the quorums of the full board of directors or its committees needed to conduct meetings for the management of our affairs.

 

The global outbreak of the COVID-19 coronavirus continues to rapidly evolve. The extent to which the COVID-19 coronavirus may impact our business and clinical trials will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions and social distancing in the U.S. and other countries, business closures or business disruptions and the effectiveness of actions taken in the U.S. and other countries to contain and treat the disease.

 

We face significant competition.

 

We face competition from competing products in each of our lines of business, in both the domestic and international markets. Worldwide, we compete against products sold to consumers by other direct selling and direct sales companies and through the Internet, and against products sold through the mass market and prestige retail channels. We also face increasing competition in our developing and emerging markets.

 

Within the direct selling channel, we compete on a regional and often country-by-country basis, with our direct selling competitors. There are also a number of direct selling companies that sell product lines similar to ours, some of which also have worldwide operations and compete with us globally. We compete against large and well-known companies that manufacture and sell broad product lines through various types of retail establishments. Our largest direct sales competitors are Herbalife, Amway, USANA Health Sciences and NuSkin Enterprises. In the energy drink market, we compete with companies such as Red Bull, Gatorade and Rock Star. Our beauty, skin care and cosmetic products compete with Avon and Bare Essentials. In addition, we compete against many other companies that manufacture and sell in narrower product lines sold through retail establishments. This industry is highly competitive and some of our principal competitors in the industry are larger than we are and have greater resources than we do. Competitive activities on their part could cause our sales to suffer. From time to time, we need to reduce the prices for some of our products to respond to competitive and customer pressures or to maintain our position in the marketplace. Such pressures also may restrict our ability to increase prices in response to raw material and other cost increases. Any reduction in prices as a result of competitive pressures, or any failure to increase prices when raw material costs increase, would harm profit margins and, if our sales volumes fail to grow sufficiently to offset any reduction in margins, our results of operations would suffer.

 

If our advertising, promotional, merchandising, or other marketing strategies are not successful, if we are unable to deliver new products that represent technological breakthroughs, if we do not successfully manage the timing of new product introductions or the profitability of these efforts, or if for other reasons our end customers perceive competitors' products as having greater appeal, then our sales and financial results may suffer.

 

If we do not succeed in effectively differentiating ourselves from our competitors’ products, including by developing and maintaining our brands or our competitors adopt our strategies, then our competitive position may be weakened and our sales, and accordingly our profitability, may be materially adversely affected.

 

We are also subject to significant competition from other network marketing organizations for the time, attention, and commitment of new and existing distributors. Our ability to remain competitive depends, in significant part, on our success in recruiting and retaining distributors. There can be no assurance that our programs for recruiting and retaining distributors will be successful. The pool of individuals who may be interested in network marketing is limited in each market, and it is reduced to the extent other network marketing companies successfully recruit these individuals into their businesses. Although we believe we offer an attractive opportunity for distributors, there can be no assurance that other network marketing companies will not be able to recruit our existing distributors or deplete the pool of potential distributors in a given market.

 

Our coffee segment also faces strong competition. The coffee industry is highly competitive, and coffee is widely distributed and readily available. Our competition will seek to create advantages in many areas including better prices, more attractive packaging, stronger marketing, more efficient production processes, speed to market, and better-quality verses value opportunities. Many of our competitors have stronger brand recognition and will reduce prices to keep our brands out of the market. Our competitors may have more automation built into their production lines allowing for more efficient production at lower costs. We compete not only with other widely advertised branded products, but also with private label or generic products that generally are sold at lower prices. Consumers’ willingness to purchase our products will depend upon our ability to maintain consumer confidence that our products are of a higher quality and provide greater value than less expensive alternatives. If the difference in quality between our brands and private label products narrows, or if there is a perception of such a narrowing, then consumers may choose not to buy our products at prices that are profitable for us.

 

 

 

Our success depends, in part, on the quality and safety of our products.

 

Our success depends, in part, on the quality and safety of our products, including the procedures we employ to detect the likelihood of hazard, manufacturing issues, and unforeseen product misuse. If our products are found to be, or are perceived to be, defective or unsafe, or if they otherwise fail to meet our distributors' or end customers' standards, our relationship with our distributors or end customers could suffer, we could need to recall some of our products, our reputation or the appeal of our brand could be diminished, and we could lose market share and or become subject to liability claims, any of which could result in a material adverse effect on our business, results of operations, and financial condition.

 

Our ability to anticipate and respond to market trends and changes in consumer preferences could affect our financial results.

 

Our continued success depends on our ability to anticipate, gauge, and react in a timely and effective manner to changes in consumer spending patterns and preferences. We must continually work to discover and market new products, maintain and enhance the recognition of our brands, achieve a favorable mix of products, and refine our approach as to how and where we market and sell our products. While we devote considerable effort and resources to shape, analyze, and respond to consumer preferences, consumer spending patterns and preferences cannot be predicted with certainty and can change rapidly. If we are unable to anticipate and respond to trends in the market for beauty and related products and changing consumer demands, our financial results will suffer.

 

Furthermore, material shifts or decreases in market demand for our products, including as a result of changes in consumer spending patterns and preferences or incorrect forecasting of market demand, could result in us carrying inventory that cannot be sold at anticipated prices or increased product returns. Failure to maintain proper inventory levels or increased product returns could result in a material adverse effect on our business, results of operations and financial condition.

 

If we are unable to protect our intellectual property rights, specifically patents and trademarks, our ability to compete could be negatively impacted.

 

Most of our products are not protected by patents. The labeling regulations governing our nutritional supplements require that the ingredients of such products be precisely and accurately indicated on product containers. Accordingly, patent protection for nutritional supplements often is impractical given the large number of manufacturers who produce nutritional supplements having many active ingredients in common. Additionally, the nutritional supplement industry is characterized by rapid change and frequent reformulations of products, as the body of scientific research and literature refines current understanding of the application and efficacy of certain substances and the interactions among various substances. In this respect, we maintain an active research and development program that is devoted to developing better, purer, and more effective formulations of our products. We protect our investment in research, as well as the techniques we use to improve the purity and effectiveness of our products, by relying on trade secret laws. Notwithstanding our efforts, there can be no assurance that our efforts to protect our trade secrets and trademarks will be successful. We intend to maintain and keep current all of our trademark registrations and to pay all applicable renewal fees as they become due. The right of a trademark owner to use its trademarks, however, is based on a number of factors, including their first use in commerce, and trademark owners can lose trademark rights despite trademark registration and payment of renewal fees. We therefore believe that these proprietary rights have been and will continue to be important in enabling us to compete and if for any reason we were unable to maintain our trademarks, our sales of the related products bearing such trademarks could be materially and negatively affected. Nor can there be any assurance that third parties will not assert claims against us for infringement of their intellectual proprietary rights. If an infringement claim is asserted, we may be required to obtain a license of such rights, pay royalties on a retrospective or prospective basis, or terminate our manufacturing and marketing of our infringing products. Litigation with respect to such matters could result in substantial costs and diversion of management and other resources and could have a material adverse effect on our business, financial condition, or operating results.

 

We consider our roasting methods essential to the flavor and richness of our coffee and, therefore, essential to our various brands. Because our roasting methods cannot be patented, we would be unable to prevent competitors from copying our roasting methods, if such methods became known. If our competitors copy our roasting methods, the value of our brands could be diminished, and we could lose customers to our competitors. In addition, competitors could develop roasting methods that are more advanced than ours, which could also harm our competitive position.

 

 

 

Goodwill and other intangible assets represent significant assets on our balance sheet, and we may experience further impairments.

 

During the year ended December 31, 2019, we recorded a loss on impairment of goodwill of $6,831,000 which represented the full amount of goodwill recognized in connection with the acquisition of Khrysos Global in February 2019. The impairment was driven by a decline in the estimated fair value primarily due to the reduction in the profitability forecasts, as well as increased working capital requirements which increased the commercial hemp segment’s carrying value. During the year ended December 31, 2019, we also recorded a loss on impairment of intangible assets related to the Khrysos acquisition of $8,461,000. For the year ended December 31, 2018, we recorded a loss on impairment of intangible assets related to our acquisitions of BeautiControl, Inc. and Future Global Vision, Inc. and recorded a loss on impairment of intangible assets of approximately $2,550,000 and $625,000, respectively. While these charges had no impact on our business operations, cash balances or operating cash flows, they resulted in significant losses during the reporting periods.

 

If we experience additional impairments in our goodwill, or if our other intangible assets become impaired, then we will be required to take further non-cash charges against earnings. Since goodwill impairment calculations are based on estimates, including external factors that are outside of our control such as our stock price and future market and economic conditions, it is possible that we may need to take additional goodwill impairment charges in the future. We also perform an analysis of our intangible assets to test for impairment whenever events occur that indicate impairment could exist. Examples of such events include: significant adverse changes in the intangible asset’s market value, useful life, or in the business climate that could affect its value; a current-period operating or cash flow loss or a projection or forecast that demonstrates continuing losses associated with the use of the intangible asset; and a current expectation that, more likely than not, the intangible asset will be sold or otherwise disposed of before the end of its previously estimated useful life.

 

We may become involved in the future in legal proceedings that, if adversely adjudicated or settled, could adversely affect our financial results.

 

We are a party to litigation at the present time and may become party to litigation in the future. In general, litigation claims can be expensive, and time consuming to bring or defend against and could result in settlements or damages that could significantly affect financial results. However, it is not possible to predict the final resolution of any litigation to which we are, or may be party to, and the impact of certain of these matters on our business, results of operations, and financial condition could be material.

 

Government reviews, inquiries, investigations, and actions could harm our business or reputation.

 

As we operate in various locations around the world, our operations in certain countries are subject to significant governmental scrutiny and may be harmed by the results of such scrutiny. The regulatory environment with regard to direct selling in emerging and developing markets where we do business is evolving and officials in such locations often exercise broad discretion in deciding how to interpret and apply applicable regulations. In addition, our coffee operations are subject to Nicaraguan regulations. The regulatory environment with regard to our hemp segment is still uncertain and evolving. From time to time, we may receive formal and informal inquiries from various government regulatory authorities about our business and compliance with local laws and regulations. Any determination that our operations or activities or the activities of our distributors, are not in compliance with existing laws or regulations could result in the imposition of substantial fines, interruptions of business, loss of supplier, vendor or other third-party relationships, termination of necessary licenses and permits, or similar results, all of which could potentially harm our business and or reputation. Even if an inquiry does not result in these types of determinations, it potentially could create negative publicity which could harm our business and or reputation.

 

The loss of key management personnel could adversely affect our business.

 

Our founder, Dr. Joel Wallach, is a highly visible spokesman for our products and our direct selling business, and our message is based in large part on his vision and reputation, which helps distinguish us from our competitors. Any loss or limitation on Dr. Wallach as a lead spokesman for our mission, business, and products could have a material adverse effect upon our business, financial condition, or results of operations. In addition, our executive officers, including Stephan Wallach and David Briskie, are primarily responsible for our day-to-day operations, with our coffee operations and hemp operations significantly dependent upon the services of David Briskie, and we believe our success depends in part on our ability to retain our executive officers, to compensate our executive officers at attractive levels, and to continue to attract additional qualified individuals to our management team. We cannot guarantee continued service by our key executive officers. We do not maintain key man life insurance on any of our executive officers. The loss or limitation of the services of any of our executive officers or the inability to attract additional qualified management personnel could have a material adverse effect on our business, financial condition, or results of operations.

 

 

 

The inability to obtain adequate supplies of raw materials for products at favorable prices, or at all, or the inability to obtain certain products from third-party suppliers or from our manufacturers, could have a material adverse effect on our business, financial condition, or results of operations.

 

We contract with third-party manufacturers and suppliers for the production of some of our products, including most of our powdered drink mixes and nutrition bars, and certain of our personal care products. These third-party suppliers and manufacturers produce and, in most cases, package these products according to formulations that have been developed by, or in conjunction with, our in-house product development team. There is a risk that any of our suppliers or manufacturers could discontinue manufacturing our products or selling their products to us. Although we believe that we could establish alternate sources for most of our products, any delay in locating and establishing relationships with other sources could result in product shortages or back orders for products, with a resulting loss of net sales. In certain situations, we may be required to alter our products or to substitute different products from another source. We have, in the past, discontinued or temporarily stopped sales of certain products that were manufactured by third parties while those products were on back order. There can be no assurance that suppliers will provide the raw materials or manufactured products that are needed by us in the quantities that we request or at the prices that we are willing to pay. Because we do not control the actual production of certain raw materials and products, we are also subject to delays caused by any interruption in the production of these materials, based on conditions not within our control, including weather, crop conditions, transportation interruptions, strikes by supplier employees, and natural disasters or other catastrophic events.

 

Shortages of raw materials may temporarily adversely affect our margins or our profitability related to the sale of those products.

 

We may experience temporary shortages of the raw materials used in certain of our nutritional products. While we periodically experience price increases due to unexpected raw material shortages and other unanticipated events, this has historically not resulted in a material effect on our overall cost of goods sold. However, there is no assurance that our raw materials will not be significantly adversely affected in the future, causing our profitability to be reduced. A deterioration of our relationship with any of our suppliers, or problems experienced by these suppliers, could lead to inventory shortages. In such case, we may not be able to fulfill the demand of existing customers, supply new customers, or expand other channels of distribution. A raw material shortage could result in decreased revenue or could impair our ability to maintain or expand our business. With respect to our green coffee, we obtain a significant portion of our unprocessed coffee beans from local farmers in Nicaragua through their agent and we are dependent upon such farmers for the supply of our product. Any decrease in supply of unprocessed beans from such farmers either related to weather or competitors, could adversely impact our business.

 

A failure of our information technology systems would harm our business.

 

The global nature of our business and our seamless global compensation plan requires the development and implementation of robust and efficiently functioning information technology systems. Such systems are vulnerable to a variety of potential risks, including damage or interruption resulting from natural disasters, telecommunication failures, and human error or intentional acts of sabotage, vandalism, break-ins and similar acts. Although we have adopted and implemented a business continuity and disaster recovery plan, which includes routine back-up, off-site archiving and storage, and certain redundancies, the occurrence of any of these events could result in costly interruptions or failures adversely affecting our business and the results of our operations.

 

Our business is subject to online security risks, including security breaches.

 

Our businesses involve the storage and transmission of users’ proprietary information, and security breaches could expose us to a risk of loss or misuse of this information, litigation, and potential liability. An increasing number of websites, including several large companies, have recently disclosed breaches of their security, some of which have involved sophisticated and highly targeted attacks on portions of their sites. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems, change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. A party that is able to circumvent our security measures could misappropriate our or our customers’ proprietary information, cause interruption in our operations, damage our computers or those of our customers, or otherwise damage our reputation and business. Any compromise of our security could result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, and a loss of confidence in our security measures, which could harm our business.

 

 

 

Currently, a significant number of our customers authorize us to bill their credit card accounts directly for all transaction fees charged by us. We rely on encryption and authentication technology licensed from third parties to provide the security and authentication to effectively secure transmission of confidential information, including customer credit card numbers. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may result in the technology used by us to protect transaction data being breached or compromised. Non-technical means, for example, actions by a suborned employee, can also result in a data breach.

 

Under payment card rules and our contracts with our card processors, if there is a breach of payment card information that we store, we could be liable to the payment card issuing banks for their cost of issuing new cards and related expenses. In addition, if we fail to follow payment card industry security standards, even if there is no compromise of customer information, we could incur significant fines or lose our ability to give customers the option of using payment cards to fund their payments or pay their fees. If we were unable to accept payment cards, our business would be seriously damaged.

 

Our servers are also vulnerable to computer viruses, physical or electronic break-ins, “denial-of-service” type attacks and similar disruptions that could, in certain instances, make all or portions of our websites unavailable for periods of time. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches. These issues are likely to become more difficult as we expand the number of places where we operate. Security breaches, including any breach by us or by parties with which we have commercial relationships that result in the unauthorized release of our users’ personal information, could damage our reputation and expose us to a risk of loss or litigation and possible liability. Our insurance policies carry coverage limits, which may not be adequate to reimburse us for losses caused by security breaches.

 

Our web customers, as well as those of other prominent companies, may be targeted by parties using fraudulent “spoof” and “phishing” emails to misappropriate passwords, credit card numbers, or other personal information or to introduce viruses or other malware programs to our customers’ computers. These emails appear to be legitimate emails sent by our Company, but they may direct recipients to fake websites operated by the sender of the email or request that the recipient send a password or other confidential information via email or download a program. Despite our efforts to mitigate “spoof” and “phishing” emails through product improvements and user education, “spoof” and “phishing” remain a serious problem that may damage our brands, discourage use of our websites, and increase our costs.

 

Our ability to conduct business in international markets may be affected by political, legal, tax and regulatory risks.

 

For the years ended December 31, 2019 and 2018, approximately 15% and 14%, respectively, of our revenue was derived from sales outside the U.S. Our green coffee business in based in Nicaragua. We own one plantation and intend to purchase another in Nicaragua. We anticipate increasing our operations in Nicaragua and in 2019 further expanded our Nicaragua operations by entering into a construction agreement with our Siles operators to purchase a 45-acre tract of land in Matagalpa and an agreement to build a second mill to accommodate CLR’s 2020 green coffee contract commitments. Additionally, on April 20 and July 29, 2020, CLR and KII (the U.S. Partners) entered into agreements (“Hemp Joint Venture Agreement”) with H&H Export and Fitracomex, Inc. (“Fitracomex”) (collectively “The Nicaraguan Partners”) and established the hemp joint venture (the “Nicaraguan Hemp Grow and Extractions Group” or the “Hemp Joint Venture”). Our ability to capitalize on growth in new international markets and to maintain the current level of operations in our existing international markets is exposed to the risks associated with international operations, including:

 

●	the possibility that local civil unrest, political instability or changes in diplomatic or trade relationships might disrupt our operations in an international market;
●	the lack of well-established or reliable legal systems in certain areas;
●	the presence of high inflation in the economies of international markets;
●	the possibility that a foreign government authority might impose legal, tax or other financial burdens on us or our coffee operations, or sales force, due, for example, to the structure of our operations in various markets;
●	the possibility that a government authority might challenge the status of our sales force as independent contractors or impose employment or social taxes on our sales force; and
●	the possibility that governments may impose currency remittance restrictions limiting our ability to repatriate cash.

 

Currency exchange rate fluctuations could reduce our overall profits.

 

In preparing our consolidated financial statements, certain financial information is required to be translated from foreign currencies to the U.S. dollar using either the spot rate or the weighted-average exchange rate. If the U.S. dollar changes relative to applicable local currencies, there is a risk our reported sales, operating expenses, and net income could significantly fluctuate. We are not able to predict the degree of exchange rate fluctuations, nor can we estimate the effect any future fluctuations may have upon our future operations. To date, we have not entered into any hedging contracts or participated in any hedging or derivative activities.

 

 

 

Taxation and transfer pricing affect our operations and we could be subjected to additional taxes, duties, interest, and penalties in material amounts, which could harm our business.

 

As a multinational corporation, in several countries, including the U.S., we are subject to transfer pricing and other tax regulations designed to ensure that our intercompany transactions are consummated at prices that have not been manipulated to produce a desired tax result, that appropriate levels of income are reported as earned by the local entities, and that we are taxed appropriately on such transactions. Regulators closely monitor our corporate structure, intercompany transactions, and how we effectuate intercompany fund transfers. If regulators challenge our corporate structure, transfer pricing methodologies or intercompany transfers, our operations may be harmed and our effective tax rate may increase.

 

A change in applicable tax laws or regulations or their interpretation could result in a higher effective tax rate on our worldwide earnings and such change could be significant to our financial results. In the event any audit or assessments are concluded adversely to us, these matters could have a material impact on our financial condition.

 

Non-compliance with anti-corruption laws could harm our business.

 

Our international operations are subject to anti-corruption laws, including the Foreign Corrupt Practices Act (the “FCPA”). Any allegations that we are not in compliance with anti-corruption laws may require us to dedicate time and resources to an internal investigation of the allegations or may result in a government investigation. Any determination that our operations or activities are not in compliance with existing anti-corruption laws or regulations could result in the imposition of substantial fines, and other penalties. Although we have implemented anti-corruption policies, controls and training globally to protect against violation of these laws, we cannot be certain that these efforts will be effective. We are aware that one of our direct marketing competitors is under investigation in the U.S. for allegations that its employees violated the FCPA in China and other markets. If this investigation causes adverse publicity or increased scrutiny of our industry, our business could be harmed.

 

RISKS RELATED TO OUR DIRECT SELLING BUSINESS

 

Independent distributor activities that violate laws could result in governmental actions against us and could otherwise harm our business.

 

Our independent distributors are independent contractors. They are not employees and they act independently of us. The network marketing industry is subject to governmental regulation. We implement strict policies and procedures to try to ensure that our independent distributors comply with laws. Any determination by the FTC or other governmental agency that we or our distributors are not in compliance with laws could potentially harm our business. Even if governmental actions do not result in rulings or orders against us, they could create negative publicity that could detrimentally affect our efforts to recruit or motivate independent distributors and attract customers.

 

Network marketing is heavily regulated and subject to government scrutiny and regulation, which adds to the expense of doing business and the possibility that changes in the law might adversely affect our ability to sell some of our products in certain markets.

 

Network marketing systems, such as ours, are frequently subject to laws and regulations, both in the U.S. and internationally, that are directed at ensuring that product sales are made to consumers of the products and that compensation, recognition, and advancement within the marketing organization are based on the sale of products rather than on investment in the sponsoring company. These laws and regulations are generally intended to prevent fraudulent or deceptive schemes, often referred to as “pyramid” schemes, which compensate participants for recruiting additional participants irrespective of product sales, use high pressure recruiting methods and or do not involve legitimate products. Complying with these rules and regulations can be difficult and requires the devotion of significant resources on our part. Regulatory authorities, in one or more of our present or future markets, could determine that our network marketing system does not comply with these laws and regulations or that it is prohibited. Failure to comply with these laws and regulations or such a prohibition could have a material adverse effect on our business, financial condition, or results of operations. Further, we may simply be prohibited from distributing products through a network-marketing channel in some countries, or we may be forced to alter our compensation plan.

 

We are also subject to the risk that new laws or regulations might be implemented or that current laws or regulations might change, which could require us to change or modify the way we conduct our business in certain markets. This could be particularly detrimental to us if we had to change or modify the way we conduct business in markets that represent a significant percentage of our net sales.

 

 

 

Our principal business segment is conducted worldwide in one channel, direct selling and therefore any negative perceptive of direct selling would greatly impact our sales.

 

Our principal business segment is conducted worldwide in the direct selling channel. Sales are made to the ultimate consumer principally through independent distributors and customers worldwide. There is a high rate of turnover among distributors, which is a common characteristic of the direct selling business. As a result, in order to maintain our business and grow our business in the future, we need to recruit, retain and service distributors on a continuing basis and continue to innovate the direct selling model. Consumer purchasing habits, including reducing purchases of products generally, or reducing purchases from distributors or buying products in channels other than in direct selling, such as retail, could reduce our sales, impact our ability to execute our global business strategy or have a material adverse effect on our business, financial condition and results of operations. If our competitors establish greater market share in the direct selling channel, our business, financial condition and operating results may be adversely affected. Furthermore, if any government bans or severely restricts our business method of direct selling, our business, financial condition and operating results may be adversely affected.

 

Our ability to attract and retain distributors and to sustain and enhance sales through our distributors can be affected by adverse publicity or negative public perception regarding our industry, our competition, or our business generally. Negative public perception may include negative publicity regarding the sales structure of significant, pure network marketing companies which has been the case recently with large network marketing companies, the quality or efficacy of nutritional supplement products or ingredients in general or our products or ingredients specifically, and regulatory investigations, regardless of whether those investigations involve us or our distributors or the business practices or products of our competitors or other network marketing companies. Any adverse publicity may also adversely impact the market price of our stock and cause insecurity among our distributors. There can be no assurance that we will not be subject to adverse publicity or negative public perception in the future or that such adverse publicity will not have a material adverse effect on our business, financial condition, or results of operations.

 

As a network marketing company, we are dependent upon an independent sales force and we do not have direct control over the marketing of our products.

 

We rely on non-employee, independent distributors to market and sell our products and to generate our sales. Distributors typically market and sell our products on a part-time basis and likely will engage in other business activities, some of which may compete with us. We have a large number of distributors and a relatively small corporate staff to implement our marketing programs and to provide motivational support to our distributors. We rely primarily upon our distributors to attract, train and motivate new distributors. Our sales are directly dependent upon the efforts of our distributors. Our ability to maintain and increase sales in the future will depend in large part upon our success in increasing the number of new distributors, retaining and motivating our existing distributors, and in improving the productivity of our distributors.

 

We can provide no assurances that the number of distributors will increase or remain constant or that their productivity will increase. Our distributors may terminate their services at any time, and, like most direct selling companies, we experience a high turnover among new distributors from year-to-year. We cannot accurately predict any fluctuation in the number and productivity of distributors because we primarily rely upon existing distributors to sponsor and train new distributors and to motivate new and existing distributors. Our operating results in other markets could also be adversely affected if we and our existing distributors do not generate sufficient interest in our business to successfully retain existing distributors and attract new distributors.

 

The loss of a significant Youngevity distributor could adversely affect our business.

 

We rely on the successful efforts of our distributors that become leaders. If these downline distributors in turn sponsor new distributors, additional business centers are created, with the new downline distributors becoming part of the original sponsoring distributor’s downline network. As a result of this network marketing system, distributors develop business relationships with other distributors. The loss of a key distributor or group of distributors, large turnover or decreases in the size of the key distributors force, seasonal or other decreases in purchase volume, sales volume reduction, the costs associated with training new distributors, and other related expenses may adversely affect our business, financial condition, or results of operations. Moreover, our ability to continue to attract and retain distributors can be affected by a number of factors, some of which are beyond our control, including:

 

●	General business and economic conditions;
●	Adverse publicity or negative misinformation about us or our products;
●	Public perceptions about network marketing programs;
●	High-visibility investigations or legal proceedings against network marketing companies by federal or state authorities or private citizens;
●	Public perceptions about the value and efficacy of nutritional, personal care, or weight management products generally;
●	Other competing network marketing organizations entering into the marketplace that may recruit our existing distributors or reduce the potential pool of new distributors; and
●	Changes to our compensation plan required by law or implemented for business reasons that make attracting and retaining distributors more difficult.

 

 

 

There can be no assurance that we will be able to continue to attract and retain distributors in sufficient numbers to sustain future growth or to maintain our present growth levels, which could have a material adverse effect on our business, financial condition, or results of operations.

 

Nutritional supplement products may be supported by only limited availability of conclusive clinical studies.

 

Some of our products include nutritional supplements that are made from vitamins, minerals, herbs, and other substances for which there is a long history of human consumption. Other products contain innovative ingredients or combinations of ingredients. Although we believe that all of our products are safe when taken as directed, there is little long-term experience with human consumption of certain of these product ingredients or combinations of ingredients in concentrated form. We conduct research and test the formulation and production of our products, but we have performed or sponsored only limited clinical studies. Furthermore, because we are highly dependent on consumers' perception of the efficacy, safety, and quality of our products, as well as similar products distributed by other companies, we could be adversely affected in the event that those products prove or are asserted to be ineffective or harmful to consumers or in the event of adverse publicity associated with any illness or other adverse effects resulting from consumers' use or misuse of our products or similar products of our competitors.

 

Our manufacturers are subject to certain risks.

 

We are dependent upon the uninterrupted and efficient operation of our manufacturers and suppliers of products. Those operations are subject to power failures, the breakdown, failure, or substandard performance of equipment, the improper installation or operation of equipment, natural or other disasters, and the need to comply with the requirements or directives of government agencies, including the FDA. There can be no assurance that the occurrence of these or any other operational problems at our facilities would not have a material adverse effect on our business, financial condition, or results of operations.

  

Challenges by private parties to the direct selling system could harm our business.

 

Direct selling companies have historically been subject to legal challenges regarding their method of operation or other elements of their business by private parties, including their own representatives, in individual lawsuits and through class actions, including lawsuits claiming the operation of illegal pyramid schemes that reward recruiting over sales. We can provide no assurance that we would not be harmed if any such actions were brought against any of our current subsidiaries or any other direct selling company we may acquire in the future.

 

RISKS RELATED TO OUR COMMERCIAL COFFEE BUSINESS

 

Increases in the cost of high-quality arabica coffee beans or other commodities or decreases in the availability of high-quality arabica coffee beans or other commodities could have an adverse impact on our business and financial results.

 

We purchase, roast, and sell high-quality whole bean arabica coffee beans and related coffee products. The price of coffee is subject to significant volatility. The high-quality arabica coffee of the quality we seek tends to trade on a negotiated basis at a premium above the “C” price. This premium depends upon the supply and demand at the time of purchase and the amount of the premium can vary significantly. An increase in the “C” coffee commodity price does increase the price of high-quality arabica coffee and also impacts our ability to enter into fixed-price purchase commitments. We frequently enter into supply contracts whereby the quality, quantity, delivery period, and other negotiated terms are agreed upon, but the date, and therefore price, at which the base “C” coffee commodity price component will be fixed has not yet been established.

 

These are known as price-to-be-fixed contracts. We also enter into supply contracts whereby the quality, quantity, delivery period, and price are fixed. The supply and price of coffee we purchase can also be affected by multiple factors in the producing countries, including weather, natural disasters, crop disease, general increase in farm inputs and costs of production, inventory levels, and political and economic conditions, as well as the actions of certain organizations and associations that have historically attempted to influence prices of green coffee through agreements establishing export quotas or by restricting coffee supplies. Speculative trading in coffee commodities can also influence coffee prices. Because of the significance of coffee beans to our operations, combined with our ability to only partially mitigate future price risk through purchasing practices, increases in the cost of high-quality arabica coffee beans could have an adverse impact on our profitability. In addition, if we are not able to purchase or receive assignments in sufficient quantities of green coffee due to any of the above factors or to a worldwide or regional shortage, we may not be able to fulfill the demand for our coffee, which could have an adverse impact on our profitability.

 

 

 

Adverse public or medical opinions about the health effects of consuming our products, as well as reports of incidents involving food-borne illnesses, food tampering, or food contamination, whether or not accurate, could harm our business.

 

Some of our products contain caffeine and other active compounds, the health effects of which are the subject of public scrutiny, including the suggestion that excessive consumption of caffeine and other active compounds can lead to a variety of adverse health effects. In the U.S., there is increasing consumer awareness of health risks, including obesity, due in part to increased publicity and attention from health organizations, as well as increased consumer litigation based on alleged adverse health impacts of consumption of various food products, frequently including caffeine. An unfavorable report on the health effects of caffeine or other compounds present in our products, or negative publicity or litigation arising from certain health risks could significantly reduce the demand for our products.

 

Similarly, instances or reports, whether true or not, of food-borne illnesses, food tampering and food contamination, either during manufacturing, packaging or preparation, have in the past severely injured the reputations of companies in the food processing, grocery and quick-service restaurant sectors and could affect us as well. Any report linking us to the use of food tampering or food contamination could damage our brand value, severely hurt sales of our products, and possibly lead to product liability claims, litigation (including class actions) or damages. If consumers become ill from food-borne illnesses, tampering or contamination, we could also be forced to temporarily stop selling our products and consequently could materially harm our business and results of operations.

 

Because our green coffee operations are concentrated within Nicaragua, we are subject to greater risks than if our green coffee business was internationally diversified.

 

Due to the fact that our green coffee operations are concentrated within Nicaragua, we are subject to greater risks than a company with coffee operations that are more geographically and internationally diversified. Political or financial instability, currency fluctuations, trade restrictions, the outbreak of pandemics, labor unrest, transport capacity and costs, port security, weather conditions, natural disasters or other events in Nicaragua could slow or disrupt our coffee operations, disrupt our supply of our green coffee and/or adversely affect our results of operations.

 

We are dependent upon H&H Coffee Group Export Corp., our largest customer of our green coffee mill processing services for the year ended December 31, 2019, and Hernandez, Hernandez Export Y Compania Limitada to supply and assign unprocessed green coffee to our mill for processing, as well as the provision of management services to our Nicaraguan subsidiary.

 

H&H is an agent of the local producers in Nicaragua and they supply and assign unprocessed green coffee to our mill for processing. We do not have a direct relationship with the local producers and are dependent on H&H, to negotiate agreements with local producers and assign raw green coffee to us in a timely and efficient manner for processing at our mill. During the year ended December 31, 2019, all of the unprocessed green coffee that was assigned to our mill for processing was supplied to us by H&H. In addition, H&H Coffee Group Export was our largest customer for our mill processing services of green coffee beans during the year ended December 31, 2019. The owners of H&H and H&H Export have been engaged by CLR as employees to manage Siles and we have a profit-sharing agreement with them in regard to profits from green coffee sales and processing with respect to profit generated from the sale of processed green coffee from La Pita, a leased mill, or the new Matagalpa Mill. In addition, an affiliated entity of H&H Export owns 50% of the Matagalpa Property and has agreed to contribute $4,700,000 toward construction of the Matagalpa Mill on the property for processing coffee in Nicaragua.

 

We have also collaborated with H&H, our green coffee supplier and H&H Export, and other third parties in Nicaragua to develop a sourcing solution by entering into the Finance, Security and Accounts Receivable/Accounts Payable Monetization Agreement (the “FSRP Agreement”.) The FSRP Agreement is designed to provide us with access to a continued supply of green coffee beans for the 2020 growing season and a solution for funding of the continued operations of our raw green coffee distribution business. Under the FSRP Agreement, management has assessed the collectability of accounts receivable from H&H Export and believes collectability is more than likely due to the contracted FSRP Agreement, our history with H&H Export and our continual communication about future contractual agreements. During the FSRP Agreement negotiations any repayment or settlement of the accounts receivable balances related to green coffee sales were stayed.

 

 

 

 

During the year ended December 31, 2019, CLR recorded revenues from mill processing services of approximately $6,416,000 and during the year ended December 31, 2018 CLR recorded the sale of processed green coffee beans and recorded green coffee sales revenue of approximately $3,938,000, to H&H Export. At December 31, 2019 and 2018, CLR's accounts receivable balance for customer related revenue to be derived from sales to H&H Export were $8,707,000 and $673,000, respectively, of which the full amount was past due at December 31, 2019, as a result, CLR has reserved $7,871,000 as bad debt related to this accounts receivable which is net of collections through December 31, 2020.

 

In March 2021, CLR entered into a Master Relationship Agreement (“MA Agreement”) with the owners of H&H in order to memorialize the various agreement and modifications to those agreements in order to memorialize each of those agreements. Additionally, certain events have occurred that have kept the parties from complying with the terms of each of the original agreements and have caused there to be an imbalance with the respect to the funds owed from one party to the other; therefore this MA Agreement also sets forth a detailed accounting of the different business relationships and reconciles the monetary obligations between each party through the end of fiscal year 2020. Failure of the agreed-up terms contained within the MRA by H&H and their financial ability to meet their commercial debts, and loan obligations could have a material impact on the financial results for our commercial coffee segment.

 

Interruptions in our supply chain of green coffee or changes in our relationships with our vendors could adversely affect our gross margins, expenses, and results of operations.

 

All of our coffee is sourced, directly or indirectly, from outside the U.S., and primarily from Nicaragua. For the years ended December 31, 2019 and 2018, approximately 38.2% and 52.1%, respectively, of our coffee segment revenue was derived from mill processing services of green coffee and the sale of green coffee, for which all of the green coffee used within these revenue streams was procured in Nicaragua. We do not grow the green coffee that we mill, process and sell and instead the green coffee that we mill, process and sell originates with local producers in Nicaragua. During the year ended December 31, 2018, all our green coffee was procured from one vendor, H&H, as the agent of the local producers in Nicaragua. We did not procure any green coffee from H&H, for the year ended December 31, 2019. We do not have a direct relationship with the local producers and are dependent on this vendor to negotiate agreements with local producers for the supply of green coffee to our mill in a timely and efficient manner.

 

In January 2019, to accommodate CLR’s green coffee purchase contract, CLR entered into an agreement with the Nicaraguan Partner, pursuant to which the Nicaraguan Partner agreed to transfer a 45-acre tract of land in Matagalpa, Nicaragua to be owned 50% by the Nicaraguan Partner and 50% by CLR. In consideration for the land acquisition we issued to H&H Export, 153,846 shares of our common stock. The fair value of the shares issued was $1,200,000 and was based on the stock price on the date of issuance of the shares. In addition, the Nicaraguan Partner and CLR agreed to contribute $4,700,000 each toward construction of a processing plant, office, and storage facilities on the Matagalpa Property for processing coffee in Nicaragua. As of the date of this filing, the Matagalpa Mill project is still incomplete for total operations. If our fulfillment network does not operate properly or if a vendor fails to deliver on its commitments, whether due to financial difficulties or other reasons, we could experience delivery delays or an inability to meet required commitments which could adversely affect our gross margins, expenses and results of operations.

 

Our estimates of revenue derived from the sale of green coffee have been based upon revenue recognition policies that have changed and have resulted in decreased revenue recognition in 2019.

 

During the first three quarters of the year ended December 31, 2019, all of the revenue derived from our sale of processed green coffee to H&H Export was initially recognized as green coffee sales revenue, on a gross basis, without giving effect to deductions for expenses directly attributed to the procurement and processing of such green coffee.  On October 12, 2020, our Audit Committee determined that our financial statements for the quarters ended March 31, 2019, June 30, 2019 and September 30, 2019 could no longer be relied upon and were restated to reflect revenue from mill processing of green coffee for H&H Export on a net basis. This change resulted in a substantial decrease in revenue and cost of revenue reported in our financial statements for such quarters despite having no material impact on our net income/loss.

 

A significant portion of our commercial coffee segment revenue and purchases for the year ended December 31, 2019 has been generated from sales from few customers and for the year ended December 31, 2018 has been generated from sales from a few customers and suppliers.

 

The agent that represents the producers that assigns green coffee for processing at our mill, H&H, is related to our largest customer of our mill processing of green coffee, H&H Export. The termination of our relationship with either H&H Export or Rothfos Corporation would adversely affect our business. For the year ended December 31, 2019, our commercial coffee segment had three customers, H&H Export, Carnival Cruise Lines, Inc. and Topco Associates, LLC, that individually comprised more than 10% of our commercial coffee segment revenue and in the aggregate approximated 54% of total segment revenue. For the year ended December 31, 2018, our commercial coffee segment had two customers, H&H Export and Rothfos Corporation that individually comprised more than 10% of our commercial coffee segment revenue and in the aggregate approximated 49% of total segment revenue. For the year ended December 31, 2019, we recorded revenues from green coffee milling and processing services of approximately $6,416,000 that approximated 33% of commercial coffee segment revenue from H&H Export. During the year ended December 31, 2018, we recorded revenue from the sale of processed green coffee beans of $3,938,000 that approximated 17% of commercial coffee segment revenue from H&H Export. 

 

 

 

 

For the year ended December 31, 2019, the commercial coffee segment primarily made purchases of processed green coffee beans from four vendors, INTL FC Stone Merchant Services, Rothfos Corporation, Sixto Packaging and the Serengeti Trading Co., that individually comprised more than 10% of total segment purchases and in aggregate approximated 73% of our total segment purchases. For the year ended December 31, 2018, the commercial coffee segment made purchases of processed green coffee beans from two vendors, H&H and Rothfos Corporation, which individually comprised more than 10% of total segment purchases and in aggregate approximated 83% of total segment purchases.

 

CLR made purchases from H&H Export of processed green coffee for the year ended December 31, 2018, that approximated 45%, of total coffee segment purchases for use in selling processed green coffee to other third parties and for use in CLR’s Miami roasting facilities. CLR did not have any purchases of processed green coffee from H&H Export during the year ended December 31, 2019.

 

RISKS RELATED TO OUR COMMERCIAL HEMP BUSINESS

 

Uncertainty caused by potential changes to legal regulations could impact the use of CBD products.

 

There is substantial uncertainty and different interpretations among federal, state, and local regulatory agencies, legislators, academics and businesses as to the scope of operation of Farm Bill-compliant hemp programs relative to the emerging regulation of cannabinoids. These different opinions include, but are not limited to, the regulation of cannabinoids by the U.S. Drug Enforcement Administration, or DEA, and/or the FDA and the extent to which manufacturers of products containing Farm Bill-compliant cultivators and processors may engage in interstate commerce. The uncertainties cannot be resolved without further federal, and perhaps even state-level, legislation, regulation or a definitive judicial interpretation of existing legislation and rules. If these uncertainties continue, they may have an adverse effect upon the introduction of our products in different markets.

 

Changes to state laws pertaining to industrial hemp could slow the use of industrial hemp which would materially impact our revenues in future periods.

 

As of the date hereof, approximately 48 states authorized industrial hemp programs pursuant to the Farm Bill. Continued development of the industrial hemp industry will be dependent upon new legislative authorization of industrial hemp at the state level, and further amendment or supplementation of legislation at the federal level. Any number of events or occurrences could slow or halt progress all together in this space. While progress within the industrial hemp industry is currently encouraging, growth is not assured. While there appears to be ample public support for favorable legislative action, numerous factors may impact or negatively affect the legislative process(es) within the various states where we have business interests. Any one of these factors could slow or halt use of industrial hemp, which could negatively impact the business up to possibly causing us to discontinue operations as a whole.

 

New legislation or regulations which impose substantial new regulatory requirements on the manufacture, packaging, labeling, advertising and distribution and sale of hemp-derived products could harm our business, results of operations, financial condition and prospects.

 

For the year ended December 31, 2019, we recorded revenue of $887,000 related to our commercial hemp segment. We believe that the sale of our hemp-derived products are in compliance with all applicable regulations since all of our hemp products contain less than 0.3% THC and are sold only in states in the U.S. that have not prohibited the sale of hemp products. The rapidly changing regulatory landscape regarding hemp-derived products presents a substantial risk to the success and ongoing viability of the hemp industry in general and our ability to offer and market hemp-derived products. New legislation or regulations may be introduced at either the federal and/or state level which, if passed, could impose substantial new regulatory requirements on the manufacture, packaging, labeling, advertising and distribution and sale of hemp-derived products, such as our Hemp FX™ CBD oil products. New legislation or regulations may also require the reformulation, elimination or relabeling of certain products to meet new standards and revisions to certain sales and marketing materials, and it is possible that the costs of complying with these new regulatory requirements could be material.

 

“Marijuana” is illegal under the federal Controlled Substances Act (“CSA”). The 2018 Farm Bill modified the definition of “marijuana” in the CSA so that the definition of “marijuana” no longer includes hemp. The 2018 Farm Bill defines hemp as the “plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3% on a dry weight basis.” All of our hemp-derived products contain less than 0.3% delta-9 tetrahydrocannabinol concentration content. As such, we believe that the manufacture, packaging, labeling, advertising, distribution and sale of our hemp-derived products do not violate the CSA. If federal or state regulatory authorities, however, were to determine that industrial hemp and derivatives could be treated by federal and state regulatory authorities as “marijuana”, we could no longer offer our Hemp FX™ CBD oil products legally and could potentially be subject to regulatory action. Although we are unaware of any enforcement actions to date against the sale of hemp-related products, any enforcement action could be detrimental to our business. Violations of U.S. federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by the U.S. federal government including but not limited to disgorgement of profits, cessation of business activities or divestiture. Any such actions could have a material adverse effect on our business.

 

 

The FDA, the FTC and their state-level equivalents, also possess broad authority to enforce the provisions of federal and state law, respectively, applicable to consumer products and safeguards as such relate to foods, dietary supplements and cosmetics, including powers to issue a public warning or notice of violation letter to a Company, publicize information about illegal products, detain products intended for import or export (in conjunction with U.S. Customs and Border Protection) or otherwise deemed illegal, request a recall of illegal products from the market, and request the Department of Justice, or the state-level equivalent, to initiate a seizure action, an injunction action, or a criminal prosecution in the U.S. or respective state courts. The initiation of any regulatory action towards industrial hemp or hemp derivatives by the FDA, the FTC or any other related federal or state agency, would result in greater legal cost to the Company, may result in substantial financial penalties and enjoinment from certain business-related activities, and if such actions were publicly reported, they may have a materially adverse effect on our business and its results of operations.

 

RISKS ASSOCIATED WITH INVESTING IN OUR COMPANY AND OUR SECURITIES

 

Our Series D preferred stock is subordinate to our existing and future debt, and interests of the Series D preferred stock could be diluted by the issuance of additional preferred shares and by other transactions.

 

The Series D preferred stock ranks junior to all of our existing and future debt and to other non-equity claims on us and our assets available to satisfy claims against us, including claims in bankruptcy, liquidation or similar proceedings. Our future debt may include restrictions on our ability to pay distributions to preferred stockholders. Our charter currently authorizes the issuance of up to 5,000,000 shares of preferred stock in one or more classes or series. At December 31, 2019, there were 161,135 shares of Series A preferred stock designated all of which are outstanding, 1,052,631 shares of Series B preferred stock designated of which 129,332 are outstanding, 700,000 shares of Series C preferred stock designated of which no shares of Series C preferred stock were outstanding, and 650,000 shares of Series D preferred stock designated of which 578,898 shares of Series D preferred stock are outstanding. Subject to limitations prescribed by Delaware law and our charter, our board of directors is authorized to issue, from our authorized but unissued shares of capital stock, preferred stock in such classes or series as our board of directors may determine and to establish from time to time the number of shares of preferred stock to be included in any such class or series. The issuance of additional shares of Series D preferred stock or additional shares of Series A preferred stock, Series B preferred stock or Series C preferred stock or another series of preferred stock designated as ranking on parity with the Series D preferred stock would dilute the interests of the holders of shares of the Series D preferred stock and our other security holders, and the issuance of shares of any class or series of our capital stock expressly designated as ranking senior to the Series D preferred stock or the incurrence of additional indebtedness could affect our ability to pay distributions on, redeem or pay the liquidation preference on the Series D preferred stock. The Series D preferred stock does not contain any terms relating to or limiting our indebtedness or affording the holders of shares of the Series D preferred stock protection in the event of a highly leveraged or other transaction, including a merger or the sale, lease or conveyance of all or substantially all our assets, that might adversely affect the holders of shares of the Series D preferred stock, so long as the rights, preferences, privileges or voting power of the Series D preferred stock or the holders thereof are not materially and adversely affected.

 

None of our preferred stock has been rated.

 

None of our preferred stock has been rated by any nationally recognized statistical rating organization, which may negatively affect their market value and your ability to sell such shares. No assurance can be given, however, that one or more rating agencies might not independently determine to issue such a rating or that such a rating, if issued, would not adversely affect the market price of our Series D preferred stock. In addition, we may elect in the future to obtain a rating of our Series D preferred stock, which could adversely impact the market price of our Series D preferred stock. Ratings only reflect the views of the rating agency or agencies issuing the ratings and such ratings could be revised downward or withdrawn entirely at the discretion of the issuing rating agency if, in its judgment, circumstances so warrant. Any such downward revision or withdrawal of a rating could have an adverse effect on the market price of our Series D preferred stock.

 

A holder of shares of the Series D preferred stock has extremely limited voting rights.

 

The voting rights as a holder of shares of the Series D preferred stock are limited. Our shares of common stock are the only class of our securities carrying full voting rights. Voting rights for holders of shares of the Series D preferred stock exist primarily with respect to adverse changes in the terms of the Series D preferred stock and the creation of additional classes or series of preferred shares that are senior to the Series D preferred stock.

 

 

 

Our cash available for distributions may not be sufficient to pay distributions on the Series D preferred stock at expected levels, and we cannot assure you of our ability to pay distributions in the future. We may use borrowed funds or funds from other sources to pay distributions, which may adversely impact our operations.

 

We intend to pay regular monthly distributions to holders of our Series D preferred stock. Distributions declared by us will be authorized by our board of directors in its sole discretion out of assets legally available for distribution and will depend upon a number of factors, including our earnings, our financial condition, restrictions under applicable law, our need to comply with the terms of our existing financing arrangements, the capital requirements of our company and other factors as our board of directors may deem relevant from time to time. We may be required to fund distributions from working capital, proceeds of this offering or a sale of assets to the extent distributions exceed earnings or cash flows from operations. Funding distributions from working capital would restrict our operations. If we are required to sell assets to fund distributions, such asset sales may occur at a time or in a manner that is not consistent with our disposition strategy. If we borrow to fund distributions, our leverage ratios and future interest costs would increase, thereby reducing our earnings and cash available for distribution from what they otherwise would have been. We may not be able to pay distributions in the future. In addition, some of our distributions may be considered a return of capital for income tax purposes. If we decide to make distributions in excess of our current and accumulated earnings and profits, such distributions would generally be considered a return of capital for federal income tax purposes to the extent of the holder’s adjusted tax basis in its shares. A return of capital is not taxable, but it has the effect of reducing the holder’s adjusted tax basis in its investment. If distributions exceed the adjusted tax basis of a holder’s shares, they will be treated as gain from the sale or exchange of such stock.

 

We could be prevented from paying cash dividends on the Series D preferred stock due to prescribed legal requirements.

 

Holders of shares of Series D preferred stock do not have a right to dividends on such shares unless declared or set aside for payment by our board of directors. Under Delaware law, cash dividends on capital stock may only be paid from “surplus” or, if there is no “surplus,” from the corporation’s net profits for the then-current or the preceding fiscal year. Unless we operate profitably, our ability to pay cash dividends on the Series D preferred stock would require the availability of adequate “surplus,” which is defined as the excess, if any, of net assets (total assets less total liabilities) over capital. Our business may not generate sufficient cash flow from operations to enable us to pay dividends on the Series D preferred stock when payable. Further, even if adequate surplus is available to pay cash dividends on the Series D preferred stock, we may not have sufficient cash to pay dividends on the Series D preferred stock.

 

Furthermore, no dividends on Series D preferred stock shall be authorized by our board of directors or paid, declared or set aside for payment by us at any time when the authorization, payment, declaration or setting aside for payment would be unlawful under Delaware law or any other applicable law.

 

We may redeem the Series D preferred stock and holders of the Series D preferred may not receive dividends that you anticipate if we do redeem the Series D.

 

On or after September 23, 2022 we may, at our option, redeem the Series D preferred stock, in whole or in part, at any time or from time to time. Also, upon the occurrence of a Change of Control, we may, at our option, redeem the Series D preferred stock, in whole or in part, within 120 days after the first date on which such Change of Control occurred. We may have an incentive to redeem the Series D preferred stock voluntarily if market conditions allow us to issue other preferred stock or debt securities at a rate that is lower than the dividend rate on the Series D preferred stock. If we redeem the Series D preferred stock, then from and after the redemption date, dividends will cease to accrue on shares of Series D preferred stock, the shares of Series D preferred stock shall no longer be deemed outstanding and all rights as a holder of those shares will terminate, except the right to receive the redemption price plus accumulated and unpaid dividends, if any, payable upon redemption.

 

Holders of shares of the Series D preferred stock should not expect us to redeem the Series D preferred stock on or after the date they become redeemable at our option.

 

The Series D preferred stock will be a perpetual equity security. This means that it will have no maturity or mandatory redemption date and will not be redeemable at the option of the holders. The Series D preferred stock may be redeemed by us at our option either in whole or in part, from time to time, at any time on or after September 23, 2022, or upon the occurrence of a Change of Control. Any decision we may make at any time to propose a redemption of the Series D preferred stock will depend upon, among other things, our evaluation of our capital position, the composition of our stockholders’ equity and general market conditions at that time.

 

 

 

The Series D preferred stock is not convertible, and investors will not realize a corresponding upside if the price of the common stock increases.

 

The Series D preferred stock is not convertible into shares of our common stock and earns dividends at a fixed rate. Accordingly, an increase in market price of our common stock will not necessarily result in an increase in the market price of our Series D preferred stock. The market value of the Series D preferred stock may depend more on dividend and interest rates for other preferred stock, commercial paper and other investment alternatives and our actual and perceived ability to pay dividends on, and in the event of dissolution satisfy the liquidation preference with respect to, the Series D preferred stock.

 

The change of control provisions in the Series D preferred stock may make it more difficult for a party to acquire us or discourage a party from acquiring us.

 

The change of control provisions in the Series D preferred stock may have the effect of discouraging a third party from making an acquisition proposal for us or of delaying, deferring or preventing certain of our change of control transactions under circumstances that otherwise could provide the holders of our Series D preferred stock with the opportunity to realize a premium over the then-current market price of such equity securities or that stockholders may otherwise believe is in their best interests.

 

The market price and trading volume of the common stock and Series D preferred stock may fluctuate significantly.

The market determines the trading price for our common stock and the Series D preferred stock and may be influenced by many factors, including our ability to timely complete our required filings with the SEC, variations in our financial results, the market for similar securities, investors’ perception of us, our history of paying distributions on the Series D preferred stock, our issuance of additional preferred equity or indebtedness and general economic, industry, interest rate and market conditions. The de-listing of our the common stock and Series D preferred from the Nasdaq has limited investors’ ability to transfer or sell shares of common stock or the Series D preferred stock and has materially adversely affected the market value of the common stock and Series D preferred stock Because the Series D preferred stock carries a fixed distribution rate, its value in the secondary market will also be influenced by changes in interest rates and will tend to move inversely to such changes.

In the event of a liquidation, a holder of Series D preferred stock may not receive the full amount of your liquidation preference.

 

In the event of our liquidation of the Company, the proceeds will be used first to repay indebtedness and then to pay holders of shares of the Series D preferred stock and any other class or series of our capital stock ranking senior to or on parity with the Series D preferred stock as to liquidation the amount of each holder’s liquidation preference and accrued and unpaid distributions through the date of payment. In the event we have insufficient funds to make payments in full to holders of the shares of the Series D preferred stock and any other class or series of our capital stock ranking senior to or on parity with the Series D preferred stock as to liquidation, such funds will be distributed ratably among such holders and such holders may not realize the full amount of their liquidation preference.  

 

We are generally restricted from issuing shares of other series of preferred stock that rank senior the Series D preferred stock as to dividend rights, rights upon liquidation or voting rights, but may do so with the requisite consent of the holders of the Series D preferred stock; and, further, no such consent is required for an increase in the number of shares of Series D preferred stock or the issuance of additional shares of Series D preferred stock or series of preferred stock ranking pari passu with the Series D preferred stock so long as such increase in the number of shares of Series D preferred stock or issuance of such new series of preferred stock does not provide for, in the aggregate (taken together with any previously issued shares of Series D preferred stock), the payment of annual dividends on (in the case of additional shares of Series D preferred stock), or on parity with (in the case of any other series of preferred stock) in excess of $2,437,500.

 

We are allowed to issue shares of other series of preferred stock that rank above the Series D preferred stock as to dividend payments and rights upon our liquidation, dissolution or winding up of our affairs, only with the approval of the holders of at least two-thirds of the outstanding Series D preferred stock; however, we are allowed to increase the number of shares of Series D preferred stock and/or additional series of preferred stock that would rank equally to the Series D preferred stock as to dividend payments and rights upon our liquidation or winding up of our affairs without first obtaining the approval of the holders of our Series D preferred stock, so long as such increase in the number of shares of Series D preferred stock or issuance of such new series of preferred stock does not provide for, in the aggregate (taken together with any previously issued shares of Series D preferred stock), the payment of annual dividends on (in the case of additional shares of Series D preferred stock), or on parity with (in the case of any other series of preferred stock) in excess of $2,437,500. The issuance of additional shares of Series D preferred stock and/or additional series of preferred stock could have the effect of reducing the amounts available to the Series D preferred stock upon our liquidation or dissolution or the winding up of our affairs. It also may reduce dividend payments on the Series D preferred stock if we do not have sufficient funds to pay dividends on all Series D preferred stock outstanding and other classes or series of stock with equal or senior priority with respect to dividends. Future issuances and sales of senior or pari passu preferred stock, or the perception that such issuances and sales could occur, may cause prevailing market prices for the Series D preferred stock and our common stock to decline and may adversely affect our ability to raise additional capital in the financial markets at times and prices favorable to us.

 

 

 

The market price of the Series D preferred stock could be substantially affected by various factors.

 

The market price of the Series D preferred stock could be subject to wide fluctuations in response to numerous factors. On February 26, 2021, the last trading price of our Series D preferred stock was $10.61 and on May 28, 2021 it was $13.82. The price of the Series D preferred stock that will prevail in the market after this offering may be higher or lower than the offering price depending on many factors, some of which are beyond our control and may not be directly related to our operating performance.

 

These factors include, but are not limited to, the following:

 

●

prevailing interest rates, increases in which we expect may have an adverse effect on the market price of the Series D preferred stock;

 

●

trading prices of similar securities;

 

●

our history of timely dividend payments;

 

●

the annual yield from dividends on the Series D preferred stock as compared to yields on other financial instruments;

 

●

general economic and financial market conditions;

  

●

government action or regulation;

 

●

the financial condition, performance and prospects of us and our competitors;

 

●

changes in financial estimates or recommendations by securities analysts with respect to us or our competitors in our industry;

 

●

our issuance of additional preferred equity or debt securities; and

 

●

actual or anticipated variations in quarterly operating results of us and our competitors.

 

As a result of these and other factors, investors who purchase the Series D preferred stock in this offering may experience a decrease, which could be substantial and rapid, in the market price of the Series D preferred stock, including decreases unrelated to our operating performance or prospects.

 

Our two principal stockholders who are also our Chief Executive Officer, Chairman and director and our Chief Operating Officer have significant influence over us.

 

Through their voting power, each of Stephan Wallach and Michelle Wallach has the ability to significantly influence the election of our directors and to control all other matters requiring the approval of our stockholders. Stephan Wallach and Michelle Wallach, his wife, together beneficially own approximately 42.3% of our total equity securities (assuming exercise of the options to purchase common stock held by Stephan Wallach and Michelle Wallach) at May 31, 2021. As our Chief Executive Officer, Stephan Wallach has the ability to control our business affairs.

 

For the year ended December 31, 2018 we reported under an “emerging growth company,” and any decision on our part to comply with certain reduced disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

 

At December 31, 2018, we were no longer an emerging growth company under the Jobs Act. However, during 2018 we were an emerging growth company up until December 31, 2018.

 

An “emerging growth company,” as defined under the Jobs Act, and, for as long as we continued to be an emerging growth company, we could choose to take advantage of exemptions from various reporting requirements applicable to other public companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

 

 

 

Under the Jobs Act, a company is deemed an emerging growth company until the earliest of: (i) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of our first sale of common equity securities pursuant to an effective registration statement; (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer. We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the Jobs Act, that allowed us to delay the adoption of new or revised accounting standards that had different effective dates for public and private companies until those standards apply to private companies. Further, as a result of these scaled regulatory requirements, our disclosure for the year ended December 31, 2018 may be more limited than that of other public companies and you may not have the same protections afforded to shareholders of such companies.

  

We ceased to be an “emerging growth company,” which means we will no longer be able to take advantage of certain reduced disclosure requirements in our public filings.

 

We ceased to be an “emerging growth company,” as defined in the Jobs Act, on December 31, 2018. As a result, we anticipate that costs and compliance initiatives will increase as a result of the fact that we ceased to be an “emerging growth company.” In particular, we are now, or will be, subject to certain disclosure requirements that are applicable to other public companies that had not been applicable to us as an emerging growth company. These requirements include:

 

●	compliance with the auditor attestation requirements in the assessment of our internal control over financial reporting once we are an accelerated filer or large accelerated filer;

 

●	compliance with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;

 

●	full disclosure and analysis obligations regarding executive compensation; and

 

●	compliance with regulatory requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

 

There can be no assurance that we will be able to comply with the applicable regulations in a timely manner, if at all.

 

Our stock has historically had a limited market. If an active trading market for our common stock does develop, trading prices may be volatile.

 

In the event that an active trading market develops, the market price of the shares of common stock may be based on factors that may not be indicative of future market performance. Consequently, the market price of the common stock may vary greatly. If an active market for the common stock develops, there is a significant risk that the stock price may fluctuate dramatically in the future in response to any of the following factors, some of which are beyond our control:

 

●	variations in our quarterly operating results;
●	announcements that our revenue or income/loss levels are below analysts’ expectations;
●	general economic slowdowns;
●	changes in market valuations of similar companies;
●	announcements by us or our competitors of significant contracts; or
●	acquisitions, strategic partnerships, joint ventures or capital commitments.

 

The requirements of being a public company, including compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the requirements of the Sarbanes-Oxley Act and the Dodd-Frank Act, have strained our resources and, increased our costs, and we may continue to be unable to comply with these requirements in a timely or cost-effective manner.

As a public company, we must comply with the federal securities laws, rules and regulations, including certain corporate governance provisions of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and the Dodd-Frank Act, related rules and regulations of the SEC and Nasdaq, with which a private company is not required to comply.

 

 

We have been unable to comply with requirements in a timely or cost-effective manner. Complying with these laws, rules and regulations occupies a significant amount of the time of our Board of Directors and management and significantly increases our costs and expenses. Among other things, we must:

Sales by our shareholders of a substantial number of shares of our common stock in the public market could adversely affect the market price of our common stock.

 

A large number of outstanding shares of common stock are held by two of our principal shareholders. If any of these principal shareholders were to decide to sell large amounts of stock over a short period of time such sales could cause the market price of the common stock to decline.

 

Our stock price has been volatile and subject to various market conditions.

  

The trading price of the common stock has been subject to wide fluctuations. On May 11, 2021 the closing price of our common stock was $0.39 and on May 21, 2021 it was $0.31. The price of the common stock may fluctuate in the future in response to quarter-to-quarter variations in operating results, material announcements by us or our competitors, governmental regulatory action, conditions in the nutritional supplement industry, negative publicity, or other events or factors, many of which are beyond our control. In addition, the stock market has historically experienced significant price and volume fluctuations, which have particularly affected the market prices of many dietary and nutritional supplement companies and which have, in certain cases, not had a strong correlation to the operating performance of these companies. Our operating results in future quarters may be below the expectations of securities analysts and investors. If that were to occur, the price of the common stock would likely decline, perhaps substantially.

Securities analysts may not cover our capital stock, and this may have a negative impact on the market price of our capital stock.

The trading market for our capital stock depends, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by independent securities and industry analysts. If no independent securities or industry analysts commence coverage of us, the trading prices for our capital stock would be negatively impacted. If we obtain independent securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our capital stock, changes their opinion of our shares or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our capital stock could decrease and we could lose visibility in the financial markets, which could cause our stock price and trading volume to decline.

We may issue preferred stock with rights senior to the common stock, Series A preferred stock and Series B preferred stock.

 

Our certificate of incorporation authorizes the issuance of up to five million shares of preferred stock without shareholder approval and on terms established by our directors. We may issue shares of preferred stock in order to consummate a financing or other transaction, in lieu of the issuance of common stock. The rights and preferences of any such class or series of preferred stock would be established by our board of directors in its sole discretion and may have dividend, voting, liquidation and other rights and preferences that are senior to the rights of the common stock and existing preferred stock.

 

 

 

You should not rely on an investment in our common stock for the payment of cash dividends.

 

We intend to retain future profits, if any, to expand our business. We have never paid cash dividends on the common stock and do not anticipate paying any cash dividends on the common stock in the foreseeable future. You should not make an investment in the common stock if you require dividend income. Any return on investment in the common stock would only come from an increase in the market price of our stock, which is uncertain and unpredictable.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.

 

Provisions in our certificate of incorporation and bylaws, as amended and restated, may have the effect of delaying or preventing a change in control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws includes provisions that:

 

●	authorize our board of directors to issue preferred stock, without further stockholder action and with voting liquidation, dividend and other rights superior to our common stock; and

 

●	provide that vacancies on our board of directors may be filled only by the vote of a majority of directors then in office, even though less than a quorum.

  

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the General Corporation Law of the State of Delaware (the “DGCL”), which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder. Any of the foregoing provisions could limit the price that investors might be willing to pay in the future for shares of common stock, and they could deter potential acquirers of our company, thereby reducing the likelihood that you would receive a premium for the common stock in an acquisition.

Reports published by securities or industry analysts, including projections in those reports that exceed our actual results, could adversely affect our common stock price and trading volume.

 

Securities research analysts, including those affiliated with our selling agents establish and publish their own periodic projections for our business. These projections may vary widely from one another and may not accurately predict the results we actually achieve. Our stock price may decline if our actual results do not match securities research analysts' projections. Similarly, if one or more of the analysts who writes reports on us downgrades our stock or publishes inaccurate or unfavorable research about our business or if one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, our stock price or trading volume could decline. While we expect securities research analyst coverage following this offering, if no securities or industry analysts begin to cover us, the trading price for our stock and the trading volume could be adversely affected.

 

Item 1B. Unresolved Staff Comments 

 

None.

 

Item 2. Properties

 

Operation Properties

 

Our corporate headquarters are located at 2400 Boswell, Road in Chula Vista, California. This is also the location of Youngevity’s main operations and distribution center for the direct selling segment. The facility consists of a 59,000 square foot Class A single use building that is comprised 40% of office space and the balance is used for distribution.

 

 

 

Our commercial coffee segment headquarters is a coffee roaster processing facility, warehouse, and distribution center located in Miami, Florida, consisting of over 50,000 square feet. Our lease for this space expires in May 2023.

 

Our commercial hemp segment, located in central Florida, leases an 82,000 square foot hemp processing and manufacturing facility in Orlando, Florida, to house its processing hemp derived products and finished goods manufacturing facility. The Orlando facility holds the post processing equipment and the extensive power systems.

 

KII owns a laboratory testing facility located in Clermont, Florida, that provides us with capabilities in regard to formulation, quality control, and testing standards with CBD products. In addition, KII owns a production shop in Mascotte, Florida. In February 2019, KII purchased a 45-acre tract of land in Groveland, Florida (“Groveland”), which was intended to host a research and development facility, a greenhouse and allocate a portion for farming. We determined that its original plan for use is not viable at the present time as KII shifted its focus back to its primary core business of extraction of cannabinoids and the production of products for sale with the cannabinoids. Currently KII has Clermont, Florida properties. On May 26, 2021, the Groveland property was sold for $800,000. KII’s remaining production property in Mascotte, FL is expected to be listed for sale by the end of 2021. KII, expects to continue to lease the 82,000 square foot hemp processing and manufacturing facility located in Orlando, Florida.

 

Below is a summary of our operating facilities by location at December 31, 2019:

 

Location		Own/Lease	Approximate Square Footage	Land in Acres
Facilities for our direct selling segment
Chula Vista, CA, U.S.		Own	59,000	-
Lindon, UT, U.S.		Lease	36,373	-
Provo, UT, U.S.		Lease	7,156	-
Auckland, New Zealand		Lease	3,570	-
Rosedale, New Zealand		Lease	14,240	-
Moscow, Russia		Lease	1,531	-
Singapore, Singapore		Lease	1,539	-
Guadalajara, Mexico		Lease	6,830	-
Zapopan, Mexico		Lease	1,500	-
Manila, Philippines		Lease	4,473	-
Bogota, Colombia		Lease	2,153	-
Lai Chi Kok Kin, Hong Kong		Lease	1,296	-
Taipei, Taiwan		Lease	3,955	-
Jakarta, Indonesia		Lease	1,884	-
Kuala Lumpur, Malaysia		Lease	3,945	-
Chiba Chiba, Japan		Lease	98	-
Facilities for our commercial coffee segment:
Matagalpa, Nicaragua (1)		Own	60,505	500
Matagalpa, Nicaragua		Own	-	45
Miami, FL, U.S.		Lease	50,110	-
Facilities for our commercial hemp segment:
Clermont, FL, U.S. (2)		Own	2,000	-
Mascotte, FL, U.S. (3)		Own	14,000	-
Groveland, FL, U.S. (4)		Own	-	45
Orlando, FL, U.S.		Lease	82,000	-

 

(1)  Arabica coffee bean plantation, dry-processing facility and mill.

(2)  Testing laboratory.

(3)  Production shop. This property is currently available-for-sale.

(4) Property was sold on May 26, 2021 (Note 14, to the consolidated financial statements.)

 

We believe that we have adequate space for our anticipated needs and that suitable additional space will be available at commercially reasonable prices as needed.

 

Item 3. Legal Proceedings

 

We are not currently subject to any material legal proceedings; however, we are subject to litigation that we deem not to be material. From time to time, we may be subject to various legal proceedings and claims that arise in the ordinary course of its business activities. Litigation, regardless of the outcome, could have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

 

 

 

PART II

 

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Information

 

Our common stock is traded on the OTC Pink Market operated by OTC Markets under the symbol “YGYI”. From June 2017 until November 2020, our common stock was traded on Nasdaq Capital Market under the symbol “YGYI.” From June 2013 until June 2017, our common stock was traded on the OTCQX Marketplace operated by OTC Markets under the symbol “YGYI”. Previously, the common stock was quoted on the OTC Markets OTC Pink market system under the symbol “JCOF”. Price quotations on the OTC Pink Market reflect inter-dealer prices, without retail mark-up, markdown, or commission, and may not necessarily represent actual transactions.

 

Our 9.75% Series D Cumulative Redeemable Perpetual Preferred Stock, $0.001 par value is traded on OTC Pink market operated by OTC Markets Group under the symbol “YGYIP”.

 

The last reported sale price of our common stock on the OTC Pink market on June 22, was $0.30 per share. The last reported sale price of our Series D Preferred Stock on the OTC Pink market on June 22, 2021 was $14.43 per share.

 

Holders

 

At the close of business on June 23, 2021, there were 640 holders of record of our common stock.  The number of holders of record is based on the actual number of holders registered on the books of our transfer agent and does not reflect holders of shares in “street name” or persons, partnerships, associations, corporations or other entities identified in security position listings maintained by depository trust companies.

 

Dividend Policy

 

We have never declared or paid any cash dividends on our common stock and we do not currently intend to pay any cash dividends on the common stock in the foreseeable future. Other than the payment of dividends on our Series D preferred stock, we expect to retain all available funds and future earnings, if any, to fund the development and growth of our business. Any future determination to pay dividends, if any, on the common stock will be at the discretion of our board of directors and will depend on, among other factors, our results of operations, financial condition, capital requirements and contractual restrictions.

 

Series B Preferred Stock

 

In March 2018, our board of directors designated 1,052,631 shares as Series B preferred stock, par value $0.001 per share. The Series B preferred stock will pay cumulative dividends from the date of issuance at a rate of 5% per annum payable quarterly in arrears on or about the last day of March, June, September and December of each year beginning June 30, 2018. During the year ended December 31, 2019, we paid $51,000 in cash dividends to holders of Series B preferred stock. During March 2020, all of our Series B preferred stock mandatorily converted. Holders of the Series B preferred stock received 50% share of common stock for each one share of preferred stock they hold. In March 2020, all outstanding shares of Series B preferred stock automatically converted into 2 shares of common stock on the two-year anniversary date of the issuance of the Series B preferred stock, pursuant to the automatic conversion feature of the Series B preferred stock and all unpaid dividends were paid through that date.

 

Series C Preferred Stock

 

In September 2018, our board of directors designated 700,000 shares as Series C preferred stock, par value $0.001 per share. The Series C preferred stock paid cumulative dividends from the date of issuance at a rate of 6% per annum payable quarterly in arrears on or about the last day of March, June, September and December of each year beginning September 30, 2018. At December 31, 2018, all Series C preferred stock had been converted to common stock and all unpaid dividends were paid through that date.

 

Series D Preferred Stock

 

In December 2019, our board of directors designated an additional 190,000 shares as Series D preferred stock, par value $0.001 per share, to a total of 650,000 shares designated. The holders of the Series D preferred stock are entitled to cumulative dividends from the first day of the calendar month in which the Series D preferred stock is issued and payable on the fifteenth day of each calendar month, when, as and if declared by the Company's board of directors. The Company’s board of directors has declared an annual cash dividend of $2.4375 per share or a monthly dividend of $0.203125 per share on the Series D preferred stock. During the year ended December 31, 2019, we paid $203,000 in cash dividends to holders of Series D preferred stock. (See Note 14 to the consolidated financial statements.)

 

 

 

 

Equity Compensation Plan Information

 

See Part III, Item 11 for information regarding securities authorized for issuance under our equity compensation plans.

 

Sales of Unregistered Securities

 

All sales of our common stock that were not registered under the Securities Act have been previously disclosed in our filings with the Securities and Exchange Commission. There were no sales of unregistered securities during the three months ended December 31, 2019.

 

Item 6. Selected Financial Data

 

As a Smaller Reporting Company as defined by Rule12b-2 of the Exchange Act and in item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.

 

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion of our financial condition and results of operation should be read in conjunction with the audited consolidated financial statements and related notes, which are included elsewhere in this Annual Report on Form 10-K. In addition to historical information, the following discussion contains certain forward-looking statements that involve risks, uncertainties and assumptions. Where possible, we have tried to identify these forward-looking statements by using words such as “anticipate,” “believe,” “intends,” or similar expressions. Our actual results could differ materially from those anticipated expressed or implied by the forward-looking statements due to important factors and risks including, but not limited to, those set forth under “Risk Factors” in Part I, Item 1A of this Annual Report. All share and per share numbers reflect the one-for-twenty reverse stock split that we effected on June 5, 2017.

 

Overview 

 

At December 31, 2019, we operated in three segments: (i) the direct selling segment, where products are offered through a global distribution network of preferred customers and distributors, (ii) the commercial coffee segment, where products are sold directly to businesses, the distribution of processed green coffee beans and provides milling services for unprocessed green coffee beans, and (iii) the commercial hemp segment, where we manufacture proprietary systems to provide end-to-end extraction and processing that allow for the conversion of hemp feed stock into hemp oil and hemp extracts. During the year ended December 31, 2019, we derived approximately 86.1% of our revenue from direct sales, approximately 13.3% of our revenue from our commercial coffee sales and approximately 0.6% of our revenue from our commercial hemp business. During the year ended December 31, 2018, we derived approximately 85.5% of our revenue from direct sales and approximately 14.5% of our revenue from our commercial coffee sales.

 

In the direct selling segment, we sell health and wellness, beauty product and skin care, scrap booking and story booking items, packaged food products, other service-based products on a global basis and more recently our Hemp FX™ hemp-derived CBD product line and offer a wide range of products through an international direct selling network. Our direct sales are made through our network, which is a web-based global network of customers and distributors. Our independent sales force markets a variety of products to an array of customers, through friend-to-friend marketing and social networking. We consider our company to be an e-commerce company whereby personal interaction is provided to customers by our independent sales network. Initially, our focus was solely on the sale of products in the health, beauty and home care market through our marketing network; however, we have since expanded our selling efforts to include a variety of other products in other markets. Our direct selling segment offers approximately 5,500 products to support a healthy lifestyle.

 

We have expanded our operations through a series of acquisitions of the assets of other direct selling companies including their product lines and sales forces. We have also substantially expanded our distributor base by merging the assets that we have acquired under our web-based independent distributor network, as well as providing our distributors with additional new products to add to their product offerings.

 

We also engage in the commercial sale of roasted coffee products, the distribution of green coffee beans and provide milling services, through CLR. CLR sells roasted and unroasted coffee and produces coffee under its own Café La Rica brand, Josie’s Java House brand and Javalution brands. CLR also produces and sells coffee under a variety of private labels through major national sales outlets and major customers including cruise lines and office coffee service operators, as well as through our direct selling business. CLR acquired the Siles in 2014, a coffee plantation and dry-processing facility located in Matagalpa, Nicaragua, an ideal coffee growing region that is historically known for high quality coffee production. The dry-processing facility is approximately 26 acres and the plantation is approximately 500 acres and produces 100 percent Arabica coffee beans that are shade grown, Rainforest Alliance Certified™ and Fair Trade Certified™. The plantation, dry-processing facility and existing U.S. based coffee roaster facilities allows CLR to control the coffee production process from field-to-cup.

 

 

 

In the commercial hemp segment, we are a manufacturer of commercial hemp-based CBD extraction and post-processing equipment, and end-to-end processor of CBD isolate, distillate, water soluble isolate and water-soluble distillate. We develop, manufacture and sell equipment and related services to customers which enable them to extract CBD oils from hemp stock. We provide 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. We are also engaged in hemp-based CBD extraction technology including tolling processing which converts hemp biomass to hemp extracts such as CBD oil, distillate and isolate. We offer customers turnkey manufacturing solutions in extraction services and end-to-end processing systems. In addition, we own a laboratory testing facility that provides us with a broad range of capabilities in regard to formulation, quality control, and testing standards with our CBD products, including potency analysis for our supply partners of hemp derived CBD products.

 

We conduct our operations primarily in the U.S. For the years ended December 31, 2019 and 2018, approximately 15% and 14%, respectively, of our revenues were derived from sales outside the U.S.

 

Overview of Significant Events

 

Public Offering. Between September and December 2019, we closed two tranches of our Series D offering, pursuant to which we issued and sold a total of 578,898 shares of our 9.75% Series D preferred stock at a weighted average price to the public of $24.05 per share, less underwriting discounts and commissions, pursuant to the terms of the underwriting agreement that we entered into with the Benchmark Company, LLC (“Benchmark”) as representative of the several underwriters. The 578,898 shares of Series D preferred stock that were sold included 43,500 shares sold pursuant to the overallotment option that we granted to the underwriters that was exercised in full. In January 2020, the Company issued an additional 11,375 shares of Series D preferred stock upon the partial exercise by the underwriters.

 

The Series D preferred stock was approved for listing on The Nasdaq Capital Market under the symbol “YGYIP,” and had commenced trading on Nasdaq September 20, 2019. The net proceeds from this offering were approximately $12,269,000 after deducting underwriting discounts and commissions and expenses which were paid by us. Trading in the Series D preferred stock was suspended on Nasdaq on November 20, 2020, and on February 2, 2021, the Series D preferred stock was removed from listing on Nasdaq, effective at the opening of the trading session on February 12, 2021. Our Series D preferred stock is now traded on OTC Pink market under the same symbol YGYIP.

 

Stock Offerings. In February 2019, we entered into a securities purchase agreement with one accredited investor that had a substantial pre-existing relationship with us pursuant to which we sold 250,000 shares of our common stock at an offering price of $7.00 per share. Pursuant to the purchase agreement, we also issued to the investor a three-year warrant to purchase 250,000 shares of common stock at an exercise price of $7.00. We received proceeds of $1,750,000 from the stock offering. Consulting fees for arranging the purchase agreement include the issuance of 5,000 shares of restricted shares of our common stock and a three-year warrant priced at $10.00 per share convertible into 100,000 shares of the Company’s common stock upon exercise. (See Note 10 to the consolidated financial statements.)

 

In June 2019, we entered into a securities purchase agreement with one accredited investor that had a substantial pre-existing relationship with us pursuant to which we sold 250,000 shares of common stock at an offering price of $5.50 per share. We received proceeds of $1,375,000 from the stock offering. (See Note 10 to the consolidated financial statements.)

 

At-the-Market Equity Offering Program. In January 2019, we entered into an at-the-market offering agreement (the “ATM agreement”) with Benchmark pursuant to which we may sell from time to time, at our option, shares of our common stock through Benchmark, as sales agent, for the sale of up to $60,000,000 of shares of our common stock. We are not obligated to make any sales of common stock under the ATM agreement and we cannot provide any assurances that we will issue any shares pursuant to the ATM agreement. During the year ended December 31, 2019, we received approximately $102,000 from the sale of 17,524 shares of common stock under the ATM agreement. We are not currently eligible to register the offer and sale of our securities using a registration statement on Form S-3 and therefore cannot make sales under the ATM agreement until such time as we once again become S-3 eligible.

 

Convertible Notes. Between February and July 2019, we closed five tranches related to the January 2019 private placement debt offering, pursuant to which we offered for sale up to $10,000,000 in principal amount of notes (the “2019 PIPE Notes”), with each investor receiving 2,000 shares of common stock for each $100,000 invested. We entered into subscription agreements with thirty-one accredited investors that had a substantial pre-existing relationship with us pursuant to which we received aggregate gross proceeds of $3,090,000 and issued 2019 PIPE Notes in the aggregate principal amount of $3,090,000 and an aggregate of 61,800 shares of common stock. The placement agent received 15,450 shares of common stock for the closed tranches as compensation. Each 2019 PIPE Note matures 24 months after issuance, bears interest at a rate of 6.00% per annum, and the outstanding principal is convertible into shares of common stock at any time after the 180th day anniversary of the issuance of the 2019 PIPE Notes, at a conversion price of $10.00 per share, subject to adjustment for stock splits, stock dividends and reclassification of the common stock. The 2019 PIPE Notes are secured by all equity in KII. (See Note 7 & Note 14 to the consolidated financial statements.)

 

 

 

Promissory Notes. In March 2019, we entered into a two-year secured promissory note with two accredited investors with whom we had a substantial pre-existing relationship with and from whom we raised cash proceeds in the aggregate of $2,000,000. The promissory notes are secured by all equity in KII. In consideration of the promissory notes, we issued 20,000 shares of our common stock for each $1,000,000 invested as well as for each $1,000,000 invested five-year warrants to purchase 20,000 shares of our common stock at a price per share of $6.00. The promissory notes pay 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. We issued in the aggregate 40,000 shares of common stock and 40,000 warrants with the Notes. (See Note 6 & Note 14 to the consolidated financial statements.)

  

In March 2020, we closed the initial tranche related to our March 2020 private placement debt offering, pursuant to offering up to an aggregate of $5,000,000 in principal amount together with up to 250,000 shares of common stock with each investor receiving 50,000 shares of common stock for each $1,000,000 invested. On March 20, 2020, we entered into a Securities Purchase Agreement (“SPA”) with one accredited investor with whom we had a substantial pre-existing relationship, pursuant to which we issued a note in the principal amount of $1,000,000, due December 31, 2020. The note matures 9 months after issuance and bears interest at a rate of 18% per annum. In addition, we issued 50,000 shares of our common stock in connection with this Note. (See Note 14 to the consolidated financial statements.)

  

Small Business Administration – Paycheck Protection Program Loan. In April 2020, our three segments participated in the recent “The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)”, and the Paycheck Protection Program (the “PPP”) due to losses caused by the COVID-19 pandemic. We received cash in the aggregate of $3,763,295 from qualified Small Business Administrators (“SBA”) lenders. In addition, under the SBA loans, our Direct Selling segment qualified for mortgage assistance, whereby our corporate office’s mortgage has been paid directly from the SBA lenders. We qualified for the mortgage payment program for a period of six months. As of June 30, 2020, the SBA has paid approximately $50,000 directly to our mortgage holder. On November 5, 2020, KII received relief of $622,500 related its loan. On April 21, 2021, CLR received a second PPP loan in the amount of $632,895, payable within 60 months if relief for the loan is not granted.

 

We are in communication with the SBA lenders in regard to the potential liability we will incur (if any) in respect for repayment of the loans and consideration of any portion of loans forgiveness of the debt.

 

H&H transactions

 

Mill Construction Agreement

In January 2019, to accommodate CLR's green coffee purchase contract, CLR entered into an agreement with H&H and H&H Export, Mr. Hernandez and Ms. Orozco, collectively referred to as the Nicaraguan Partner, pursuant to which the Nicaraguan Partner agreed to transfer the Matagalpa Property to be owned 50% by the Nicaraguan Partner and 50% by CLR. In consideration for the land acquisition we issued to H&H Export, 153,846 shares of common stock. The fair value of the shares issued was $1,200,000 and was based on the stock price on the date of issuance of the shares. In addition, the Nicaraguan Partner and CLR agreed to contribute $4,700,000 each toward construction of a processing plant, office, and storage facilities on the Matagalpa Property for processing coffee in Nicaragua. The addition of the mill will accommodate CLR’s green coffee contract commitments. For the year ended December 31, 2019 and 2018, CLR made payments of $2,150,000 and $900,000, respectively, towards the Matagalpa Mill project. At December 31, 2019, CLR contributed a total of $3,050,000 towards the Matagalpa Mill project, in addition $391,117 was paid for operating equipment and the Nicaraguan Partner contributed a total of $1,922,000. CLR’s remaining portion of $1,650,000 was paid during 2020, including an additional $912,606 related to operating equipment. As of the date of this filing, the Matagalpa Mill is in construction and was not ready for full operations.

 

In January 2019, we issued 295,910 shares of our common stock to H&H Export to pay for certain working capital, construction and other payables. In connection with the issuance, we over issued 121,649 shares of common stock, resulting in the net issuance of common stock to settle payables of 174,261 shares. H&H Export agreed to reimburse CLR for the over issuance of the 121,649 shares of common stock in cash. At December 31, 2019, the value of the shares was approximately $397,000 based on the stock price at December 31, 2019. Management has reviewed the amount due and in conjunction with the impact of the underlying COVID crisis and has determined that the receivable balance of $397,000, was more than likely to be uncollected as of December 31, 2019, and therefore the full amount was recognized as an allowance for collectability at the end of December 31, 2019. (See Note 3 to the consolidated financial statements under “Other Related Party Transactions” for further discussion related to H&H Export.)

 

 

 

 

H&H Advance

 

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 CLR’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 is 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 $5,340,000, was not collected as of December 31, 2020, and therefore $5,340,000 was recognized as an allowance for collectability at the end of December 31, 2019. (See Note 3 to the consolidated financial statements under “Other Related Party Transactions” for further discussion related to H&H Export.)

 

Amendment to Operating and Profit-Sharing Agreement

 

In January 2019, CLR entered into an amendment to the March 2014 operating and profit-sharing agreement with the owners of H&H Export. In addition, CLR and H&H Export, Mr. Hernandez and Ms. Orozco have 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, a leased mill, 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. 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. The shares of common stock issued were valued at $7.50 per share. Profit-sharing expense for the year ended December 31, 2019 was $1,060,000 compared to a profit-sharing benefit of $910,000 in the same period last year, which is recorded in accrued expenses in the consolidated balance sheets at each respective year.

 

Joint Venture Agreement in Nicaragua for Hemp Processing Center between the CLR and KII and Nicaraguan partner

 

On April 20 and July 29, 2020, CLR and KII (the “U.S. Partners”) entered into agreements (“Hemp Joint Venture Agreement”) with H&H Export and Fitracomex, Inc. (“Fitracomex”) (collectively “The Nicaraguan Partners”) and established the Hemp Joint Venture (the “Nicaraguan Hemp Grow and Extractions Group” or the “Hemp Joint Venture”).

 

The agreement calls for H&H Export to contribute the 2,200-acre Chaguitillo Farms in Sebaco-Matagalpa, Nicaragua which will be owned by H&H Export and the U.S. Partners on a 50/50 basis separate from the Hemp Joint Venture.

 

The agreement calls for Nicaraguan Partners to contribute the excavation and preparation for hemp growth of the 2,200 acres, installation of electrical service, and the construction of 45,000 square feet of buildings to be used for office, processing, storage, drying and green house space.

 

The U.S. Partners will contribute all the necessary extraction equipment to convert hemp to crude oil and will also provide the feminized hemp seeds for the pilot grow program, along with their expertise in the hemp business. The U.S. Partners will also provide all necessary working capital as required.

 

Additionally, we agreed, subject to the approval of The Nasdaq Stock Market (“Nasdaq”) to issue 1,500,000 shares of our restricted common stock, $0.001 par value, to Fitracomex. In accordance with the Hemp Joint Venture Agreement, in July 2020 we issued to Fitracomex the agreed upon shares of restricted common stock. We also agreed to issue warrants to Fitracomex for the purchase 5,000,000 shares of our common stock at an exercise price of US $1.50, exercisable for a term of five (5) years after completion of the construction and upon the approval by our stockholders of the proposed issuance. In addition, we agreed to use our best efforts to register the resale of the shares of our common stock issued to Fitracomex under the U.S. Securities Act of 1933, as amended (the "Securities Act"), and make any necessary applications with Nasdaq to list the shares.

 

The U.S. Partners and H&H Export will serve as the managing partners with all business decisions will require prior consent and agreement of both parties. The Net Profits and Net Losses for each fiscal period shall be allocated among the partners as follows: twenty five percent (25%) to the Nicaraguan Partners and seventy five percent (75%) to the U.S. Partners.

 

 

 

Acquisitions During the Years Ended 2019 and 2018

 

In November 2019, we acquired certain assets of BeneYOU. BeneYOU is a nutritional and beauty product company that brings customers and distributors of brands of Jamberry which offers a line of nail products, the brand Avisae which focuses on gut health and the brand M.Global which delivers hydration products. (See Note 2 to the consolidated financial statements.)

 

In February 2019, KII acquired 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. (See Note 2 to the consolidated financial statements.)

 

In March 2018, we acquired certain assets of ViaViente. ViaViente is the distributor of The ViaViente Miracle, a highly concentrated, energizing whole fruit puree blend that is rich in antioxidants and naturally occurring vitamins and minerals. (See Note 2 to the consolidated financial statements.)

 

In February 2018, we acquired certain assets and certain liabilities of Nature Direct. Nature Direct, is a manufacturer and distributor of essential oil based nontoxic cleaning and care products for personal, home and professional use. (See Note 2 to the consolidated financial statements.)

 

Going Concern

 

The accompanying consolidated financial statements have been prepared and presented on a basis assuming we will continue as a going concern. At December 31, 2019, we had a significant accumulated deficit and we have experienced significant losses and incurred negative cash flows for the last few years. Net cash used in operating activities was $14,337,000 and $12,352,000 for the year ended December 31, 2019 and 2018, respectively. Our cash and cash equivalents totaled $4,463,000 at December 31, 2019. We do not currently believe that our existing cash resources are sufficient to meet our anticipated needs over the next twelve months from the date hereof. Based on our current cash levels and our current rate of cash requirements, we will need to raise additional capital and/or will need to further reduce our expenses from current levels. Our independent registered public accounting firm has issued a report that includes an explanatory paragraph referring to our recurring losses from operations (anticipated continued losses in the future) and net capital deficiency that raise substantial doubt in our ability to continue as a going concern without additional capital becoming available.

 

Critical Accounting Policies and Estimates

 

Discussion and analysis of our financial condition and results of operations are based upon financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates; including those related to collection of receivables, inventory obsolescence, sales returns and non-monetary transactions such as stock and stock options issued for services, deferred taxes and related valuation allowances, fair value of assets and liabilities acquired in business combinations, asset impairments, useful lives of property, equipment and intangible assets and value of contingent acquisition debt. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

 

Revenue Recognition

 

We recognize 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. (See Note 4 to the consolidated financial statements.)

 

We ship the majority of our direct selling segment products directly to the distributors primarily via UPS, USPS or FedEx and receives substantially all payments for these sales in the form of credit card transactions. We regularly monitor our use of credit card or merchant services to ensure that its financial risk related to credit quality and credit concentrations is actively managed. Revenue is recognized upon passage of title and risk of loss to customers when product is shipped from the fulfillment facility. We ship the majority of our commercial coffee segment and commercial hemp segment products via common carrier and invoice our customers for the products. 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. In addition, our commercial coffee segment records revenue at net for providing milling services of green coffee beans at the CLR mill. Our commercial hemp segment records revenue also related to lab testing services which are billed upon release of results or delivery of product.

 

Sales revenue and a reserve for estimated returns are recorded net of sales tax.

 

 

 

Fair Value of Financial Instruments

 

Certain of our financial instruments including cash and cash equivalents, accounts receivable, inventories, prepaid expenses, accounts payable, accrued liabilities and deferred revenue are carried at cost, which is considered to be representative of their respective fair values because of the short-term nature of these instruments. Our notes payable and derivative liabilities are carried at estimated fair value. (See Note 9 to the consolidated financial statements.)

 

Derivative Financial Instruments

 

We do not use derivative instruments to hedge exposures to cash flow, market or foreign currency.

 

We review the terms of convertible debt and equity instruments we issue to determine whether there are derivative instruments, including an embedded conversion option that is required to be bifurcated and accounted for separately as a derivative financial instrument. In circumstances where a host instrument contains more than one embedded derivative instrument, including a conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument. Also, in connection with the sale of convertible debt and equity instruments, we may issue freestanding warrants that may, depending on their terms, be accounted for as derivative instrument liabilities, rather than as equity.

 

Derivative instruments are initially recorded at fair value and are then revalued at each reporting date with changes in the fair value reported as non-operating income or expense. When the convertible debt or equity instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds allocated to the convertible host instruments are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the convertible instruments themselves, usually resulting in those instruments being recorded at a discount from their face value. (See Note 8 to the consolidated financial statements.)

 

The discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to interest expense, using the effective interest method.

 

Inventory and Cost of Revenues

 

Inventory is stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method. We record an inventory reserve for estimated excess and obsolete inventory based upon historical turnover, market conditions and assumptions about future demand for its products. When applicable, expiration dates of certain inventory items with a definite life are taken into consideration.

 

Cost of revenues includes the cost of inventory, shipping and handling costs incurred in connection with shipments to customers, direct labor and benefits costs, royalties associated with certain products, transaction merchant fees and depreciation on certain assets.

 

Operating and Financing Leases

 

The Company leases certain office space, warehouses, distribution centers, manufacturing centers, and equipment. A contract is or contains a lease if the contract conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.

 

In general, the Company’s leases include one or more options to renew, with renewal terms that generally vary from one to ten years. The exercise of lease renewal options is generally at the Company’s sole discretion. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.

 

The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. Leases with an initial term of twelve months or less are not recorded on the Company’s consolidated balance sheets, and the Company does not separate non-lease components from lease components. Lease cost is recognized on a straight-line basis over the lease term.

 

Finance lease right-of-use assets are amortized over their estimated useful lives, as the Company does believe that it is reasonably certain that options which transfer ownership will be exercised. In general, for the majority of the Company’s material leases, the renewal options are not included in the calculation of its right-of-use assets and lease liabilities, as the Company does not believe that it is reasonably certain that these renewal options will be exercised. Periodically, the Company assesses its leases to determine whether it is reasonably certain that these options and any renewal options could be reasonably expected to be exercised.

 

 

 

The majority of the Company’s leases are for real estate and equipment. In general, the individual lease contracts do not provide information about the rate implicit in the lease. Because the Company is not able to determine the rate implicit in its leases, it instead generally uses its incremental borrowing rate to determine the present value of lease liabilities. In determining its incremental borrowing rate, the Company reviewed the terms of its leases, its senior secured credit facility, swap rates, and other factors.

 

Business Combinations

 

We account for business combinations under the acquisition method and allocate the total purchase price for acquired businesses to the tangible and identified intangible assets acquired and liabilities assumed, based on their estimated fair values. When a business combination includes the exchange of our common stock, the value of the common stock is determined using the closing market price at the date such shares were tendered to the selling parties. The fair values assigned to tangible and identified intangible assets acquired and liabilities assumed are based on management or third-party estimates and assumptions that utilize established valuation techniques appropriate for our industry and each acquired business. Goodwill is recorded as the excess, if any, of the aggregate fair value of consideration exchanged for an acquired business over the fair value (measured at the acquisition date) of total net tangible and identified intangible assets acquired. A liability for contingent consideration, if applicable, is recorded at fair value at the acquisition date. In determining the fair value of such contingent consideration, management estimates the amount to be paid based on probable outcomes and expectations on financial performance of the related acquired business. The fair value of contingent consideration is reassessed quarterly, with any change in the estimated value charged to operations in the period of the change. Increases or decreases in the fair value of the contingent consideration obligations can result from changes in actual or estimated revenue streams, discount periods, discount rates, and probabilities that contingencies will be met.

 

Long-Lived Assets

 

Long-lived assets, including property and equipment and definite lived intangible assets are carried at cost less accumulated amortization. Costs incurred to renew or extend the life of a long-lived asset are reviewed for capitalization. All finite-lived intangible assets are amortized on a straight-line basis, which approximates the pattern in which the estimated economic benefits of the assets are realized, over their estimated useful lives. We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate their net book value may not be recoverable. We first consider whether indicators of impairment are present. If indicators are present, we perform a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to the asset (group) in question to its carrying amount (as a reminder, entities cannot record an impairment for a held and used asset unless the asset first fails this recoverability test). If the undiscounted cash flows used in the test for recoverability are less than the long-lived assets (group’s) carrying amount, we then determine the fair value of the long- lived asset (group) and recognize an impairment loss, if any, if the carrying amount of the long-lived asset (group) exceeds its fair value. For the year ended December 31, 2018, we recorded a loss on impairment of intangible assets related to our acquisitions of BeautiControl, Inc. and Future Global Vision, Inc. and recorded a loss on impairment of intangible assets of approximately $2,550,000 and $625,000, respectively. While these charges had no impact on our business operations, cash balances or operating cash flows, they resulted in significant losses during the reporting periods. For the year ended December 31, 2019, we determined that there were indicators of impairment present for long-lived assets related to our commercial hemp segment, as result a test for recoverability concluded that the carrying amount of the long-lived asset (group) did not exceed its fair value. As a result, we recorded a loss on impairment of intangible assets related to our acquisition of Khrysos Global of approximately $8,461,000. (See Note 2 to the consolidated financial statements.)

 

Goodwill

 

Goodwill is recorded as the excess, if any, of the aggregate fair value of consideration exchanged for an acquired business over the fair value (measured at the acquisition date) of total net tangible and identified intangible assets acquired. Goodwill and other intangible assets with indefinite lives are not amortized but are tested for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. We first assess qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. If the qualitative assessment determines it is necessary, we will perform a quantitative impairment test shall be used to identify goodwill impairment and measure the amount of a goodwill impairment loss to be recognized (if any). We determined no impairment of our goodwill occurred for the year ended December 31, 2018.

 

At the end of 2019 the qualitative testing determined that a quantitative test was not required for our direct selling segment and our commercial coffee segment. The quantitative testing for our commercial hemp segment led us recognizing a loss on impairment of goodwill of $6,831,000.

 

Stock-based Compensation

 

We account for stock-based compensation in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Board ("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. 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

 

We account for 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 bases of our 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.

 

Results of Operations

 

Year ended December 31, 2019 compared to year ended December 31, 2018

 

Revenues

 

For the year ended December 31, 2019, our revenues decreased approximately $15,003,000 to $147,442,000 as compared $162,445,000 for the year ended December 31, 2018. During the year ended December 31, 2019, we derived 86.1% of our revenues from our direct sales, 13.3% of revenues from our commercial coffee sales and 0.6% of our revenues from our commercial hemp sales. During the year ended December 31, 2018, we derived 85.5% of our revenues from our direct sales and 14.5% of our revenues from our commercial coffee sales.

 

Revenues in the direct selling segment decreased by approximately $11,844,000 to $127,011,000 as compared to $138,855,000 for the year ended December 31, 2018. This decrease was attributed to a decrease of $14,255,000 in revenues from existing business, partially offset by revenues from new acquisitions of $2,411,000. The decrease in existing business was primarily due to a decline in the number of ordering preferred customers, partially offset by an increase in distributor revenues.

 

Revenues in the commercial coffee segment decreased by approximately $4,046,000 to $19,544,000 as compared to $23,590,000 for the year ended December 31, 2018. This decrease was attributed to a decrease in our green coffee business of $4,819,000 primarily driven by the shift in revenue away from green coffee sales to revenues related to mill processing services that were partially offset by increased revenues of $773,000 from our roasted coffee business. For the year ended December 31, 2019, CLR recorded revenues from green coffee milling and processing services of $6,416,000 to H&H Export; with the related green coffee to be resold by H&H Export. Additionally, we recorded revenue from the sale of processed green coffee of $1,046,000.

 

CLR recorded net revenues from processed green coffee of approximately $12,281,000 for the year ended December 31, 2018, of which $3,938,000 was to H&H Export, to be resold by H&H Export. Revenues in roasted coffee increased 6.8% to $12,082,000 for the year ended December 31, 2019.

 

Revenue in the commercial hemp segment from our Khrysos Global acquisition were approximately $887,000.

 

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

 

	Year Ended December 31,		Percentage
	2019	2018	Change (1)
Direct selling	$127,011	$138,855	(8.5)%
As a % of Revenue	86.1%	85.5%	(0.6)%
Commercial coffee:
Processed green coffee	1,046	12,281	(91.5)%
As a % of Segment Revenue	5.4%	52.1%	(46.7)%
Milling and processing services	6,416	-	N/A
As a % of Segment Revenue	32.8%	-%	N/A
Roasted coffee and other	12,082	11,309	6.8%
As a % of Segment Revenue	61.8%	47.9%	13.9%
Commercial coffee - total	19,544	23,590	(17.2)%
As a % of Revenue	13.3%	14.5%	(1.2)%
Commercial hemp	887	-	N/A
As a % of Revenue	0.6%	-%	N/A
Total Revenues	$147,442	$162,445	(9.2)%

 

 

 

Cost of Revenues

 

For the year ended December 31, 2019, cost of revenues decreased approximately $13,931,000 or 20.7% to $53,482,000 as compared to $67,413,000 for the year ended December 31, 2018.

 

Cost of revenues in the direct selling segment decreased by approximately $3,094,000 or 7.0% to $40,851,000 when compared to the same period last year, primarily due to the decrease in revenues discussed above, partially offset by an increase in inventory adjustments to increase the inventory reserve.

 

Cost of revenues in the commercial coffee segment decreased by approximately $12,132,000 or 51.7% to $11,336,000 when compared to the same period last year, primarily due to the shift in revenue to milling and processing services for 2019 when compared to 2018. As revenue for milling services does not contain a cost of goods sold component, this shift in revenue from green coffee processed sales to milling and processing services lowers our cost of revenue. Cost of revenues for processed green coffee the year ended December 31, 2019 was credit of $754,000 as a result of a pricing adjustment related to a price per pound settlement. During the year ended December 31, 2018, cost of revenues for processed green coffee sales were $11,747,000. Cost of revenues for roasted coffee sales the year ended December 31, 2019 increased 3.1% to approximately $12,090,000 compared to $11,721,000 during the year ended December 31, 2018.

 

Cost of revenues in the commercial hemp segment from our Khrysos Global acquisition was approximately $1,295,000.

 

Gross Profit (Loss)

 

For the year ended December 31, 2019, gross profit decreased approximately $1,072,000 or 1.1% to $93,960,000 as compared to $95,032,000 for the year ended December 31, 2018. Gross profit as a percentage of revenues increased to 63.7% compared to 58.5% in the same period last year.

 

Gross profit in the direct selling segment decreased by approximately $8,750,000 or 9.2% to $86,160,000 when compared to the same period last year, primarily as a result of the decrease in revenues discussed above and the increase in inventory adjustments to increase the inventory reserve. Gross profit as a percentage of revenues in the direct selling segment decreased to 67.8% compared to 68.4% in the same period last year.

 

Gross profit in the commercial coffee segment increased by approximately $8,086,000 to $8,208,000 when compared to the same period last year. Gross profit as a percentage of revenues in the commercial coffee segment increased to 42.0% for the year ended December 31, 2019, compared to 0.5% in the same period last year. The increase in gross profit in the commercial coffee segment was primarily due to the overall increase in the processing and milling of unprocessed green coffee that in turn drove higher gross profits from the combination of processed green coffee sales and revenues on milling and processing services during the year ended December 31, 2019, offset by the gross loss in the roasted coffee. Gross profit from the sales of processed green coffee was $1,800,000 and $534,000 for the year ended December 31, 2019 and 2018, respectively. Gross profits from milling and processing services was $6,416,000 for the year ended December 31, 2019. During the years ended December 31, 2019 and 2018, we recognized a loss related to roasted coffee of $8,000 and $412,000, respectively.

 

Gross loss in the commercial hemp segment from our Khrysos Global acquisition was approximately $408,000. Gross loss as a percentage of revenues in the commercial hemp segment was 46.0%. 

 

 

 

Below is a table of gross profit (loss) by segment (in thousands) and gross profit (loss) as a percentage of segment revenues:

 

	Year Ended December 31,		Percentage
	2019	2018	Change (1)
Direct selling	$86,160	$94,910	(9.2)%
Gross Profit % of Segment Revenues	67.8%	68.4%	(0.6)%
Commercial coffee:
Processed green coffee	1,800	534	237.1%
Gross Profit % of Segment Revenues	9.2%	2.3%	6.9%
Milling and processing services	6,416	-	N/A
Gross Profit % of Segment Revenues	32.8%	-%	N/A
Roasted coffee and other	(8)	(412)	(98.1)%
Gross Profit % of Segment Revenues	(0.0)%	(1.7)%	1.7%
Commercial coffee - total	8,208	122	6,627.9%
Gross Profit % of Segment Revenues	42.0%	0.5%	41.5%
Commercial hemp	(408)	-	N/A
Gross Profit % of Segment Revenues	(46.0)%	-%	N/A
Total	$93,960	$95,032	(1.1)%
Gross Profit % of Revenues	63.7%	58.5%	5.2%

 

 

Operating Expenses

 

For the year ended December 31, 2019, our operating expenses increased by approximately $50,078,000 or 51.3% to $147,747,000 as compared to $97,669,000 for the year ended December 31, 2018. The increase included $12,892,000 in stock and equity-based compensation expense that was recorded in the first quarter of 2019 for options granted that were fully vested at the time of issuance when compared to the prior year that did not have such grants. Excluding the effect of stock and equity-based compensation expense in the first quarter of 2019, operating expenses would have increased by 35.1%.

 

Distributor Compensation

 

For the year ended December 31, 2019, the distributor compensation paid to our independent distributors in the direct selling segment decreased by approximately $4,599,000 or 7.5% to $56,488,000 as compared to $61,087,000 for the year ended December 31, 2018. This decrease was primarily attributable to the decrease in revenues. Distributor compensation as a percentage of direct selling revenues increased to 44.5% as compared to 44.0% for the year ended December 31, 2018.

 

Sales and Marketing

 

For the year ended December 31, 2019, the sales and marketing expense increased by approximately $769,000 or 5.7% to $14,167,000 as compared to $13,398,000 for the year ended December 31, 2018. The increase included $471,000 in stock and equity-based compensation expense that was recorded in the first quarter of 2019 for options granted that were fully vested at the time of issuance when compared to the prior year that did not have such grants. Excluding the effect of stock and equity-based compensation expense in the first quarter of 2019, sales and marketing expense would have increased by 2.2%.

 

Sales and marketing expenses in the direct selling segment increased by approximately $363,000 or 2.9% to $12,823,000 as compared to $12,460,000 for the same period last year. The increase included $471,000 in stock and equity-based compensation expense that was recorded in the first quarter of 2019 for options granted that were fully vested at the time of issuance when compared to the prior year that did not have such grants. Excluding the effect of stock and equity-based compensation expense in the first quarter of 2019, sales and marketing expense in the direct selling segment would have decreased by 0.9%.

 

Sales and marketing expenses in the commercial coffee segment increased by approximately $180,000 or 19.2% to $1,118,000 as compared to $938,000 for the same period last year, primarily due to increased advertising costs and compensation expense.

 

Sales and marketing expenses in the commercial hemp segment were approximately $226,000 for the year ended December 31, 2019.

 

 

 

General and Administrative

 

For the year ended December 31, 2019, general and administrative expenses increased by approximately $39,616,000 or 208.9% to $61,800,000 from $20,009,000 for the year ended December 31, 2018. The increase included $12,421,000 in stock and equity-based compensation expense that was recorded in the first quarter of 2019. Excluding the effect of this stock and equity-based compensation expense in the first quarter of 2019, general and administrative expense would have increased by 146.8%.

  

General and administrative expenses in the direct selling segment increased approximately $20,226,000 or 122.9 to $36,680,000 for the year ended December 31, 2019 compared to $16,454,000 for the same period last year. These increases were primarily the result of increases in accounting and computer consulting costs and costs associated with the contingent liability revaluation of $6,937,000. Other increases included $10,996,000 in stock and equity-based compensation expense that was recorded in the first quarter of 2019 for options granted that were fully vested at the time of issuance when compared to the prior year that did not have such grants. Excluding the effect of stock and equity-based compensation expense in the first quarter of 2019, general and administrative expenses in the direct selling segment would have increased by 56.1%. For the year ended December 31, 2018, the contingent debt revaluation adjustment included gains of $2,520,000 related to the revaluation our acquisition of BeautiControl, Inc. and $1,246,000 related to the elimination of the contingent liability associated with our acquisition of Nature’s Pearl Corporation due to breach of the asset purchase agreement by the seller.

 

General and administrative expenses in the commercial coffee segment increased by approximately $17,469,000 or 491.4% to $21,024,000 for the year ended December 31, 2019 as compared to $3,555,000 for the same period last year. This increase included $1,425,000 in stock and equity-based compensation expense that was recorded in the first quarter of 2019. Excluding the effect of stock and equity-based compensation expense recorded in the first quarter of 2019, general and administration expense in the commercial coffee segment would have increased by 451.3%. Also contributing was the increase in profit-sharing expense of $1,970,000 as well as higher wages and warehouse storage costs in 2019 compared to the same period last year.

 

At December 31, 2019 CLR's accounts receivable balance for customer related revenue by H&H Export were approximately $8,707,000, of which the full amount was past due at December 31, 2019. As a result, the Company has reserved $7,871,000 as bad debt related to this accounts receivable which is net of collections through December 31, 2020. (See Note 3 to the consolidated financial statements under “Other Related Party Transactions” for further discussion related to H&H Export.)

 

In addition, CLR recorded a reserve against an outstanding receivable due from Alain Hernandez related to the over issuance of shares against the amounts payable. Management has reviewed the amount due and in conjunction with the impact of the underlying COVID crisis and has determined that the net amount of the amount receivable for $397,000, is more than likely to be uncollected as of December 31, 2019, and therefore approximately $397,000 has been recognized as an allowance for collectability at the end of December 31, 2019. (See Note 3 to the consolidated financial statements under “Other Related Party Transactions” for further discussion related to H&H Export.)

 

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 green coffee beans. In March 2019, this advance was converted to a $5,000,000 loan agreement as a note receivable. 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 $5,340,000, was not collected as of December 31, 2020, and therefore $5,340,000 was recognized as an allowance for collectability at the end of December 31, 2019. (See Note 3 to the consolidated financial statements under “Other Related Party Transactions” for further discussion related to H&H Export.)

 

General and administrative expense in the commercial hemp segment from our Khrysos Global acquisition was approximately $4,096,000 and was primarily related to wages and general office costs.

 

Loss on Impairment of Intangible Assets

 

For the year ended December 31, 2019, we recorded a loss on impairment of intangible assets related to our acquisition of Khrysos Global of approximately $8,461,000. (See Note 2 to the consolidated financial statements.)

 

For the year ended December 31, 2018, we recorded a loss on impairment of intangible assets related to our acquisitions of BeautiControl, Inc. and Future Global Vision, Inc. and recorded a loss on impairment of intangible assets of approximately $2,550,000 and $625,000, respectively. (See Note 2 to the consolidated financial statements.)

 

 

 

Loss on Impairment of Goodwill

 

During the fourth quarter of 2019, we recorded a loss on impairment of goodwill of $6,831,000 related to the commercial hemp segment. The impairment was driven by a decline in the estimated fair value primarily due to the reduction in the profitability forecasts, as well as increased working capital requirements which increased its carrying value. (See Note 2 & Note 5 to the consolidated financial statements.)

 

Operating Loss

 

For the year ended December 31, 2019, our operating loss increased by approximately $51,150,000 to an operating loss of $53,787,000 as compared to $2,637,000 for the year ended December 31, 2018. The increase in our operating loss included $12,892,000 in stock and equity-based compensation expense recorded in the first quarter of 2019 as discussed above under operating expenses. Excluding the effect of stock and equity-based compensation expense in the first quarter of 2019, the operating loss would have been $40,821,000 or an increase of $36,009,000 compared to the same period last year which was primarily due to the lower revenue and higher operating expenses including the loss on impairment of goodwill and intangible assets as discussed above.

 

Total Other Income (Expenses), Net

 

For the year ended December 31, 2019, total net other income was approximately $1,808,000 as compared to net other expense of $17,017,000 for the year ended December 31, 2018. The increase in net other income of $18,825,000 was due to the increase in the change in the fair value of derivative liabilities, the decrease in net interest expense, the loss on the modification of warrants recorded in 2019 and the loss on induced debt conversion and the extinguishment loss on debt recorded in 2018.

 

The change in fair value of derivative liabilities increased by approximately $10,147,000 to $5,502,000 in other income for the year ended December 31, 2019 compared to $4,645,000 in other expense for the year ended December 31, 2018. Various factors are considered in the pricing models we use to value the warrants including our current stock price, the remaining life of the warrants, the volatility of our stock price, and the risk-free interest rate. Future changes in these factors may have a significant impact on the computed fair value of our derivative liabilities. As such, we expect future changes in the fair value of the warrants and may vary significantly from period to period. (See Note 8 & Note 9 to the consolidated financial statements.)

 

Net interest expense decreased by approximately $3,766,000 for the year ended December 31, 2019 to $2,818,000 compared to $6,584,000 for the year ended December 31, 2018.

 

Interest expense the year ended December 31, 2019 included: (i) interest payments to investors associated with our private placements and debt transactions, (ii) interest payments related to our Crestmark agreement, (iii) interest payments related to our short-term note, and (iv) interest paid for other operating debt. Non-cash interest of amortization expense and other non-cash interest, offset by interest income.

 

Interest expense in 2018 included: (i) interest payments related to investors associated with our private placement transactions, (ii) interest payments related to our short-term note, (iii) interest payments related to our Crestmark agreement and, (iv) interest paid for other operating debt. Non-cash interest includes amortization expense and other non-cash interest, offset by interest income.

 

During the year ended December 31, 2019, we recorded a loss on modification of warrants of approximately $876,000 related to warrant modifications from inducement of shares and the change in the terms of the warrants. (See Note 10 to the consolidated financial statements.)

 

During the year ended December 31, 2018, we recorded a non-cash loss on an induced debt conversion as a result of an exchange of debt for common stock. An investor in our 2014 private placement exchanged their 2014 PIPE Note with a principal balance of $4,000,000 for 747,664 shares of common stock in October 2018. We concluded that the 2014 PIPE Note should be recognized as a debt modification for an induced conversion of convertible debt and we recognized all remaining unamortized discounts of approximately $679,000 immediately subsequent to October 2018 as interest expense and recorded a loss on the debt exchange in the amount of $4,706,000 with the corresponding entry through equity. (See Note 7 to the consolidated financial statements.)

 

During 2018, we also recorded a non-cash extinguishment loss on debt of approximately $1,082,000 as a result of the triggering of the automatic conversion of the 2017 PIPE Notes associated with our 2017 private placement to common stock. This loss represents the difference between the carrying value of the 2017 PIPE Notes and embedded conversion feature and the fair value of the shares that were issued. The fair value of the shares issued was based on the stock price on the date of the conversion. (See Note 7 to the consolidated financial statements.)

 

 

 

Income Taxes 

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the effective date of the change. At December 31, 2019, we have evaluated the realizability of the deferred tax asset, based upon achieved and estimated future results and through consideration of all positive and negative evidences and have determined that it is more likely than not that the deferred tax assets will not be realized. A valuation allowance remains on the U.S. state and foreign tax attributes that are likely to expire before realization. We have approximately $75,000 in refundable credits, and expects that a substantial portion will be refunded between 2020 and 2021. As such, we do not have a valuation allowance relating to the refundable AMT credit carryforward.

 

We recognized an income tax provision of approximately $9,000 which was our estimated federal, state and foreign income tax expense for the year ended December 31, 2019 compared to an income tax provision of $416,000 for the year ended December 31, 2018. The difference between the effective tax rate and the federal statutory rate of 21% was due to the permanent differences, change in valuation allowance, state taxes (net of federal benefit), and foreign tax rate differential.

 

Net Loss

 

For the years ended December 31, 2019 and 2018, the Company reported a net loss of approximately $51,988,000 and $20,070,000, respectively. The increase in net loss of $31,918,000 when compared to the prior period was due to the increase in operating loss of $48,975,000, partially offset by the decrease in net other expense of $16,650,000 and a decrease in the income tax provision of $407,000 as discussed above.

 

Adjusted EBITDA

 

EBITDA (earnings or loss before interest, income taxes, depreciation and amortization) as adjusted to remove the effect of stock-based compensation expense, equity-based compensation expense, amortization of debt discount and issuance costs, the change in the fair value of the derivatives, the loss on the modification of warrants, the loss on impairment of goodwill, the loss on impairment of intangible assets, the loss on induced debt conversion, the loss on induced debt conversion, and the loss on extinguishment of debt or "Adjusted EBITDA." Adjusted EBITDA was a loss of approximately $15,447,000 for the year ended December 31, 2019 compared to $7,013,000 for the year ended December 31, 2018.

 

Management believes that Adjusted EBITDA, when viewed with our results under GAAP and the accompanying reconciliations, provides useful information about our period-over-period results. Adjusted EBITDA is presented because management believes it provides additional information with respect to the performance of our fundamental business activities and is also frequently used by securities analysts, investors and other interested parties in the evaluation of comparable companies. We also rely on Adjusted EBITDA as a primary measure to review and assess the operating performance of our company and our management team.

 

Adjusted EBITDA is a non-GAAP financial measure. We calculate adjusted EBITDA by taking net income, and adding back the expenses related to interest, income taxes, depreciation, amortization, stock-based compensation expense, equity-based compensation expense, amortization of debt discount and issuance costs, change in the fair value of the warrant derivative, loss on modification of warrants, loss on impairment of goodwill, loss on impairment of intangible assets, loss on induced debt conversion, and loss on extinguishment of debt, and as each of those elements are calculated in accordance with GAAP.  Adjusted EBITDA should not be construed as a substitute for net income (loss) (as determined in accordance with GAAP) for the purpose of analyzing our operating performance or financial position, as Adjusted EBITDA is not defined by GAAP.

 

 

A reconciliation of our adjusted EBITDA to net loss is included in the table below (in thousands):

 

	Years Ended
	December 31,
	2019	2018
Net loss	$(51,988)	$(20,070)
Add/Subtract:
Interest, net	2,818	6,584
Income tax provision	9	416
Depreciation	2,134	1,819
Amortization	2,401	2,879
EBITDA	(44,626)	(8,372)
Add/Subtract:
Stock-based compensation	12,697	1,453
Equity-based compensation and amortization of issuance costs	4,597	324
Amortization of debt discounts and issuance costs	1,219	-
Change in the fair value of warrant derivatives	(5,502)	4,645
Loss on modification of warrants	876	–
Loss on impairment of goodwill	6,831	–
Loss on impairment of intangible assets	8,461	3,175
Loss on induced debt conversion	–	4,706
Loss on extinguishment of debt	–	1,082
Adjusted EBITDA	$(15,447)	$7,013

 

Liquidity and Capital Resources

 

Sources of Liquidity  

 

At December 31, 2019 we had cash and cash equivalents of approximately $4,463,000 as compared to cash and cash equivalents of $2,879,000 at December 31, 2018.

 

Cash Flows 

 

Cash used in operating activities. Net cash used in operating activities for the year ended December 31, 2019 was approximately $14,337,000 as compared to $12,352,000 for the year ended December 31, 2018. Net cash used in operating activities in 2019 consisted of a net loss of $51,988,000 and $10,339,000 in changes in operating assets and liabilities, partially offset by net non-cash operating activity of $47,990,000. Net cash used in operating activities in 2018 consisted of a net loss of approximately $20,070,000 and $9,434,000 in changes in operating assets and liabilities, partially offset by net non-cash operating activity of $17,152,000.

 

Net non-cash operating expenses in 2019 included approximately $4,535,000 in depreciation and amortization, $12,697,000 in stock-based compensation expense, $4,597,000 in equity-based compensation for services, $876,000 loss on warrant modification, $1,219,000 in amortization of debt discounts and issuance costs, $1,141,000 in increase in inventory reserves, $73,000 in deferred income taxes, $8,005,000 in increase in allowance for accounts receivable, $8,461,000 related to the loss on impairment of intangible assets, $6,831,000 related to the loss on impairment of goodwill, $5,737,000 related to an allowance for notes and other receivable and $1,158,000 related to noncash operating leases partially offset by $5,502,000 related to the change in fair value of warrant derivative liability and $1,838,000 related to the change in fair value of contingent acquisition debt.