Youngevity International, Inc. - Annual Report: 2016 (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, 2016
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)
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Delaware
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90-0890517
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification No.)
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2400 Boswell Road,
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91914
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Chula Vista, CA
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(Zip Code)
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(Address of principal executive offices)
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(619) 934-3980
(Registrant’s telephone number, including area
code)
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Securities registered pursuant
to Section 12(b) of the Act:
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Name of each exchange on which registered
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None
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Securities registered pursuant to Section 12(g) of the
Act:
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Common stock $0.001 par value
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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 [X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted 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
and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [
]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting company. See definition of
“accelerated filer,” “large accelerated
filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (Check one):
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Large accelerated filer [ ]
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Accelerated filer [ ]
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Non-accelerated filer [ ]
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Smaller reporting company [X]
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(Do not check if a
smaller reporting company)
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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 30, 2016, the last
business day of the registrant’s recently completed second
quarter, was approximately $31,618,639 based upon the closing stock
price reported on the OTCQX Market on June 30, 2016 on that
date.
The number of shares of registrant's Common Stock outstanding on
March 17, 2017 was 392,704,557.
Documents incorporated by reference: None.
YOUNGEVITY INTERNATIONAL, INC.
FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 2016
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PART I
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5
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15
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27
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28
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28
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28
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PART II
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29
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31
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32
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41
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41
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75
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75
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75
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PART III
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76
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80
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82
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84
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85
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PART IV
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86
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| FORM 10-K SUMMARY |
87
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88
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YOUNGEVITY INTERNATIONAL, INC.
Annual Report (Form 10-K)
For Year Ended December 31, 2016
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. In some cases you can identify
forward-looking statements by terminology such as
“may,” “should,” “potential,”
“continue,” “expects,”
“anticipates,” “intends,”
“plans,” “believes,”
“estimates,” and similar expressions. These statements
are based on our 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.
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.
Item 1. Business
We are
a leading omni-direct lifestyle company offering a hybrid of the
direct selling business model that also offers e-commerce and the
power of social selling. Assembling a virtual Main Street of
products and services under one corporate entity, Youngevity offers
products from the six top selling retail categories:
health/nutrition, home/family, food/beverage (including coffee),
spa/beauty, apparel/jewelry, as well as innovative
services.
We
operate in two segments: the direct selling segment where products
are offered through a global distribution network of preferred
customers and distributors and the commercial coffee segment where
products are sold directly to businesses. During the year ended
December 31, 2016, we derived approximately 89% of our revenue from
our direct sales and approximately 11% of our revenue from our
commercial coffee sales, respectively.
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
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 multiple 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 more than 5,000 products to
support a healthy lifestyle including:
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Nutritional supplements
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Gourmet coffee
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Weight management
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Skincare and cosmetics
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Health and wellness
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Packaged foods
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Lifestyle products (spa, bath, home and garden)
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Pet care
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Digital products including scrap and memory books
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Telecare health services
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Apparel and fashion accessories
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Business lending
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Since
2010 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
substantially expanded our distributor base by merging the
companies 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 2016 and 2015
acquisitions.
Legacy for Life, LLC
Effective September 1, 2016, we
acquired certain assets of Legacy for Life, LLC, an Oklahoma based
direct sales company and acquired the equity of two wholly owned
subsidiaries of Legacy for Life, LLC. Legacy for Life Taiwan and
Legacy for Life Limited (Hong Kong) collectively referred to
as (“Legacy for Life”). Legacy for Life is a science
based direct seller of i26, a product made from the IgY Max formula
or hyperimmune whole dried egg, which is the key ingredient in
Legacy for Life products. Additionally, we entered into an
Ingredient Supply Agreement to market i26 worldwide. The contingent
consideration’s estimated fair value at the date of
acquisition was $825,000. In addition we agreed to pay $221,000
over a stated term in accordance with
the agreement for the net assets of the Taiwan and Hong Kong
entities and certain inventories from Legacy for Life.
Nature’s Pearl Corporation
Effective September
1, 2016, we acquired certain assets of Nature’s Pearl
Corporation, (“Nature’s Pearl”) a direct sales
company that produces nutritional supplements and skin and personal
care products using the muscadine grape grown in the southeastern
region of the United States that are deemed to be rich in
antioxidants. The contingent consideration’s estimated fair
value at the date of acquisition was $1,475,000. We paid $200,000 for the purchase of certain
inventories, which has been applied against and reduced
the maximum aggregate purchase price.
Renew Interest, LLC (SOZO Global, Inc.)
On July
29, 2016, we acquired certain assets of Renew Interest, LLC
(“Renew”) formerly owned by SOZO Global, Inc.
(“SOZO”), a direct sales company that offers
nutritional supplements, skin and personal care products, weight
loss products and coffee products. The SOZO brand of products
contains CoffeeBerry a fruit extract known for its high level of
antioxidant properties. The contingent consideration’s
estimated fair value at the date of acquisition was $465,000.
We agreed to pay $300,000 for the
purchase of certain inventories and assumed liabilities over a
stated term in accordance with the agreement, which has been
applied against and reduced the maximum aggregate purchase price.
We also received additional inventories on a consignment
basis.
South Hill Designs Inc.
On
January 20, 2016, we acquired certain assets of South Hill Designs
Inc., (“South Hill”) a direct sales and proprietary
jewelry company that specializes
in customized lockets and charms. The purchase price allocation of the
intangible assets acquired for South Hill was $839,000 as of
December 31, 2016.
Additionally, we entered into an Exclusive, Licensing and Source
Agreement with two of the founders of South Hill for services and
the use of certain intellectual property.
Paws Group, LLC
Effective
July 1, 2015, we acquired certain assets of Paws Group, LLC,
(“PAWS”) a direct sales company for pet lovers that
offers an exclusive pet boutique carrying treats for dogs and cats
as well as grooming and bath products. The purchase
price consisted of a maximum aggregate purchase price of $150,000.
We paid approximately $61,000 for the purchase of certain
inventories, which has been applied against and reduced
the maximum aggregate purchase price.
Mialisia & Co., LLC
On
June 1, 2015, we acquired certain assets of Mialisia & Co.,
LLC, (“Mialisia”) a direct sales jewelry company that
specializes in interchangeable jewelry. As a result of this
business combination, our distributors and customers obtained
access to the unique line of Mialisia’s patent-pending
“VersaStyle™” jewelry and the Mialisia
distributors and customers obtained access to products offered by
us. The purchase price consisted of a maximum aggregate
purchase price of $1,900,000. We paid approximately $119,000 for
the purchase of certain inventories, which has
been applied against and reduced the maximum aggregate
purchase price.
JD Premium LLC
On
March 4, 2015, we acquired certain assets of JD Premium, LLC
(“JD Premium”) a dietary supplement company. As a
result of this business combination, our distributors and customers
obtained access to JD Premium’s unique line of products and
JD Premium’s distributors and clients obtained access to
products offered by us. The purchase price consisted of a
maximum aggregate purchase price of $500,000. We paid $50,000
for the purchase of certain inventories, which has
been applied against and reduced the maximum aggregate
purchase price.
Sta-Natural, LLC
On
February 23, 2015, we acquired certain assets and assumed certain
liabilities of Sta-Natural, LLC, (“Sta-Natural”) a
dietary supplement company and provider of vitamins, minerals and
supplements for families and their pets. As a result of this
business combination, our distributors and customers obtained
access to Sta-Natural’s unique line of products and
Sta-Natural’s distributors and clients obtained access to
products offered by us. The purchase price consisted of a
maximum aggregate purchase price of $500,000. We paid $25,000 for
the purchase of certain inventories, which has
been applied against and reduced the maximum aggregate
purchase price.
Set forth below is information regarding each of our other
acquisitions during 2013 and 2014.
On
October 1, 2014, we acquired certain assets and assumed certain
liabilities of Restart Your Life, LLC, a dietary supplement company
and provider of immune system support products and therapeutic skin
lotions. In May 2014, we acquired certain assets and certain
liabilities of Beyond Organics, LLC, a vertically integrated
organic food and beverage company marketing its organic products
through a network of independent sales distributors. In April 2014,
we acquired certain assets and certain liabilities of Good Herbs,
Inc., a traditional herbal company with pure, unaltered,
chemical-free natural herbal supplements marketing its organic
products through a network of independent sales
distributors.
In
November of 2013, we acquired certain assets and certain
liabilities of Biometics International, Inc., a developer and
distributor of a line of liquid supplements marketed through a
network of independent sales distributors. In October 2013, we
acquired certain assets and liabilities of GoFoods Global, LLC, a
developer and distributor of a complete line of packaged foods
including breads and desserts, soups and entrees. In August 2013,
we acquired certain assets and certain liabilities of Heritage
Markers, LLC, a developer and distributor of a line of digital
products including scrap books, memory books and greeting cards
marketed through a network of independent sales distributors and
the product line is sold through an e-commerce platform. In July
2012, we acquired certain assets of Livinity, Inc., a developer and
distributor of nutritional products through a network of
distributors. In April 2012, we acquired certain assets of GLIE,
LLC, a developer and distributor of nutritional supplements,
including vitamins and mineral
supplements.
Coffee
Segment - We engage in the
commercial sale of one of our products, our coffee through our
subsidiary CLR Roasters, LLC (“CLR”) and its
subsidiary. We own a traditional coffee roasting
business that produces coffee under its own Café La Rica
brand, Josie’s Java House Brand and Javalution brands. CLR
produces 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 distributor
network. Our coffee manufacturing division, CLR, was
established in 2001 and is a wholly-owned subsidiary. CLR produces
and markets a unique line of coffees with health benefits under the
JavaFit® brand which is sold directly to
consumers.
Our
CLR Miami Roasting facility is 50,000 square foot and is SQF Level
2 certified, which is a stringent food safety auditing 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 coffee segment and started our new
green coffee business with CLR’s acquisition of Siles
Plantation Family Group, which is now a wholly-owned subsidiary of
CLR located in Matagalpa, Nicaragua. Siles Plantation Family Group
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 allows 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 and around the world. CLR has
engaged a husband and wife team to operate the Siles Plantation
Family Group by way of an operating agreement. The agreement
provides for the sharing of profits and losses generated by the
Siles Plantation Family Group after certain conditions are met. CLR
has made substantial improvements to the land and facilities since
2014. The 2017 harvest season started in November 2016 and will
continue through April of 2017.
Products
Direct Selling Segment - Youngevity®
We
offer more than 5,000 products to support a healthy lifestyle. All
of these products, which are sold through our direct selling
network, can be categorized into six verticals. (Health &
Nutrition, Home & Family, Food & Beverage, Spa &
Beauty, Apparel & Jewelry, and Services.)
Our
flagship Health & Nutrition 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), and Beyond
Osteo-fx™ (a bone and joint health supplement). 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 and
Paks to target specific health concerns or goals.
Our
Food & Beverage includes nutrient-rich energy drinks, healthy
probiotic chocolates, and organic gourmet coffee. Our Be The Change
Coffee is grown and processed at our very own green coffee
plantation in the Nicaraguan rainforest. 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. Our Spa & Beauty products
include Youngevity® Mineral Makeup™, Botanical Spa and
Essential Oils. Our Home and Garden products include our For Tails
Only™ line of pet products, Hydrowash™, an
environmentally safe cleaner, and Bloomin Minerals™, a line
of plant and soil revitalizers.
Our acquisition of Heritage Makers in August of
2013 allowed customers and distributors to create and publish a
number of products utilizing their personal photos. Soon
after, we introduced Our Memories For Life, a scrapbooking and
memory keeping line of products, and Anthology DIY by Lisa
Bearnson, a creative new approach to start-to-finish DIY projects.
Heritage Makers account provides ongoing access to Studio, a user
friendly, online program, where a person can make one-of-a-kind
keepsakes, 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. The full offering can be viewed at www.heritagemakers.com.
Information contained on our websites are not incorporated by
reference, 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.
In
2014 we introduced our MK Collaboration line of fashion and jewelry
accessories to complement our nutritional and makeup products and
with the acquisition of Mialisia in 2015 and the licensing
agreement we entered into with South Hill Designs which was
effective January 13, 2016 (a proprietary jewelry company that
sells customized lockets and charms), we have further expanded our
jewelry line that our distributors have access to offering more
variety and appealing to a broader consumer base.
Coffee Segment - CLR
On
July 11, 2011, our 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 AL International, Inc. On July 23, 2013 AL
International, Inc. 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 Company. CLR operates a
traditional coffee roasting business, and through the merger we
were provided access to additional distributors, as well as added
the JavaFit® product line 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 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
Wal-Mart, Winn-Dixie, Jetro, American Grocers, Publix, Home Goods,
Marshalls and TJ Maxx.
During
2015 CLR invested in the K-Cup® coffee equipment and
capabilities and began the production of the K-Cup® line of
single-serve coffee products. In addition, we registered our own
Y-Cup® trademark for Youngevity identification to expand the
business brand name.
CLR’s
green coffee business provides for the sale of green coffee beans
to other roasters and distributors, primarily from the distribution
of coffee beans from Nicaragua.
Our
CLR products offered include:
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100% Colombian Premium Blend;
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Italian Espresso;
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House Blend;
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Decaffeinated Coffee;
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Dark Roast;
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Half-caff 50/50 blend Espresso;
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Donut Shop;
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Green Coffee Beans;
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Flavored Coffees;
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Organic Coffees; and
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Espresso;
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Select Water Decaffeinated.
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Distribution
Direct Selling
Segment - We presently sell
products domestically in 50 states and internationally, with
operations in the U.S. and currently eight international
distribution centers. For the year ended December 31,
2016 approximately 9% of our sales 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 one-time 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 contacts 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 customer’s
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.
We
employ certain web enabled systems to increase distributor support,
which allows distributors to run their business more efficiently
and also 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, below is a list of some of
our websites:
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● www.youngevity.com
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● www.clrroasters.com
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● www.ygyi.com
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● www.cafelarica.com
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● www.youngofficial.com
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● www.javalution.com
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● www.heritagemakers.com
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● www.mialisia.com
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● www.mkcollab.com
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● www.mybeyondorganic.com
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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.
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 introducing additional distributors, they have the
incentive to recruit 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 have the opportunity to earn bonuses based on the
net sales of products made by distributors they have recruited
introduced 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.
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, as well as Super Sack packaging that holds bulk coffee up
to 1,100 pounds. The coffee segment’s single-serve K-Cup
filling equipment is capable of producing 35 million K-Cups
annually of our own brands and private label
orders.
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 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 Company owned brands that are currently
on retail shelves includes Café La Rica and the Josie’s
Java House of brands.
The
coffee segment also includes our green coffee business. CLR sources
green coffee from Nicaragua in Central America and sells procured
coffee 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.
Seasonality and Back Orders
Our
business in both the direct selling and coffee segment can
experience weaker sales during the summer months; however, based on
recent experience, seasonality has not been material to our
operating results. We have not experienced significant back
orders.
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. In order 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 through the use of 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.
A
number of 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 particular 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.
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 (“RFP”) 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 (“DSD”)
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
DSD.
Suppliers
We
purchase our inventory from multiple third-party suppliers at
competitive prices. For the year ended December 31, 2016 we
made purchases from three vendors that individually comprised more
than 10% of total purchases and in aggregate approximated
54% of total purchases for the two
segments.
Direct Selling
Segment - We purchase raw
materials from numerous domestic and international suppliers. Other
than the coffee products produced through CLR, all of our products
are manufactured by independent suppliers. To achieve certain
economies of scale, best pricing and uniform quality, we rely
primarily on a few principal suppliers, namely: Global Health Labs,
Inc., Pacific Nutritional, Inc. and Nutritional Engineering,
Inc.
Sufficient
raw materials were available during the year ended December 31,
2016 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.
Coffee Segment
- We currently source green coffee
from Nicaragua. We utilize a combination of
outside brokers
and direct relationships with farms for our supply of green coffee.
Outside brokers provide the largest supply of our 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 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 United States currency and economics in the
producing countries.
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 actually 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 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. 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 Overview
We
are engaged in two industries, the direct selling industry and the
sale of coffee industry.
Direct Selling Industry
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.
According
to the World Federation of Direct Selling Association 2016 annual
report, the United States is the world’s largest direct
selling market, representing 20% worldwide based on 2015
statistical data. Driving industry growth is the increase in the
number of people involved in direct selling, on global level over
103 million people are direct sellers as reported in 2015, an
increase of 4.4% from 99 million people in 2014.
In
the United States retail sales for the direct selling channel
increased 4.8% to $36.1 billion in 2015 from $34.7 billion in 2014.
Compounded annual growth rate from 2012-2015 was 4.5%. And on a
global level retail sales for the direct selling channel increased
7.7% to $183.7 billion in 2015 from $170.6 billion in 2014.
Compounded annual growth rate from 2012-2015 was 7.2%.
The
Direct Selling Association (“DSA”) reported in its 2015
Overview sales by major product group in the United States that the
fastest growing product was Wellness followed by Services &
Other, the two categories alone representing $19 billion in sales
in 2015. Top product categories continue to gain market share: home
and family care/durables, personal care, jewelry, clothing,
leisure/educations. Wellness products include weight-loss products
and dietary supplements. Source: 2016 Growth & Outlook Report:
U.S. Selling in 2015.
Coffee Selling Industry
According to IBISWorld industry March 2016 reports 51121c. “Coffee
Production and Demand in the U.S.”, during the past five
years, the coffee production industry fared well, exhibiting
revenue growth due to increases in input commodity prices that were
passed on to customers. Moreover, in the next five years, the
industry is expected to benefit from consumer demand for
premium-coffee products. As the world price of coffee is expected
to grow, coffee producers are expected to benefit from less
volatile input commodity prices, compared with the previous period.
As a result, we anticipate that coffee producers will be able
to efficiently reflect input commodity pricing in their coffee
prices. The strong demand projection comes at a time of squeezed
global coffee supplies, which pushed prices to multiyear highs last
year following a historic drought in Brazil, the world’s
largest grower.
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 Nestle. 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.
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.
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 Consumer Product Safety Commission,
the U.S. Department of Agriculture, and the Environmental
Protection Agency. 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 or require the reformulation,
of our products, which could result in lost revenues and increased
costs to us. 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,
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 (§3546), which was passed by Congress in December 2006,
impose significant regulatory requirements on dietary supplements
including reporting of “serious adverse events” to 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.
In
addition, 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:
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liability for information retrieved from or transmitted over the
Internet;
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online content regulation;
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commercial e-mail;
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visitor privacy; and
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taxation and quality of products and services.
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Moreover,
the applicability to the Internet of existing laws governing issues
such as:
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intellectual property ownership and infringement;
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consumer protection;
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obscenity;
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defamation;
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employment and labor;
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the protection of minors;
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health information; and
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personal privacy and the use of personally identifiable
information.
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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: (1) an internal
network server that manages user accounts, print and file sharing,
firewall management, and wide area network connectivity; (2) a
leading brand database server to manage sensitive transactional
data, corporate accounting and sales information; (3) a
centralized host computer supporting our customized order
processing, fulfillment, and independent distributor management
software; (4) a standardized telecommunication switch and
system; (5) a hosted independent distributor website system
designed specifically for network marketing and direct selling
companies; and (6) 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 platform.
Product Returns
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. Product returns as a percentage of our
net sales have been approximately 2% of our monthly net sales over
the last two years. Commercial coffee segment sales are only
returnable if defective.
Employees
As
of March 17, 2017, we had 362 employees
worldwide. We believe that our current personnel are
capable of meeting 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.
Our Corporate History
Youngevity
International, Inc., formerly AL International, Inc., founded in
1996, operates through the following domestic wholly-owned
subsidiaries: AL Global Corporation, which operates our direct
selling networks, CLR Roasters, LLC (“CLR”), our
commercial coffee business, 2400 Boswell LLC, MK Collaborative LLC,
Youngevity Global LLC and the wholly-owned foreign subsidiaries
Youngevity Australia Pty. Ltd., Youngevity NZ, Ltd., Siles
Plantation Family Group S.A. located in Nicaragua, Youngevity
Mexico S.A. de CV, Youngevity Israel, Ltd., Youngevity Russia LLC,
Youngevity Colombia S.A.S., Youngevity International Singapore Pte.
Ltd., Mialisia Canada, Inc., and Legacy for Life Limited (Hong
Kong).
The
Company also operates subsidiary branches of Youngevity Global LLC
in the Republic of the Philippines, Taiwan Province the
People’s Republic of China.
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 AL 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
Company. CLR operates a traditional coffee roasting
business, and through the merger we were provided access to
additional distributors, as well as added the JavaFit® product
line to our network of direct marketers.
Effective
July 23, 2013, we changed our name from AL International,
Inc. to Youngevity International, Inc.
On February 23, 2017, our Board of Directors and
holders of in excess of a majority of our voting stock
approved an amendment to our Certificate of Incorporation to
effectuate: (i) a reverse stock split (the “Reverse
Split”) of the issued and outstanding shares of common stock
at a ratio to be determined in the discretion of our board of
directors within a range of one share of common stock for every
fifteen (15) to twenty-five (25) 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 (the “Decrease”);
concurrently with the Reverse Split; and an amendment to our 2012
Stock Option Plan (the “Plan”) to increase the number
of shares of common stock available for grant and to expand the
types of awards available for grant (the “Plan
Amendments”).
Emerging Growth Company
We
are an emerging growth company under the Jumpstart Our Business
Startups Act (the “JOBS Act”), which was enacted in
April 2012. We shall continue to be deemed an emerging growth
company until the earliest of:
(a)
the last day of the fiscal year in which we have total annual gross
revenues of $1 billion or more;
(b)
the last day of the fiscal year of the issuer following the fifth
anniversary of the date of the first sale of common equity
securities of the issuer pursuant to an effective registration
statement;
(c)
the date on which we have issued more than $1 billion in
non-convertible debt, during the previous 3-year period, issued;
or.
(d)
the date on which we are deemed to be a large accelerated
filer.
As
an emerging growth company we will be subject to reduced public
company reporting requirements and are 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 are also exempt from Section 14A (a)
and (b) of the Securities Exchange Act of 1934 which require the
shareholder approval, on an advisory basis, of executive
compensation and golden parachutes.
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 allows 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. As a result of this election, our financial
statements may not be comparable to companies that comply with
public company effective dates.
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 40% of office space
and the balance is used for distribution.
Available Information
Our
common stock is traded on the OTCQX Marketplace, operated by the
OTC Markets Group, under the symbol
“YGYI”.
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 furnished to, 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 Our phone number is (619)934-3980 and our
facsimile number is (619)934-5009.
RISK
FACTORS
Investing in our common stock 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 common stock could decline and
investors could lose all or a part of the money paid to buy our
common stock.
RISKS RELATING TO OUR BUSINESS
Because we have recently acquired several businesses and
significantly increased our investment in our green coffee
business, 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 four years, we completed 21 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, 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 product offering and customer base.
We have
recently expanded our operations, engaging in 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. 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. 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. Our management has limited direct experience in
operating a business of our current size as well as one that is
publicly traded.
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 carrying 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 carrying value of the
contingent acquisition debt is required.
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:
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difficulties
in assimilating acquired operations or products, including the loss
of key employees from acquired businesses
and
disruption to our direct selling channel;
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diversion of management's attention from our core
business;
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adverse effects on existing business relationships with suppliers
and customers; and
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risks of entering markets in which we have limited or no prior
experience.
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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.
The failure to comply with the terms of our outstanding Notes could
result in a default under the terms of the notes and, if uncured,
it could potentially result in action against the pledged assets of
CLR.
We
have issued $7,187,500 of convertible notes (the “November
2015 Notes) to investors in November 2015 (the “November 2015
Offering”) that are secured by certain of our assets and
those of CLR other than its inventory and accounts
receivable. We have also issued an additional $4,750,000 in
principal amount of notes (the “September 2014 Notes”)
in September 2014 Offering (the “September 2014
Offering”) secured by CLR’s pledge of the
Nicaragua green coffee beans acquired with the proceeds, the
contract rights under a letter of intent and all proceeds of the
foregoing (which lien is junior to CLR’s factoring agreement
and equipment lease but senior to all of its other obligations),
Stephan Wallach, our Chief Executive Officer, has also personally
guaranteed the repayment of the notes, and has agreed not to sell,
transfer or pledge 30 million shares of our common stock that he
owns so long as his personal guaranty is in effect. The November
2015 Notes mature in 2018, and the September 2014 Notes mature in
2019 and require us, among other things, to maintain the security
interest given by CLR for the notes, make quarterly installments of
interest, reserve a sufficient number of our shares of common stock
for conversion requests and honor any conversion requests made by
the investors to convert their notes into shares of our common
stock. If we fail to comply with the terms of the notes, the note
holders could declare a default under the notes and if the default
were to remain uncured, as 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 or our
assets would likely have a serious disruptive effect on our
coffee and direct selling operations.
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 year ended December
31, 2016, approximately 50%, 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 Consumer Product Safety Commission,
the U.S. Department of Agriculture, and the Environmental
Protection Agency. 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, or require the
reformulation, of our products, which could result in lost revenues
and increased costs to us. 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 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.
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 Consumer Product Safety Commission and the Food and
Drug Administration. 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, 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. We face continued
economic challenges in fiscal 2017 because customers may continue
to have 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.
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,
pandemic situations or large scale power outages can have a short
or, sometimes, long-term impact on consumer spending.
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 Escentuals. 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.
We may become involved in the future in legal proceedings that, if
adversely adjudicated or settled, could adversely affect our
financial results.
We
may be party to litigation at the present time or 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 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. 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 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, 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.
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.
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. The
inability to obtain sufficient capital to fund the expansion of our
business could have a material adverse effect on us.
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 year ended December 31, 2016 approximately 9% of
our sales were derived from sales outside the United
States. Our green coffee business in based in Nicaragua. We
own one plantation and intend to purchase another in Nicaragua. 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:
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the possibility that local civil unrest, political instability or
changes in diplomatic or trade relationships might disrupt our
operations in an international market;
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the lack of well-established or reliable legal systems in certain
areas;
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the presence of high inflation in the economies of international
markets;
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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;
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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
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the possibility that governments may impose currency remittance
restrictions limiting our ability to repatriate cash.
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Currency exchange rate fluctuations could reduce our overall
profits.
For
the year ended December 31, 2016, approximately 9% of our sales
were derived from sales outside the United States. 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
United States, 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
United States 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 Federal
Trade Commission 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 United States 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.
For example, the FTC released a proposed New Business Opportunity
Rule in April 2006. As initially drafted, the proposed rule would
have required pre-sale disclosures for all business opportunities,
which may have included network marketing compensation plans such
as ours. However, in March 2008 the FTC issued a revised notice of
proposed rulemaking, which indicates that the New Business
Opportunity Rule as drafted will not apply to multi-level marketing
companies.
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:
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General business and economic conditions;
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Adverse publicity or negative misinformation about us or our
products;
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Public perceptions about network marketing programs;
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High-visibility investigations or legal proceedings against network
marketing companies by federal or state authorities or private
citizens;
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Public perceptions about the value and efficacy of nutritional,
personal care, or weight management products
generally;
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Other competing network marketing organizations entering into the
marketplace that may recruit our existing distributors or reduce
the potential pool of new distributors; and
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Changes to our compensation plan required by law or implemented for
business reasons that make attracting and retaining distributors
more difficult.
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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 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. Increases in the “C”
coffee commodity price do increase the price of high-quality
arabica coffee and also impact 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 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 United States, 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.
RISKS ASSOCIATED WITH INVESTING IN OUR COMMON STOCK
We are controlled by one principal stockholder who is also our
Chief Executive Officer and Chairman.
Through
his voting power, Mr. Stephan Wallach, our Chief Executive Officer
and Chairman, has the ability to elect a majority of our directors
and to control all other matters requiring the approval of our
stockholders, including the election of all of our directors. Mr.
Wallach owns and beneficially owns approximately 71.5% of our total
equity securities (assuming exercise of the options to purchase
common stock held by Mr. Wallach and Michelle Wallach, his wife and
Chief Operating Officer and Director). As our Chief Executive
Officer, Mr. Wallach has the ability to control our business
affairs.
We are 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.
We
are an “emerging growth company,” as defined in the
Jumpstart Our Business Startups Act enacted in April 2012, and, for
as long as we continue to be an emerging growth company, we may
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, not being required to comply with any new requirements
adopted by the Public Company Accounting Oversight Board, or the
PCAOB, requiring mandatory audit firm rotation or a supplement to
the auditor's report in which the auditor would be required to
provide additional information about the audit and the financial
statements of the issuer, not being required to comply with any new
audit rules adopted by the PCAOB after April 5, 2012 unless the SEC
determines otherwise, 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.
We
could remain 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 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
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 allows 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. We cannot predict if investors
will find our common stock less attractive if we choose to rely on
these exemptions. If some investors find our common stock less
attractive as a result of any choices to reduce future disclosure,
there may be a less active trading market for our common stock and
our stock price may be more volatile. Further, as a result of these
scaled regulatory requirements, our disclosure may be more limited
than that of other public companies and you may not have the same
protections afforded to shareholders of such
companies.
Our financial statements may not be comparable to companies that
comply with public company effective dates.
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 allows 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. As a result of this election, our financial
statements may not be comparable to companies that comply with
public company effective dates.
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 our shares of common stock may be based on factors that may not
be indicative of future market performance. Consequently, the
market price of our common stock may vary greatly. If an active
market for our common stock develops, there is a significant risk
that our stock price may fluctuate dramatically in the future in
response to any of the following factors, some of which are beyond
our control:
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variations in our quarterly operating results;
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announcements that our revenue or income/loss levels are below
analysts’ expectations;
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general economic slowdowns;
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changes in market valuations of similar companies;
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announcements by us or our competitors of significant contracts;
or
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acquisitions, strategic partnerships, joint ventures or capital
commitments.
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Because our shares are deemed “penny stocks,” an
investor may have difficulty selling them in the secondary trading
market.
The
SEC has adopted regulations which generally define a “penny
stock” to be any equity security that has a market price, as
therein defined, of less than $5.00 per share or with an exercise
price of less than $5.00 per share, subject to certain exceptions.
Additionally, if the equity security is not registered or
authorized on a national securities exchange that makes certain
reports available, the equity security may also constitute a
“penny stock.” As our common stock comes within the
definition of penny stock, these regulations require the delivery
by the broker-dealer, prior to any transaction involving our common
stock, of a risk disclosure schedule explaining the penny stock
market and the risks associated with it. The broker-dealer also
must provide the customer with bid and offer quotations for the
penny stock, the compensation of the broker-dealer and any
salesperson in the transaction, and monthly account statements
indicating the market value of each penny stock held in the
customer’s account. In addition, the penny stock rules
require that, prior to a transaction in a penny stock not otherwise
exempt from those rules the broker-dealer must make a special
written determination that the penny stock is a suitable investment
for the purchaser and receive the purchaser’s written
agreement to the transaction. These disclosure requirements
may have the effect of reducing the trading activity in the
secondary market for our common stock. The ability of
broker-dealers to sell our common stock and the ability of
shareholders to sell our common stock in the secondary market would
be limited. As a result, the market liquidity for our common
stock would be severely and adversely affected. We can provide no
assurance that trading in our common stock will not be subject to
these or other regulations in the future, which would negatively
affect the market for our common stock.
We are subject to the reporting requirements of Federal Securities
Laws, which can be expensive.
We
are subject to the information and reporting requirements under the
Securities Exchange Act of 1934 and other federal securities laws,
and the compliance obligations of the Sarbanes-Oxley Act of 2002.
The costs of preparing and filing annual and quarterly reports and
other information with the SEC has and will continue to cause our
expenses to be higher than they would be if we were a
privately-held company.
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 our common stock are held by
several 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 our
common stock to decline.
Our stock price has been volatile and subject to various market
conditions.
There
can be no assurance that an active market in our stock will be
sustained. The trading price of our common stock has been subject
to wide fluctuations. The price of our 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 our
common stock would likely decline, perhaps
substantially.
We may issue preferred stock with rights senior to the common
stock, which we may issue in order to consummate a merger or other
transaction necessary to raise capital.
Our
certificate of incorporation authorizes the issuance of up to 100
million shares of preferred stock, par value $0.001 per share
(the “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.
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 our stock and do not anticipate
paying any cash dividends in the foreseeable future. You should not
make an investment in our common stock if you require dividend
income. Any return on investment in our common stock would only
come from an increase in the market price of our stock, which is
uncertain and unpredictable.
There is no public market for the notes or warrants to purchase
shares of our common stock that were issued to investors in our
Private Placements.
There
is no established public trading market for the warrants that were
issued in the September 2014 Offering and the November 2015
Offering and we do not expect a market to develop. In addition, we
do not intend to apply to list the warrants on any national
securities exchange or other nationally recognized trading system.
Without an active market, the liquidity of the warrants will be
limited.
Due to the speculative nature of warrants, there is no guarantee
that it will ever be profitable for investors who received warrants
in our private placements to exercise their warrants.
The
warrants issued in the September 2014 Offering and the
November 2015 Offering do not confer any rights of share ownership
on their holders, such as voting rights or the right to receive
dividends, but rather merely represent the right to acquire our
common stock at a fixed price for a limited period of time.
Investors in the September 2014 Offering and the November 2015
Offering may exercise their right to acquire the shares of Common
Stock underlying their warrants at any time after the date of
issuance by paying the respective exercise price per share, prior
to their expiration, after which date any unexercised warrants will
expire and have no further value. There can be no assurance that
the market price of the Common Stock will ever equal or exceed the
exercise price of the warrants, and, consequently, whether it will
ever be profitable for investors to exercise their
warrants.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Operation Properties
Our
corporate headquarters are located at 2400 Boswell, Road, Chula
Vista, California 91914. This is also the location of
Youngevity’s main operations and distribution center. 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.
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Entity
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Location
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Approximate Square
Footage of Facilities
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Land in Acres |
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Own/Lease
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Approximate Rent
Expense $
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Youngevity
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Chula Vista, CA
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59,000
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-
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Own (1)
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Youngevity
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Alisio Viejo, CA
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3,288
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-
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Lease
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89,000
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CLR
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Miami, FL
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50,110
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-
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Lease (2)
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414,000
|
|
Siles Family Group
|
|
Matagalpa, Nicaragua
|
|
200,000
|
|
500
|
|
Own (3)
|
|
-
|
|
Heritage Makers
|
|
Orem, UT
|
|
9,300
|
|
-
|
|
Lease
|
|
121,000
|
|
Youngevity
|
|
Auckland, New Zealand
|
|
3,570
|
|
-
|
|
Lease (4)
|
|
69,000
|
|
Youngevity
|
|
Moscow, Russia
|
|
1,550
|
|
-
|
|
Lease
|
|
125,000
|
|
Youngevity
|
|
Singapore
|
|
3,222
|
|
-
|
|
Lease
|
|
269,000
|
|
Youngevity
|
|
Guadalajara, Mexico
|
|
1,500
|
|
-
|
|
Lease
|
|
23,000
|
|
Youngevity
|
|
Manila, Philippines
|
|
4,473
|
|
-
|
|
Lease
|
|
6,000
|
|
Legacy for Life
|
|
Lai Chi Kok Kin, Hong Kong
|
|
1,296
|
|
-
|
|
Lease
|
|
17,000
|
|
Legacy for Life
|
|
Taipei, Taiwan
|
|
4,722
|
|
-
|
|
Lease
|
|
7,000
|
All
the Youngevity facilities include office space, warehouse and
distribution center.
(1)
Youngevity
corporate headquarters. The building is owned by our subsidiary
2400 Boswell, LLC, a limited liability company that we acquired
from the step parent of Mr. Wallach, our Chief Executive Officer.
On March 15, 2013, we acquired 2400 Boswell, LLC for $248,000 in
cash, $334,000 of debt forgiveness and accrued interest, and a
promissory note of approximately $393,000, payable in equal
payments over five years and bears interest at
5.00%. Additionally, we assumed a long-term mortgage of
$3,625,000, payable over 25 years, interest rate of 5.75%. As of
December 31, 2016 the balance on the long-term mortgage was
$3,363,000 and the balance on the promissory note was
$108,000.
(2)
CLR
headquarters, coffee roaster, warehouse, and distribution
center.
(3)
CLR
Arabica coffee bean plantation and dry-processing facility and
mill.
(4)
Includes
distribution for Australia.
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. As of December 31, 2016 we are
considering other space needs for operations as our needs
grow.
Item 3. Legal
Proceedings
We are, from time to time, the subject of claims and suits arising
out of matters occurring during the operation of our business. We
are not presently party to any legal proceedings that, if
determined adversely to us, would individually or taken together
have a material adverse effect on our business, operating results,
financial condition or cash flows. Regardless of the outcome,
litigation can have an adverse impact on us because of defense and
settlement costs, diversion of management resources and other
factors.
Not
applicable.
PART II
Item 5. Market for the Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Market Information
Since
June 2013, our common stock has been traded on the QX tier of the
OTC Market under the symbol "YGYI". Previously, our
common stock was quoted on the OTC Markets OTC Pink Market system
under the symbol “JCOF”. On March 17, 2017, the closing
price of our common stock on the OTCQX was $0.26. The range of high
and low bid or sales prices for each of the quarters of the fiscal
years ended December 31, 2016 and 2015 is presented
below:
|
|
2016
|
2015
|
||
|
|
High
|
Low
|
High
|
Low
|
|
First
Quarter
|
$0.33
|
$0.22
|
$0.27
|
$0.22
|
|
Second
Quarter
|
$0.32
|
$0.24
|
$0.41
|
$0.24
|
|
Third
Quarter
|
$0.32
|
$0.23
|
$0.39
|
$0.23
|
|
Fourth
Quarter
|
$0.32
|
$0.26
|
$0.35
|
$0.26
|
Holders
As
of the close of business on March 17, 2017, there were 518 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.
Dividends
We
did not pay any dividends in fiscal years ended 2016 or
2015. We intend to retain future profits, if any, to
expand its business. We do not anticipate paying any cash dividends
in the foreseeable future.
Sales of Unregistered Securities
We
did not sell any unregistered shares of our common stock during the
year ended December 31, 2016 in transactions that were not
registered under the Securities Act, other than as previously
disclosed in our filings with the Securities and Exchange
Commission.
Repurchases of Equity Securities
On December 11, 2012, we authorized a share
repurchase program to repurchase up to 15 million of our issued and
outstanding common shares from time to time on the open market or
via private transactions through block trades. Under
this program, we repurchased a total of 125,708 shares at a
weighted-average cost of $0.28 per share in 2016 and 1,344,222
shares at a weighted-average cost of $0.31 per share in
2015.
Share
repurchases activity during the three months ended December 31,
2016 was as follows:
|
ISSUER
PURCHASES OF EQUITY SECURITIES
|
||||
|
|
|
|
|
|
|
Period ending December 31, 2016
|
Total Number
of Shares Purchased (*)
|
Average Price Paid per Share
|
Total Number of Shares Purchased as Part of
Publicly
Announced Plans or Programs
|
Maximum Number of Shares that May Yet Be Purchased Under the Plans
or Programs
|
|
October
1 to October 31
|
-
|
-
|
-
|
11,068,120
|
|
November
1 to November 30
|
-
|
-
|
-
|
11,068,120
|
|
December
1 to December 31
|
-
|
-
|
-
|
11,068,120
|
|
Total
|
-
|
-
|
-
|
11,068,120
|
|
(*) On December 11, 2012, we authorized a share
repurchase program to repurchase up to 15 million of our issued and
outstanding common shares from time to time on the open market or
via private transactions through block trades. The initial
expiration date for the stock repurchase program was December 31,
2013. On October 7, 2013, the Board voted to extend the stock
repurchase program until a date is set to revoke the
program.
|
Equity Compensation Plan Information
The
2012 Stock Option Plan, or the Plan, is our only active equity
incentive plan pursuant to which options to acquire common stock
have been granted and are currently outstanding.
As
of December 31, 2016, the number of stock options and restricted
common stock outstanding under our equity compensation plans, the
weighted average exercise price of outstanding options and
restricted common stock and the number of securities remaining
available for issuance were as follows:
|
Plan category
|
Number of
securities
issued
under equity
compensation plan
|
Weighted-
average
exercise
price of
outstanding options
|
Number of securities remaining available for
future issuance under equity compensation plans
|
|
Equity
compensation plans approved by security holders
|
-
|
$-
|
-
|
|
Equity
compensation plans not approved by security holders
|
33,230,000
|
0.24
|
6,300,825
|
|
total
|
33,230,000
|
$0.24
|
6,300,825
|
On February 23, 2017, our board of
directors received the approval
of our stockholders, to amend the 2012 Stock Option Plan (the
“Plan”) to increase the number of shares of common
stock available for grant and to expand the types of awards
available for grant under the Plan. The amendment of the Plan
increases the number of shares of the Company’s common stock
that may be delivered pursuant to awards granted during the life of
the plan from 40,000,000 to 80,000,000 shares authorized. The Plan
currently provides only for the grant of options; however the Plan
amendments will allow for the grant of: (i) incentive stock
options; (ii) nonqualified stock options; (iii) stock appreciation
rights; (iv) restricted stock; and (v) other stock-based and
cash-based awards to eligible individuals. The terms of the awards
will be set forth in an award agreement, consistent with the terms
of the Plan. No stock option is exercisable later than ten years
after the date it is granted.
Item 6. Selected Financial
Data
The
following table sets forth historical financial data and should be
read in conjunction with the Company’s consolidated financial
statements and related notes set forth in Item 8 below and previous
filings. We have derived the selected historical financial data for
the years ended December 31, 2016, 2015, 2014, 2013 and 2012
from our audited financial statements and the related
notes.
|
|
Year Ended December 31,
|
||||
|
|
2016
|
2015
|
2014
|
2013
|
2012
|
|
|
|
|
|
|
|
|
Statements of Operations Data:
|
|
|
|
||
|
Revenues
|
$162,667
|
$156,597
|
$134,043
|
$85,627
|
$75,004
|
|
Cost
of revenues
|
64,530
|
63,628
|
57,718
|
34,326
|
31,179
|
|
Gross
profit
|
98,137
|
92,969
|
76,325
|
51,301
|
43,825
|
|
Distributor
compensation
|
67,148
|
63,276
|
52,646
|
32,985
|
30,526
|
|
Selling
and marketing, general and administrative expense
|
28,474
|
24,287
|
20,310
|
13,964
|
13,580
|
|
Operating
income (loss)
|
2,515
|
5,406
|
3,369
|
4,352
|
(281)
|
|
Interest
expense, net
|
(4,474)
|
(4,491)
|
(2,356)
|
(1,249)
|
(90)
|
|
Extinguishment
loss on debt
|
-
|
(1,198)
|
-
|
-
|
-
|
|
Change
in fair value of warrant derivative liability
|
1,371
|
(39)
|
(15)
|
-
|
-
|
|
Income
(loss) before income taxes
|
(3,103)
|
(322)
|
998
|
3,103
|
(368)
|
|
Income
tax (benefit) provision
|
(190)
|
1,384
|
(4,371)
|
452
|
196
|
|
Net
income (loss)
|
$(398)
|
$(1,706)
|
$5,369
|
$2,651
|
$(564)
|
|
|
|
|
|
|
|
|
Other Financial Data
|
|
|
|
|
|
|
Depreciation
and amortization
|
$3,862
|
$3,354
|
$2,686
|
$2,079
|
$1,905
|
|
Stock
based compensation
|
395
|
455
|
534
|
848
|
629
|
|
Change
in fair value of warrant derivative liability
|
(1,371)
|
39
|
15
|
-
|
-
|
|
Extinguishment
loss on debt
|
-
|
1,198
|
-
|
-
|
-
|
|
Adjusted
EBITDA (1)
|
6,772
|
9,215
|
6,589
|
7,279
|
3,170
|
|
|
|
|
|
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$869
|
$3,875
|
$2,997
|
$4,320
|
$3,025
|
|
Inventory
|
21,492
|
17,977
|
11,783
|
5,973
|
4,675
|
|
Total
assets
|
66,008
|
61,329
|
55,732
|
34,853
|
24,907
|
|
Stockholders’
Equity
|
18,998
|
18,881
|
18,589
|
11,499
|
9,879
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding, diluted
|
392,641,735
|
392,075,608
|
389,795,108
|
391,953,473
|
387,392,118
|
(1) Adjusted
EBITDA is a non-GAAP financial measure. We calculate Adjusted
EBITDA by taking net income, and adding back the expenses related
to interest, taxes, depreciation, amortization, stock based
compensation expense, change in the fair value of warrant
derivative and non-cash impairment loss and debt extinguishment
gain or loss, 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. Management believes that Adjusted EBITDA, when viewed
with our results under GAAP, provides useful information about our
period-over-period growth. Adjusted EBITDA is presented because
management believes it provides additional information with respect
to the performance of our fundamental business activities and is
also frequently used by securities analysts, investors and other
interested parties in the evaluation of comparable companies. We
also rely on Adjusted EBITDA as a primary measure to review and
assess the operating performance of our company and our management
team.
ITEM
7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion of our financial condition and results of
operations 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.
Overview
We
operate in two segments: the direct selling segment where products
are offered through a global distribution network of preferred
customers and distributors and the commercial coffee segment where
products are sold directly to businesses. During the years ended
December 31, 2016 and 2015, we derived approximately 89% of our
revenue from direct sales and approximately 11% of our revenue from
our commercial coffee sales, respectively.
In
the direct selling segment we sell health and wellness products on
a global basis and offer a wide range of products through an
international direct selling network of independent distributors.
Our multiple independent selling forces sell a variety of products
through friend-to-friend marketing and social
networking.
We also engage in the commercial sale of coffee. We own
a traditional coffee roasting business, CLR that sells roasted and
unroasted coffee and produces coffee under its own Café La
Rica brand, Josie’s Java House brand and Javalution brands.
CLR produces coffee under a variety of private labels through major
national sales outlets and major customers including cruise lines
and office coffee service operators. During fiscal 2014 CLR
acquired the Siles Plantation Family Group, 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.
During
the year ended December 31, 2016, we derived approximately 91% of
our revenues from sales within the United States.
Recent Events
New Acquisitions
Effective March 1,
2017, we acquired certain assets of Bellavita Group, LLC a direct
sales company and producer of health and beauty products primarily
in the Asian market and Ricolife, LLC a direct sales company and
producer of teas with health benefits contained within its tea
formulas.
2014
and 2015 Debt Offerings
On
November 25, 2015, we closed the final round of the November 2015
Offering pursuant to which we raised cash proceeds of $3,187,500
and converted $4,000,000 of debt from a previous private placement.
We issued to three (3) investors three (3) year senior secured
November 2015 Notes in the aggregate principal amount of $7,187,500
convertible into 20,535,714 shares of Common Stock at a conversion
price of $0.35 per share and warrants exercisable to purchase an
aggregate of 9,583,333 shares of Common Stock from us at a price
per share of $0.45. We also issued 3,011,904 warrants to the
placement agent and its designees, of which 2,053,571 have an
exercise price of $0.35 per share and 958,333 have an exercise
price of $0.45 per share.
The
November 2015 Notes bear interest at a rate of eight percent (8%)
per annum. We have the right to prepay the November 2015
Notes at any time after the one year anniversary date of the
issuance of the November 2015 Notes at a rate equal to 110% of the
then outstanding principal balance and accrued
interest. The November 2015 Notes rank senior to all of
our debt other than certain debt owed to Wells Fargo Bank,
Crestmark Bank, the investors in our prior private placements, a
mortgage on property, and any refinancing’s
thereof. We and CLR, have provided collateral to secure
the repayment of the November 2015 Notes and have pledged our
assets (which liens are junior to CLR’s line of credit and
equipment lease and junior to the rights of note holders in our
prior financings but senior to all of their other obligations), all
subject to the terms and conditions of a security agreement among
us, CLR and the investors. Stephan Wallach, our Chief
Executive Officer, has also personally guaranteed the repayment of
the November 2015 Notes, subject to the terms of a Guaranty
executed by him with the investors. In addition, Mr. Wallach has
agreed not to sell, transfer or pledge the 30 million shares of the
Common Stock that are currently pledged as collateral to a previous
financing so long as his personal guaranty is in
effect.
The
November 2015 Warrants contain cashless exercise provisions in the
event a registration statement registering the Common Stock
underlying the November 2015 Warrants has not been declared
effective by the Securities and Exchange Commission by specified
dates and customary anti-dilution protection and registration
rights. The November 2015 Warrants issued to investors
expire sixty (60) months from the date of issuance and have an
exercise price of $0.45 per share. The November 2015 Warrants
issued to the placement agent and its designees are exercisable for
958,333 shares of Common Stock that expire in sixty (60) months
from the date of issuance and, have an exercise price of $0.45
per share and 2,053,571 shares of Common Stock that expire in
thirty-six (36) months from issuance and have an exercise price of
$0.35 per share.
The
offering proceeds were invested in our wholly owned subsidiary, CLR
to fund working capital for its Nicaragua plantation and for the
purchase of green coffee to accelerate the growth on its green
coffee division.
In
connection with the November 2015 Offering, we also entered into
the “Registration Rights Agreement” with the investors
in the November 2015 Offering. The Registration Rights
Agreement requires that we file a registration statement (the
“Initial Registration Statement”) with the Securities
and Exchange Commission within sixty (60) days of the final closing
date of the November 2015 Offering (the “Filing Date”)
for the resale by the investors of all of the shares Common
Stock underlying the November 2015 Notes and the November 2015
Warrants and all shares of Common Stock issuable upon any stock
split, dividend or other distribution, recapitalization or similar
event with respect thereto (the “Registrable
Securities”). Upon the occurrence of certain
events (each an “Event”), we will be required to pay to
the investors liquidated damages of 1.0% of their respective
aggregate purchase price upon the date of the Event and then
monthly thereafter until the Event is cured. In no
event may the aggregate amount of liquidated damages payable to
each of the investors exceed in the aggregate 10% of the aggregate
purchase price paid by such investor for the Registrable
Securities. On February 12, 2016 we received notice from the SEC
that our registration statement was effective.
In January 2015, we raised aggregate gross
proceeds of $5,250,000 (the “January 2015 Offering”)
when we entered into note purchase agreements with three (3)
accredited investors pursuant to which we sold 52.5 units, each
unit consisting of a one (1) year secured note (the
“January 2015 Note”) in the aggregate principal amount
of $100,000 and 30,000 shares of Common Stock. We used the
net offering proceeds from the January 2015 Offering for CLR to
fund the purchase of Nicaragua green coffee to be sold under the
terms of a letter of intent for sourcing and supply. The January
2015 Notes bear interest at a rate of eight percent (8%) per
annum. We have the right to prepay the January 2015
Notes at any time at a rate equal to 100% of the then outstanding
principal balance and accrued interest. The January 2015
Notes rank pari passu to all other notes of ours other than certain
outstanding senior debt. CLR has provided collateral to
secure the repayment of the January 2015 Notes and has pledged the
Nicaragua green coffee beans acquired with the proceeds, the
contract rights under the letter of intent and all proceeds of the
foregoing (which lien is junior to CLR’s line of credit and
equipment lease but senior to all of its other obligations), all
subject to the terms and conditions of a security agreement among
us, CLR and the investors. Stephan Wallach, our Chief
Executive Officer, has also personally guaranteed the repayment of
the January 2015 Notes, subject to the terms of a Guaranty executed
by him with the investors. In addition, Mr. Wallach has
agreed not to sell, transfer or pledge 30 million shares of the
Common Stock that he owns so long as his personal guaranty is in
effect. One holder of a January 2015 Note in the principal amount
of $5,000,000 was prepaid on October 26, 2015 through a cash
payment from us to the investor of $1,000,000 and the remaining
$4,000,000 owed was applied to the investor’s purchase of a
$4,000,000 November 2015 Note in the November 2015 Offering and a
November 2015 Warrant exercisable to purchase 5,333,333 shares of
Common Stock. The remaining balance of the January 2015 Notes
as December 31, 2015 was $250,000 and was paid in January
2016.
Between
July 31, 2014 and September 10, 2014, we entered into Note
Purchase Agreements (the "2014 Note" by way of completing a private
placement offering (“2014 Private Offering”) with seven
accredited investors pursuant to which the Company raised aggregate
gross proceeds of $4,750,000 and sold units consisting of five (5)
year senior secured convertible 2014 Notes in the aggregate
principal amount of $4,750,000, that are convertible into
13,571,429 shares of our common stock, at a conversion price of
$0.35 per share, and warrants to purchase 18,586,956 shares of
common stock at an exercise price of $0.23 per share, subject to
adjustment as provided therein. As of December 31, 2016 the
principal amount of $4,750,000 remains outstanding. The outstanding
2014 Notes are secured by certain of our pledged assets, bear
interest at a rate of eight percent (8%) per annum and paid
quarterly in arrears with all principal and unpaid interest due
between July and September 2019.
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.
Emerging Growth Company
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 allows 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. As a result of this election, our financial
statements may not be comparable to companies that comply with
public company effective dates.
Revenue Recognition
We
recognize revenue from product sales when the following four
criteria are met: persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the selling
price is fixed or determinable, and collectability is reasonably
assured. We ship the majority of the direct selling segment
products directly to the distributors and customers via UPS, USPS
or FedEx and receive substantially all payments for these sales in
the form of credit card transactions. We regularly monitor the use
of credit card or merchant services to ensure that the 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 the coffee 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.
Sales
revenue and a reserve for estimated returns are recorded net of
sales tax when product is shipped.
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 liability are carried at estimated
fair value (see Note 7, 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 6, 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.
Inventory and Cost of Sales
Inventory
is stated at the lower of cost or market 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.
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 as of
the date such shares were tendered to the selling parties. The fair
values assigned to tangible and identified intangible assets
acquired and liabilities assumed are based on management or third
party estimates and assumptions that utilize established valuation
techniques appropriate for 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 as of the acquisition date) of total net
tangible and identified intangible assets acquired. A liability for
contingent consideration, if applicable, is recorded at fair value
as of the acquisition date. In determining the fair value of such
contingent consideration, management estimates the amount to be
paid based on probable outcomes and expectations on financial
performance of the related acquired business. The fair value of
contingent consideration is reassessed quarterly, with any change
in the estimated value charged to operations in the period of the
change. Increases or decreases in the fair value of the contingent
consideration obligations can result from changes in actual or
estimated revenue streams, discount periods, discount rates, and
probabilities that contingencies will be met.
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. Impairment, if any, is based on the excess of the
carrying amount over the fair value, based on market value when
available, or discounted expected cash flows, of those assets and
is recorded in the period in which the determination is
made.
Goodwill
Goodwill
is recorded as the excess, if any, of the aggregate fair value of
consideration exchanged for an acquired business over the fair
value (measured as of the acquisition date) of total net tangible
and identified intangible assets acquired. 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.
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. We account for equity
instruments issued to non-employees in accordance with
authoritative guidance for equity based payments to non-employees.
Stock options issued to non-employees are accounted for at their
estimated fair value determined using the Black-Scholes
option-pricing model. The fair value of options granted to
non-employees is re-measured as they vest, and the resulting
increase in value, if any, is recognized as expense during the
period the related services are rendered.
Income Taxes
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
The
comparative financials discussed below show the consolidated
financial statements of Youngevity International, Inc. as of and
for the years ended December 31, 2016 and 2015.
Year ended December 31, 2016 compared to year ended December 31,
2015
Revenues
For
the year ended December 31, 2016, our revenue increased 3.9% to
$162,667,000 as compared to $156,597,000 for the year ended
December 31, 2015. During the year ended December 31, 2016,
we derived approximately 89% of our revenue from our direct sales
and approximately 11% of our revenue from our commercial coffee
sales. Direct selling segment revenues increased by $6,491,000
or 4.7% to $145,418,000 as compared to the year ended December 31,
2015. This increase was primarily attributed to additional revenues
of $9,602,000 derived from the Company’s new acquisitions,
offset by a decrease of $3,111,000 in revenues from existing
business. For the year ended December 31, 2016, commercial coffee
segment revenues decreased by $421,000 or 2.4% to $17,249,000 as
compared to the year ended December 31, 2015. This decrease was
primarily attributed to a decrease in our roaster business due to a
strategic shift in the segment’s business model to focus more
effort on Company owned brands and forego its lower margin bulk
coffee processing business, partially offset by an increase in
green coffee sales as a result of increases in green coffee
prices.
The
following table summarizes our revenue in thousands by
segment:
|
|
For the years ended
December 31,
|
Percentage
|
|
|
Segment
Revenues
|
2016
|
2015
|
change
|
|
Direct
selling
|
$145,418
|
$138,927
|
4.7%
|
|
Commercial
coffee
|
17,249
|
17,670
|
(2.4)%
|
|
Total
|
$162,667
|
$156,597
|
3.9%
|
Cost of Revenues
For the year ended December 31, 2016, overall cost of revenues
increased approximately 1.4% to $64,530,000 as compared to
$63,628,000 for the year ended December 31, 2015. The direct
selling segment cost of revenues increased 6.4% as a result of cost
related to the increase in sales, an increase in product royalties
and labor costs, partially offset by a decrease in shipping costs.
For the year ended December 31, 2016, the cost of revenues of the
commercial coffee segment decreased 10.8% when compared to the same
period last year. This was attributable to decreases in sales
related to the roaster business and lower green coffee costs as a
result of the Company’s ability to procure green coffee at
lower costs from its plantation and other suppliers in
Nicaragua.
Cost
of revenues includes the cost of inventory including green coffee,
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.
Gross Profit
For the year ended December 31, 2016, gross profit increased
approximately 5.6% to $98,137,000 as compared to $92,969,000 for
the year ended December 31, 2015. Gross profit in the direct
selling segment increased by 3.9% to $97,219,000 from $93,613,000
in the prior year as a result of the changes in revenues and costs
discussed above. Gross profit as a percentage of revenues in the
direct selling segment decreased by approximately 0.5% to 66.9% for
the year ended December 31, 2016, compared with the same period
last year. Gross profit in the commercial coffee segment
increased to $918,000, compared to a loss of $644,000 in the prior
year. The improvement in gross profit percentage in the commercial
coffee segment was primarily due to improved margins in green
coffee business as a result of more favorable pricing structure,
the ability to procure coffee at lower costs from the
Company’s plantation and other suppliers in Nicaragua,
increased K-Cup® revenues in the current year, which carry
higher margins and a strategic initiative to focus more on
marketing CLR Roasters company-owned brands which yield higher
gross margins and the decrease in the certain fixed costs
associated with the setup of the K-Cup business when compared to
2015. Gross profit as a percentage of revenues in the commercial
coffee segment increased by approximately 9.0% to 5.3% for the year
ended December 31, 2016, compared with the same period last year.
Overall gross profit as a percentage of revenues increased to
60.3%, compared to 59.4% in the prior year. Below is a table of
gross profit percentages by segment:
|
|
For the years
ended December 31,
|
Percentage
|
|
|
Segment Gross Profit (Loss)
|
2016
|
2015
|
change
|
|
Direct
selling
|
$97,219
|
$93,613
|
3.9%
|
|
Gross Profit % of Revenues
|
66.9%
|
67.4%
|
(0.5)%
|
|
Commercial
coffee
|
918
|
(644)
|
243.5%
|
|
Gross Profit % of Revenues
|
5.3%
|
(3.6)%
|
9.0%
|
|
Total
|
$98,137
|
$92,969
|
5.6%
|
|
Gross Profit % of Revenues
|
60.3%
|
59.4%
|
0.9%
|
Operating Expenses
For
the year ended December 31, 2016, our operating expenses increased
approximately 9.2% to $95,622,000 as compared to $87,563,000 for
the year ended December 31, 2015. Included in operating expense is
distributor compensation paid to our independent distributors in
the direct selling segment. For the year ended December 31, 2016,
distributor compensation increased 6.1% to $67,148,000 from
$63,276,000 for the year ended December 31, 2015. This increase was
primarily attributable to the increase in revenues. Distributor
compensation as a percentage of direct selling revenues increased
to 46.2% for the year ended December 31, 2016 as compared to 45.5%
for the year ended December 31, 2015. This increase was primarily
attributable to added incentive payouts and higher level
achievements by distributors.
For
the year ended December 31, 2016, the sales and marketing expense
increased 26.8% to $10,413,000 from $8,212,000 for the year ended
December 31, 2015 primarily due to increases in marketing and
customer service staff direct labor and benefits costs, product
marketing costs, convention costs and distributor events
costs.
For
the year ended December 31, 2016, the general and administrative
expense increased 12.4% to $18,061,000 from $16,075,000 for the
year ended December 31, 2015 primarily due to increases in costs
related to the international expansion, employee labor and benefits
costs, consulting fees, amortization costs, computer and internet
related costs, travel costs, offset primarily by a decrease in
non-cash expense of $253,000 as compared to last year related to
warrant modification expense recognized during the year ended
December 31, 2015. In addition, the contingent liability
revaluation resulted in a benefit of $1,462,000 for the year ended
December 31, 2016 compared to a benefit of $446,000 for the year
ended December 31, 2015.
Operating Income
For
the year ended December 31, 2016, operating income decreased
approximately 53.5% to $2,515,000 as compared to $5,406,000 for the
year ended December 31, 2015. This was primarily due to the
increase in sales and marketing costs discussed
above. Operating income as a percentage of revenues decreased
to 1.5%, for the year ended December 31, 2016 compared to 3.5% for
the year ended December 31, 2015.
Total Other Expense
For
the year ended December 31, 2016, total other expense decreased by
$2,625,000 to $3,103,000 as compared to $5,728,000 for the year
ended December 31, 2015. Total other expense is primarily net
interest expense of $4,474,000 and the change in the fair value of
warrant derivative of $1,371,000.
Net
interest expense decreased by $17,000 for the year ended December
31, 2016 to $4,474,000 as compared to $4,491,000 in 2015. Interest
expense includes interest payments related to acquisitions and
other operating debt, interest payments to investors associated
with the 2014 and 2015 Private Placement transactions and related
non-cash amortization costs of $1,438,000 and other non-cash costs
of $129,000.
The
Company recorded a non-cash extinguishment loss on debt of
$1,198,000 for the year ended December 31, 2015 as a result of the
repayment of $5,000,000 in Notes Payable to one of the investors
from the January 2015 Private Placement through issuance of a new
November 2015 Note Payable. This loss represents the difference
between the reacquisition value of the new debt to the holder of
the note and the carrying amount of the holder’s extinguished
debt (see Note 5, to the consolidated financial statements.)
Change in Fair Value of
Warrant Derivative Liability.
Various factors are considered in the pricing models we use to
value the warrants, including our current stock price, the
remaining life of the warrants, the volatility of our stock price,
and the risk free interest rate. Future changes in these factors
may have a significant impact on the computed fair value of the
warrant liability. As such, we expect future changes in the fair
value of the warrants to continue and may vary significantly from
year to year (see Note 7, to the consolidated financial
statements.)
The extinguishment loss on debt and warrant liability revaluations
has not had a cash impact on our working capital, liquidity or
business operations.
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. The Company has determined through consideration of
all positive and negative evidence that the US deferred tax assets
are more likely than not to be realized. The Company does not have
a valuation allowance in the US Federal tax jurisdiction. A
valuation allowance remains on the state and foreign tax attributes
that are likely to expire before realization. The valuation
allowance increased approximately $183,000 for the year ended
December 31, 2016 and increased approximately $161,000 for the year
ended December 31, 2015.We have recognized an income tax benefit of
$190,000, which is our estimated federal, state and foreign income
tax liability for the year ended December 31, 2016. The current
effective tax rate is 32.3% compared to the Federal statutory tax
rate of 35.0%.
Net Loss
For
the year ended December 31, 2016, the Company reported a net loss
of $398,000 as compared to a net loss of $1,706,000 for the year
ended December 31, 2015. The primary reason for the decrease in net
loss when compared to prior year was due to the decrease in income
tax provision from $1,384,000 in tax provision in 2015 to a tax
benefit of $190,000 in 2016, offset by an increase in net loss
before income taxes from $322,000 in 2015 to $588,000 in net loss
before income taxes in 2016.
Adjusted EBITDA
EBITDA
(earnings before interest, income taxes, depreciation and
amortization) as adjusted to remove the effect of stock based
compensation expense and the non-cash loss on extinguishment of
debt and the change in the fair value of the warrant derivative or
"Adjusted EBITDA," decreased 26.5% to $6,772,000 for the year ended
December 31, 2016 compared to $9,215,000 in the same period for the
prior year.
Management
believes that Adjusted EBITDA, when viewed with our results under
GAAP and the accompanying reconciliations, provides useful
information about our period-over-period changes. 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 (loss), and adding back the
expenses related to interest, income taxes, depreciation,
amortization, stock based compensation expense, change in the fair
value of the warrant derivative, non-cash impairment loss and debt
extinguishment gain or loss, 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 for the
years ended December 31, 2016 and 2015 is included in the table
below (in thousands):
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
Net
loss
|
$(398)
|
$(1,706)
|
|
Add
|
|
|
|
Interest,
net
|
4,474
|
4,491
|
|
Income
taxes
|
(190)
|
1,384
|
|
Depreciation
|
1,518
|
1,242
|
|
Amortization
|
2,344
|
2,112
|
|
EBITDA
|
7,748
|
7,523
|
|
Add
|
|
|
|
Stock
based compensation
|
395
|
455
|
|
Change
in the fair value of warrant derivative
|
(1,371)
|
39
|
|
Extinguishment
loss on debt
|
-
|
1,198
|
|
Adjusted
EBITDA
|
$6,772
|
$9,215
|
Liquidity and Capital Resources
Sources of Liquidity
At
December 31, 2016 we had cash and cash equivalents of approximately
$869,000 as compared to cash and cash equivalents of $3,875,000 as
of December 31, 2015. The decrease in cash was primarily due to
inventory purchases, cash for payments of financing
activities and cash used for capital
expenditures.
Cash Flows
Cash used
in operating activities.
Net cash used in operating activities for the year ended December
31, 2016 was $161,000 as compared to net cash provided by
operating activities of $1,367,000 for the year ended December 31,
2015. Net cash used in operating activities consisted of net loss
of $398,000, net non-cash operating activity of $2,030,000
offset by $1,793,000 in changes in operating assets and
liabilities.
Net non-cash operating expenses included $3,862,000 in depreciation
and amortization, $395,000 in stock based compensation expense,
$360,000 related to the amortization of deferred financing costs
associated with our Private Placements, $1,053,000 related to the
amortization of debt discounts, $128,000 related to the
amortization of warrant issuance costs and $88,000 in other
non-cash items, offset by $1,371,000 related to the
change in the fair value of warrant derivative liability, $325,000
related to deferred income taxes, $698,000 in expenses allocated in
profit sharing agreement and $1,462,000 related to the change in
the fair value of contingent acquisition debt.
Changes
in operating assets and liabilities were attributable to decreases
in working capital, primarily related to changes in inventory of
$3,515,000, changes in accounts receivable of $525,000 of which
$522,000 related to an increase in our factoring receivable and an
increase of $3,000 from trade related receivables, prepaid expenses
and other current assets of $733,000, accrued distributor
compensation of $60,000, deferred revenues of $710,000 and income
tax receivable of $138,000. Increases in working capital primarily
related to changes in accrued expenses and other liabilities of
$2,729,000, and accounts payable of $1,159,000.
Cash used in
investing activities. Net cash used in investing activities for
the year ended December 31, 2016 was $1,445,000, as compared to net
cash used in investing activities of $3,230,000 for the year ended
December 31, 2015. Net cash used in investing activities consisted
of purchases of property and equipment, leasehold improvements and
cash expenditures related to business acquisitions.
Cash used
in financing activities.
Net cash used in financing activities was $1,508,000 for the year
ended December 31, 2016 as compared to net cash provided by
financing activities of $2,792,000 for the year ended December 31,
2015. The decrease in cash provided by financing activities was
primarily due to the net proceeds related to the January 2015
Private Placement of approximately $5,080,000 received during the
prior year period.
Net
cash used in financing activities consisted of $833,000 in payments
related to the CLR Roasters factoring agreement, $453,000 in
payments to reduce notes payable, $773,000 in payments related to
contingent acquisition debt, and $36,000 in payments related to our
share repurchase program offset by proceeds from the exercise of
stock options and warrants, net, of $30,000 and $557,000 in
proceeds from capital lease financing net of payments to reduce
capital lease obligations.
Payments Due by Period
The
following table summarizes our expected contractual obligations and
commitments subsequent to December 31, 2016 (in
thousands):
|
|
|
Current
|
Long-Term
|
||||
|
Contractual Obligations*
|
Total
|
2017
|
2018
|
2019
|
2020
|
2021
|
Thereafter
|
|
Operating
Leases
|
$4,578
|
$1,138
|
$930
|
$634
|
$557
|
$571
|
$748
|
|
Capital
Leases
|
2,678
|
984
|
972
|
604
|
90
|
28
|
-
|
|
Purchase
Obligations
|
1,164
|
1,164
|
-
|
-
|
-
|
-
|
-
|
|
Convertible
Notes Payable, “July 2014 Private
Placement”(*)
|
4,750
|
-
|
-
|
4,750
|
-
|
-
|
-
|
|
Convertible
Notes Payable, “November 2015 Private Placement”
(*)
|
7,188
|
-
|
7,188
|
-
|
-
|
-
|
-
|
|
Notes
Payable, Operating
|
4,650
|
220
|
162
|
141
|
143
|
108
|
3,876
|
|
Contingent
Acquisition Debt
|
8,001
|
628
|
719
|
694
|
814
|
382
|
4,764
|
|
Total
|
$33,009
|
$4,134
|
$9,971
|
$6,823
|
$1,604
|
$1,089
|
$9,388
|
(*) The
notes issued in the November 2015 and July 2014 Private Placements
mature in three and five years, respectively, after their date of
issuance unless they are converted into shares of Common Stock
prior to maturity.
“Operating
leases” generally provide that property taxes, insurance, and
maintenance expenses are our responsibility. Such expenses are not
included in the operating lease amounts that are outlined in the
table above.
During
the third quarter of fiscal year ended December 31, 2014, we
completed a private placement and entered into Note Purchase
Agreements with seven (7) accredited investors pursuant to which we
sold units consisting of five (5) year senior secured convertible
Notes in the aggregate principal amount of $4,750,000, that are
convertible into shares of our common stock. The Notes are due in
September 2019 if the option to convert has not been exercised (see
Note 5, to the consolidated financial
statements.)
In
November 2015, we completed a private placement and entered into
Note Purchase Agreements with three (3) accredited investors
pursuant to which we sold senior secured convertible notes in
the aggregate principal amount of $7,187,500, that are convertible
into shares of Common Stock. The Notes are due in October 2018 if
the option to convert has not been exercised (see Note 5, to the
consolidated financial statements.)
The
“Notes Payable, Operating” relates primarily to our
note and mortgage on our corporate office property 2400 Boswell
building. On March 15, 2013, we acquired 2400 Boswell for
approximately $4.6 million dollars. 2400 Boswell LLC is
the owner and lessor of the building occupied by us for our
corporate office and warehouse in Chula Vista, CA. The purchase was
from an immediate family member of our Chief Executive Officer and
consisted of approximately $248,000 in cash, $334,000 of debt
forgiveness and accrued interest, and a promissory note of
approximately $393,000, payable in equal payments over 5 years and
bears interest at 5.00%. Additionally, we assumed a
long-term mortgage of $3,625,000, payable over 25 years and have an
initial interest rate of 5.75%. The interest rate is the prime rate
plus 2.50%. The lender will adjust the interest rate on the first
calendar day of each change period. As of December 31, 2016 the
balance on the long-term mortgage was $3,363,000 and the balance on
the promissory note was $108,000, both of which are included in
notes payable.
The
“Contingent acquisition debt” relates to contingent
liabilities related to business acquisitions. Generally, these
liabilities are payments to be made in the future based on a level
of revenue derived from the sale of products. These
numbers are estimates and actual numbers could be higher or lower
because many of our contingent liabilities relate to payments on
sales that have no maximum payment amount. In many of those
transactions, we have recorded a liability for contingent
consideration as part of the purchase price. All
contingent consideration amounts are based on management’s
best estimates utilizing all known information at the time of the
calculation.
In connection with our 2011 acquisition of FDI, we assumed mortgage
guarantee obligations made by FDI on the building previously
housing our New Hampshire operations. The balance of the
mortgages is approximately $1,806,000 as of December 31,
2016.
Factoring Agreement
We have a factoring agreement (“Factoring Agreement”)
with Crestmark Bank (“Crestmark”) related to the
Company’s accounts receivable resulting from sales of certain
products within its commercial coffee segment. Effective May 1,
2016, the Company entered into a third amendment to the factoring
agreement (“Agreement”). Under the terms of the
Agreement, all new receivables assigned to Crestmark shall be
“Client Risk Receivables” and no further credit
approvals will be provided by Crestmark and there will be no new
credit-approved receivables. The changes to the Agreement include
expanding the factoring facility to include borrowings to be
advanced against acceptable eligible inventory up to 50% of landed
cost of finished goods inventory and meeting certain criteria, not
to exceed the lesser of $1,000,000 or 85% of the value of the
receivables already advanced with a maximum overall borrowing of
$3,000,000. Interest accrues on the outstanding balance and a
factoring commission is charged for each invoice factored which is
calculated as the greater of $5.00 or 0.75% to 0.875% of the gross
invoice amount and is recorded as interest expense. In addition the
Company and the Company’s CEO Mr. Wallach have entered into a
Guaranty and Security Agreement with Crestmark Bank if in the event
that CLR were to default. This Agreement continues in full force
and is effective until February 1, 2019.
The
Company accounts for the sale of receivables under the Factoring
Agreement as secured borrowings with a pledge of the subject
inventories and receivables as well as all bank deposits as
collateral, in accordance with the authoritative guidance for
accounting for transfers and servicing of financial assets and
extinguishments of liabilities. The caption “Accounts
receivable, due from factoring company” on the accompanying
consolidated balance sheets in the amount of approximately
$1,078,000 and $556,000 as of December 31, 2016 and December
31, 2015, respectively, reflects the related collateralized
accounts.
The
Company's outstanding liability related to the Factoring Agreement
was approximately $1,290,000 and $457,000 as of December 31, 2016
and December 31, 2015, respectively, and is included in other
current liabilities, net on the consolidated balance
sheets.
Future Liquidity Needs
We
believe that current cash balances, future cash provided by
operations, and available amounts under our accounts receivable
factoring agreement will be sufficient to cover our operating and
capital needs in the ordinary course of business for at least the
next 12 months.
-40-
Table of Contents
Though
our operations are currently meeting our working capital
requirements, if we experience
an adverse operating environment or unusual capital expenditure
requirements, or if we continue our expansion internationally or
through acquisitions, additional financing may be required. No
assurance can be given, however, that additional financing, if
required, would be available on favorable terms. We might also
require or seek additional financing for the purpose of expanding
into new markets, growing our existing markets, or for other
reasons. Such financing may include the use of additional debt or
the sale of additional equity securities. Any financing which
involves the sale of equity securities or instruments that are
convertible into equity securities could result in immediate and
possibly significant dilution to our existing
shareholders.
Off-Balance Sheet Arrangements
There
were no off-balance sheet arrangements as of December 31,
2016.
Item 7A. Quantitative and
Qualitative Disclosures About Market Risk
As
a Smaller Reporting Company as defined by Rule 12b-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 8. Consolidated
Financial Statements
Index to Consolidated Financial Statements
|
42
|
|
|
Financial
Statements:
|
43
|
|
43
|
|
|
44
|
|
|
45
|
|
|
46
|
|
|
47
|
|
|
|
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of
Youngevity International, Inc.
Chula
Vista, California
We have audited the accompanying consolidated
balance sheets of Youngevity International, Inc.
and Subsidiaries (the
“Company”) as of December 31, 2016 and 2015, and the
related consolidated statements of operations, comprehensive income
(loss), stockholders’ equity, and cash flows for each of the
years then ended. The Company’s management is responsible for
these consolidated financial statements. Our responsibility is to
express an opinion on these consolidated financial statements based
on our audits.
We
conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are
free of material misstatement. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of
Youngevity
International, Inc. and Subsidiaries as of December 31, 2016 and 2015, and the
consolidated results of its operations and cash flows for each of
the years then ended in conformity with accounting principles
generally accepted in the United States of
America.
/s/
Mayer Hoffman McCann P.C.
San
Diego, California
March
30, 2017
|
Youngevity International, Inc.
and Subsidiaries
|
||||||||
|
Consolidated Balance Sheets
|
||||||||
|
(In thousands, except share amounts)
|
||||||||
|
|
|
As of
|
|
|||||
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
||
|
ASSETS
|
|
|
|
|
|
|
||
|
Current Assets
|
|
|
|
|
|
|
||
|
Cash
and cash equivalents
|
|
$
|
869
|
|
|
$
|
3,875
|
|
|
Accounts
receivable, due from factoring company
|
|
|
1,078
|
|
|
|
556
|
|
|
Trade
accounts receivable, net
|
|
|
1,071
|
|
|
|
1,068
|
|
|
Income
tax receivable
|
|
|
311
|
|
|
|
173
|
|
|
Deferred
tax assets, net current
|
|
|
565
|
|
|
|
711
|
|
|
Inventory
|
|
|
21,492
|
|
|
|
17,977
|
|
|
Prepaid
expenses and other current assets
|
|
|
3,087
|
|
|
|
2,412
|
|
|
Total
current assets
|
|
|
28,473
|
|
|
|
26,772
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
14,006
|
|
|
|
12,699
|
|
|
Deferred tax assets, long-term
|
|
|
2,292
|
|
|
|
1,821
|
|
|
Intangible assets, net
|
|
|
14,914
|
|
|
|
13,714
|
|
|
Goodwill
|
|
|
6,323
|
|
|
|
6,323
|
|
|
Total
assets
|
|
$
|
66,008
|
|
|
$
|
61,329
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
8,174
|
|
|
$
|
7,015
|
|
|
Accrued
distributor compensation
|
|
|
4,163
|
|
|
|
4,223
|
|
|
Accrued
expenses
|
|
|
3,701
|
|
|
|
3,605
|
|
|
Deferred
revenues
|
|
|
1,870
|
|
|
|
2,580
|
|
|
Other
current liabilities
|
|
|
2,389
|
|
|
|
577
|
|
|
Capital
lease payable, current portion
|
|
|
821
|
|
|
|
111
|
|
|
Notes
payable, current portion
|
|
|
219
|
|
|
|
456
|
|
|
Warrant
derivative liability
|
|
|
3,345
|
|
|
|
4,716
|
|
|
Contingent
acquisition debt, current portion
|
|
|
628
|
|
|
|
264
|
|
|
Total
current liabilities
|
|
|
25,310
|
|
|
|
23,547
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease payable, net of current portion
|
|
|
1,569
|
|
|
|
294
|
|
|
Notes payable, net of current portion
|
|
|
4,431
|
|
|
|
4,647
|
|
|
Convertible notes payable, net of debt discount
|
|
|
8,327
|
|
|
|
6,786
|
|
|
Contingent acquisition debt, net of current portion
|
|
|
7,373
|
|
|
|
7,174
|
|
|
Total
liabilities
|
|
|
47,010
|
|
|
|
42,448
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies, Note 9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
Convertible
Preferred Stock, $0.001 par value: 100,000,000 shares authorized;
161,135 shares issued and outstanding at December 31, 2016 and
December 31, 2015
|
|
|
-
|
|
|
|
-
|
|
|
Common
Stock, $0.001 par value: 600,000,000 shares authorized; 392,698,557
and 392,583,015 shares issued and outstanding at December 31, 2016
and December 31, 2015, respectively
|
|
|
393
|
|
|
|
393
|
|
|
Additional
paid-in capital
|
|
|
169,839
|
|
|
|
169,432
|
|
|
Accumulated
deficit
|
|
|
(151,016
|
)
|
|
|
(150,618
|
)
|
|
Accumulated
other comprehensive loss
|
|
|
(218
|
)
|
|
|
(326
|
)
|
|
Total
stockholders’ equity
|
|
|
18,998
|
|
|
|
18,881
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
66,008
|
|
|
$
|
61,329
|
|
See accompanying notes.
Youngevity International, Inc. and
Subsidiaries
Consolidated Statements of Operations
(In thousands, except share and per share amounts)
|
|
|
Years Ended
December 31,
|
|
|||||
|
|
|
2016
|
|
|
2015
|
|
||
|
|
|
|
|
|
|
|
||
|
Revenues
|
|
$
|
162,667
|
|
|
$
|
156,597
|
|
|
Cost of revenues
|
|
|
64,530
|
|
|
|
63,628
|
|
|
Gross
profit
|
|
|
98,137
|
|
|
|
92,969
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Distributor
compensation
|
|
|
67,148
|
|
|
|
63,276
|
|
|
Sales
and marketing
|
|
|
10,413
|
|
|
|
8,212
|
|
|
General
and administrative
|
|
|
18,061
|
|
|
|
16,075
|
|
|
Total
operating expenses
|
|
|
95,622
|
|
|
|
87,563
|
|
|
Operating income
|
|
|
2,515
|
|
|
|
5,406
|
|
|
Interest
expense, net
|
|
|
(4,474
|
)
|
|
|
(4,491
|
)
|
|
Extinguishment
loss on debt
|
|
|
-
|
|
|
|
(1,198
|
)
|
|
Change
in fair value of warrant derivative liability
|
|
|
1,371
|
|
|
|
(39
|
)
|
|
Total
other expense
|
|
|
(3,103
|
)
|
|
|
(5,728
|
)
|
|
Loss before income taxes
|
|
|
(588
|
)
|
|
|
(322
|
)
|
|
Income tax (benefit) provision
|
|
|
(190
|
)
|
|
|
1,384
|
|
|
Net loss
|
|
|
(398
|
)
|
|
|
(1,706
|
)
|
|
Preferred stock dividends
|
|
|
(12
|
)
|
|
|
(12
|
)
|
|
Net loss available to common stockholders
|
|
$
|
(410
|
)
|
|
$
|
(1,718
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
Net loss per share, diluted
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic
|
|
|
392,641,735
|
|
|
|
392,075,608
|
|
|
Weighted average shares outstanding, diluted
|
|
|
392,641,735
|
|
|
|
392,075,608
|
|
See accompanying notes.
Youngevity International, Inc. and
Subsidiaries
Consolidated Statements of Comprehensive Loss
(In thousands)
|
|
|
Years Ended
December 31,
|
|
|||||
|
|
|
2016
|
|
|
2015
|
|
||
|
|
|
|
|
|
|
|
||
|
Net loss
|
|
$
|
(398
|
)
|
|
$
|
(1,706
|
)
|
|
Foreign
currency translation
|
|
|
108
|
|
|
|
(51
|
)
|
|
Total other comprehensive income (loss)
|
|
|
108
|
|
|
|
(51
|
)
|
|
Comprehensive loss
|
|
$
|
(290
|
)
|
|
$
|
(1,757
|
)
|
See accompanying notes.
Youngevity International, Inc. and
Subsidiaries
Consolidated Statements of Stockholders' Equity
(In thousands, except shares)
|
|
Preferred Stock
|
Common Stock
|
Additional Paid-in
|
Accumulated Other
Comprehensive
|
Accumulated
|
Total
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Income
(loss)
|
Deficit
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance at December 31, 2014
|
161,135
|
$-
|
390,301,312
|
$390
|
$167,386
|
$(275)
|
$(148,912)
|
$18,589
|
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,706)
|
(1,706)
|
|
Foreign currency
|
|
|
|
|
|
|
|
|
|
translation adjustment
|
-
|
-
|
-
|
-
|
-
|
(51)
|
-
|
(51)
|
| Beneficial conversion feature of convertible notes payable, net of tax |
-
|
-
|
-
|
-
|
402
|
-
|
-
|
402
|
|
Issuance of common stock pursuant to Notes Payable
|
-
|
-
|
2,450,000
|
2
|
585
|
-
|
-
|
587
|
|
Issuance of warrants pursuant to Convertible Notes Payable debt
financing
|
-
|
-
|
-
|
-
|
384
|
-
|
-
|
384
|
|
Issuance of common stock pursuant to the exercise of
warrants
|
-
|
-
|
806,250
|
1
|
201
|
-
|
-
|
202
|
|
Issuance of common stock pursuant to the exercise of stock
options
|
-
|
-
|
369,675
|
-
|
70
|
-
|
-
|
70
|
|
Repurchase of common stock
|
-
|
-
|
(1,344,222)
|
-
|
(426)
|
-
|
-
|
(426)
|
|
Dividends on preferred stock
|
-
|
-
|
-
|
-
|
(12)
|
-
|
-
|
(12)
|
|
Warrant modification expense
|
-
|
-
|
-
|
-
|
779
|
-
|
-
|
779
|
|
Stock based compensation expense
|
-
|
-
|
-
|
-
|
455
|
-
|
-
|
455
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2015
|
161,135
|
$-
|
392,583,015
|
$393
|
$169,432
|
$(326)
|
$(150,618)
|
$18,881
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(398)
|
(398)
|
|
Foreign currency
translation adjustment
|
-
|
-
|
-
|
-
|
-
|
108
|
-
|
108
|
|
Issuance of common stock pursuant to the exercise of
warrants
|
-
|
-
|
39,250
|
-
|
10
|
-
|
-
|
10
|
|
Issuance of common stock pursuant to the exercise of stock
options
|
-
|
-
|
102,000
|
-
|
20
|
-
|
-
|
20
|
|
Issuance of common stock for services
|
-
|
-
|
100,000
|
-
|
30
|
-
|
-
|
30
|
|
Repurchase of common stock
|
-
|
-
|
(125,708)
|
-
|
(36)
|
-
|
-
|
(36)
|
|
Dividends on preferred stock
|
-
|
-
|
-
|
-
|
(12)
|
-
|
-
|
(12)
|
|
Stock based compensation expense
|
-
|
-
|
-
|
-
|
395
|
-
|
-
|
395
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
161,135
|
$-
|
392,698,557
|
$393
|
$169,839
|
$(218)
|
$(151,016)
|
$18,998
|
See accompanying notes.
Consolidated Statements of Cash Flows
(In
thousands, except share amounts)
|
|
|
Years Ended
December 31,
|
|
|||||
|
|
|
2016
|
|
|
2015
|
|
||
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
||
|
Net loss
|
|
$
|
(398
|
)
|
|
$
|
(1,706
|
)
|
|
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
3,862
|
|
|
|
3,354
|
|
|
Stock
based compensation expense
|
|
|
395
|
|
|
|
455
|
|
|
Warrant
modification expense
|
|
|
-
|
|
|
|
253
|
|
|
Amortization
of deferred financing costs
|
|
|
360
|
|
|
|
899
|
|
|
Amortization
of prepaid advisory fees
|
|
|
58
|
|
|
|
20
|
|
|
Stock
issuance for services
|
|
|
30
|
|
|
|
-
|
|
|
Change
in fair value of warrant derivative liability
|
|
|
(1,371
|
)
|
|
|
39
|
|
|
Amortization
of debt discount
|
|
|
1,053
|
|
|
|
967
|
|
|
Amortization
of warrant issuance costs
|
|
|
128
|
|
|
|
21
|
|
|
Expenses
allocated in profit sharing agreement
|
|
|
(698
|
)
|
|
|
(528
|
)
|
|
Change
in fair value of contingent acquisition debt
|
|
|
(1,462
|
)
|
|
|
(446
|
)
|
|
Extinguishment
loss on debt
|
|
|
-
|
|
|
|
1,198
|
|
|
Deferred
income taxes
|
|
|
(325
|
)
|
|
|
1,409
|
|
|
Changes
in operating assets and liabilities, net of effect from business
combinations:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(525
|
)
|
|
|
168
|
|
|
Inventory
|
|
|
(3,515
|
)
|
|
|
(6,194
|
)
|
|
Prepaid
expenses and other current assets
|
|
|
(733
|
)
|
|
|
885
|
|
|
Accounts
payable
|
|
|
1,159
|
|
|
|
1,608
|
|
|
Accrued
distributor compensation
|
|
|
(60
|
)
|
|
|
46
|
|
|
Deferred
revenues
|
|
|
(710
|
)
|
|
|
(2,495
|
)
|
|
Accrued
expenses and other liabilities
|
|
|
2,729
|
|
|
|
1,278
|
|
|
Income
taxes receivable
|
|
|
(138
|
)
|
|
|
136
|
|
|
Net Cash (Used In) Provided by Operating Activities
|
|
|
(161
|
)
|
|
|
1,367
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
Acquisitions,
net of cash acquired
|
|
|
(48
|
)
|
|
|
(32
|
)
|
|
Purchases
of property and equipment
|
|
|
(1,397
|
)
|
|
|
(3,198
|
)
|
|
Net Cash Used in Investing Activities
|
|
|
(1,445
|
)
|
|
|
(3,230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of secured promissory notes and common stock, net of
offering costs
|
|
|
-
|
|
|
|
5,080
|
|
|
Proceeds
from issuance of convertible notes payable, net
|
|
|
-
|
|
|
|
2,383
|
|
|
Proceeds
from the exercise of stock options and warrants, net
|
|
|
30
|
|
|
|
272
|
|
|
(Payments)
proceeds to factoring company
|
|
|
(833
|
)
|
|
|
82
|
|
|
Payments
of notes payable, net
|
|
|
(453
|
)
|
|
|
(1,214
|
)
|
|
Payments
of contingent acquisition debt
|
|
|
(773
|
)
|
|
|
(3,338
|
)
|
|
Proceeds
(payments) of capital leases
|
|
|
557
|
|
|
|
(47
|
)
|
|
Repurchase
of common stock
|
|
|
(36
|
)
|
|
|
(426
|
)
|
|
Net Cash (Used In) Provided by Financing
Activities
|
|
|
(1,508
|
)
|
|
|
2,792
|
|
|
Foreign Currency Effect on Cash and Cash
Equivalents
|
|
|
108
|
|
|
|
(51
|
)
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(3,006
|
)
|
|
|
878
|
|
|
Cash and Cash Equivalents, Beginning of Period
|
|
|
3,875
|
|
|
|
2,997
|
|
|
Cash and Cash Equivalents, End of Period
|
|
$
|
869
|
|
|
$
|
3,875
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
2,966
|
|
|
$
|
2,127
|
|
|
Income taxes
|
|
$
|
181
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Noncash Investing and Financing
Activities
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment funded by capital leases and
accounts payable agreements
|
|
$
|
1,582
|
|
|
$
|
429
|
|
|
Common stock issued in connection with financing
|
|
$
|
-
|
|
|
$
|
587
|
|
|
Acquisitions of net assets in exchange for contingent acquisition
debt (see Note 2 for non-cash activity)
|
|
$
|
3,604
|
|
|
$
|
1,136
|
|
During
2015, the Company issued certain convertible notes payable that
included warrants. The related beneficial conversion feature,
valued at approximately $15,000 was classified as an equity
instrument and recorded as a discount to the carrying value of the
related debt. The warrants, valued at approximately $1,491,000,
were recognized as a derivative liability. In addition, the Company
issued warrants to the placement agent, valued at approximately
$384,000 was classified as an equity instrument and recorded as
issuance costs.
See
accompanying notes.
Notes
to Consolidated Financial Statements
December
31, 2016 and 2015
Note 1. Basis of Presentation and Description of
Business
Nature of Business
Youngevity
International, Inc. (the “Company”), founded in 1996,
develops and distributes health and nutrition related products
through its global independent direct selling network, also known
as multi-level marketing, and sells coffee products to commercial
customers. The Company operates in two business
segments, its direct selling segment where products are offered
through a global distribution network of preferred customers and
distributors and its commercial coffee segment where products are
sold directly to businesses. In the following text, the terms
“we,” “our,” and “us” may
refer, as the context requires, to the Company or collectively to
the Company and its subsidiaries.
The Company operates through the following domestic wholly-owned
subsidiaries: AL Global Corporation, which operates our direct
selling networks, CLR Roasters, LLC (“CLR”), our
commercial coffee business, 2400 Boswell LLC, MK Collaborative LLC,
Youngevity Global LLC and the wholly-owned foreign subsidiaries
Youngevity Australia Pty. Ltd., Youngevity NZ, Ltd., Siles
Plantation Family Group S.A., located in Nicaragua, Youngevity
Mexico S.A. de CV, Youngevity Israel, Ltd., Youngevity Russia, LLC,
Youngevity Colombia S.A.S, Youngevity International Singapore Pte.
Ltd., Mialisia Canada, Inc., and Legacy for Life Limited (Hong
Kong).
The
Company also operates subsidiary branches of Youngevity Global LLC
in the Philippines and Taiwan.
Summary of Significant Accounting Policies
A
summary of the Company’s significant accounting policies
consistently applied in the preparation of the accompanying
consolidated financial statements follows:
Basis of Presentation
The
Company consolidates all majority owned subsidiaries, investments
in entities in which we have controlling influence and variable
interest entities where we have been determined to be the primary
beneficiary. All significant intercompany accounts and
transactions have been eliminated in
consolidation.
Certain reclassifications have been made to
conform to the current year presentations including the
Company’s adoption of Accounting Standards Update
(“ASU”) 2015-03 and ASU 2015-15, pertaining to the
presentation of debt issuance costs with retrospective application
effective January 1, 2016. This resulted in a
reclassification from prepaid expenses
and other assets to convertible notes payable, net of debt
discount. Refer below to
“Recently Issued Accounting Pronouncements” below and
Note 5 to the consolidated financial statements for further
details. These reclassifications did not affect revenue, total
costs and expenses, income (loss) from operations, or net income
(loss). The adoption of ASU No.
2015-03 resulted in a reclassification of unamortized debt issuance
costs of $1,456,000 from an asset to a liability classification on
the Company’s consolidated financial statements as of
December 31, 2015.
Segment Information
The Company has two reporting segments: direct
selling and commercial coffee. The direct selling segment develops
and distributes health and wellness products through its global
independent direct selling network also known as multi-level
marketing. The commercial coffee segment is a coffee roasting and
distribution company specializing in gourmet coffee. The
determination that the Company has two reportable segments is based
upon the guidance set forth in Accounting Standards Codification
(“ASC”) Topic 280, “Segment
Reporting.” During the
twelve months ended December 31, 2016 and 2015, we derived
approximately 89% of our revenue from our direct sales segment and
approximately 11% of our revenue from our commercial coffee sales
segment, respectively.
Use of Estimates
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States
(“GAAP”) requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and
expense for each reporting period. Estimates are used in
accounting for, among other things, allowances for doubtful
accounts, deferred taxes, and related valuation allowances,
fair value of derivative liabilities, uncertain tax positions, loss
contingencies, fair value of options granted under our stock based
compensation plan, fair value of assets and liabilities acquired in
business combinations, capital leases, asset impairments, estimates
of future cash flows used to evaluate impairments, useful lives of
property, equipment and intangible assets, value of contingent
acquisition debt, inventory obsolescence, and sales
returns.
Actual
results may differ from previously estimated amounts and such
differences may be material to the consolidated financial
statements. Estimates and assumptions are reviewed
periodically and the effects of revisions are reflected
prospectively in the period they occur.
Liquidity
We
believe that current cash balances, future cash provided by
operations, and available amounts under our accounts receivable
factoring agreement will be sufficient to cover our operating and
capital needs in the ordinary course of business for at least the
next 12 months as of March 30,
2017.
Though
our operations are currently meeting our working capital
requirements, if we experience an adverse operating environment or
unusual capital expenditure requirements, or if we continue our
expansion internationally or through acquisitions, additional
financing may be required. No assurance can be given, however, that
additional financing, if required, would be available on favorable
terms. We might also require or seek additional financing for the
purpose of expanding into new markets, growing our existing
markets, or for other reasons. Such financing may include the use
of additional debt or the sale of additional equity securities. Any
financing which involves the sale of equity securities or
instruments that are convertible into equity securities could
result in immediate and possibly significant dilution to our
existing shareholders.
Cash and Cash Equivalents
The
Company considers only its monetary liquid assets with original
maturities of three months or less as cash and cash
equivalents.
Derivative Financial Instruments
The
Company does not use derivative instruments to hedge exposures to
cash flow, market or foreign currency.
The
Company reviews the terms of convertible debt and equity
instruments it issues 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, the Company
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.
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.
Accounts Receivable
Accounts receivable are recorded net of an allowance for doubtful
accounts. Accounts receivable are considered delinquent when the
due date on the invoice has passed. The Company records its
allowance for doubtful accounts based upon its assessment of
various factors including past experience, the age of the accounts
receivable balances, the credit quality of its customers, current
economic conditions and other factors that may affect
customers’ ability to pay. Accounts receivable are written
off against the allowance for doubtful accounts when all collection
efforts by the Company have been unsuccessful. Certain accounts
receivable are financed as part of a factoring agreement. During
the fourth quarter of fiscal 2016, the Company recorded a $10,000
allowance towards outstanding receivables associated with CLR.
There was no allowance for doubtful accounts recorded as of
December 31, 2015.
Inventory and Cost of Revenues
Inventory
is stated at the lower of cost or market value. Cost is determined
using the first-in, first-out method. The Company records an
inventory reserve for estimated excess and obsolete inventory based
upon historical turnover, market conditions and assumptions about
future demand for its products. When applicable, expiration dates
of certain inventory items with a definite life are taken into
consideration.
Inventories
consist of the following (in thousands):
|
|
December 31,
|
|
||||||
|
|
|
2016
|
|
|
2015
|
|
||
|
Finished goods
|
|
$
|
11,550
|
|
|
$
|
9,893
|
|
|
Raw materials
|
|
|
11,006
|
|
|
|
8,970
|
|
|
Total inventory
|
|
|
22,556
|
|
|
|
18,863
|
|
|
Reserve for excess and obsolete
|
|
|
(1,064
|
)
|
|
|
(886
|
)
|
|
Inventory, net
|
|
$
|
21,492
|
|
|
$
|
17,977
|
|
A
summary of the reserve for obsolete and excess inventory is as
follows (in thousands):
|
|
|
|
December 31,
|
|
||||
|
|
|
2016
|
|
|
2015
|
|
||
|
Balance as of December 31, 2015
|
|
$
|
(886
|
)
|
|
$
|
(478
|
)
|
|
Addition to provision
|
|
|
(1,564
|
)
|
|
|
(1,114
|
)
|
|
Write-off of inventory
|
|
|
1,386
|
|
|
|
706
|
|
|
Balance as of December 31, 2016
|
|
$
|
(1,064
|
)
|
|
$
|
(886
|
)
|
Cost
of revenues includes the cost of inventory, shipping and handling
costs, royalties associated with certain products, transaction
banking costs, warehouse labor costs and depreciation on certain
assets.
Deferred Issuance Costs
Deferred
issuance costs and debt discounts of approximately $3,611,000 and
$5,152,000, as of December 31, 2016 and 2015, respectively,
associated with our 2015 and 2014 Private Placement transactions
are included with convertible notes payable on the Company's
consolidated balance sheets. Deferred issuance costs related
to our offerings are amortized over the life of the notes and are
amortized as issuance costs to interest expense. See Note 5,
below.
Warrant Issuance Costs
As
of December 31, 2016 and 2015, warrant issuance costs
associated with our November 2015 Private Placement include the
fair value of the warrants issues of approximately $235,000 and
$384,000 respectively, and is included with convertible notes
payable, net of debt discounts on the Company's consolidated
balance sheets. The warrant issuance costs related to this
offering are being amortized over the life of the convertible notes
and are amortized as issuance costs to interest expense. See note
5, below.
Plantation Costs
The
Company’s commercial coffee segment CLR includes the results
of the Siles Plantation Family Group (“Siles”), which
is a 500 acre coffee plantation and a dry-processing facility
located on 26 acres both located in Matagalpa, Nicaragua. Siles is
a wholly-owned subsidiary of CLR, and the results of
CLR include the depreciation and amortization of capitalized
costs, development and maintenance and harvesting costs of
Siles. In accordance with US generally accepted accounting
principles (“GAAP”), plantation maintenance and
harvesting costs for commercially producing coffee farms are
charged against earnings when sold. Deferred harvest costs
accumulate throughout the year, and are expensed over the remainder
of the year as the coffee is sold. The difference between actual
harvest costs incurred and the amount of harvest costs recognized
as expense is recorded as either an increase or decrease in
deferred harvest costs, which is reported as an asset and included
with prepaid expenses and other current assets in the consolidated
balance sheets. Once the harvest is complete, the harvest cost is
then recognized as the inventory value.
Costs associated with the 2017 and 2016 harvest as of December 31,
2016 and 2015 total approximately $452,000 and $350,000,
respectively and are included in prepaid expenses and other current
assets as deferred harvest costs on the Company’s
consolidated balance sheet.
Inventory related to our previously harvested coffee in Nicaragua
as of December 31, 2016 is $112,000 and as of December 31, 2015 was
$192,000.
Property and Equipment
Property
and equipment are recorded at historical cost. Depreciation is
provided in amounts sufficient to relate the cost of depreciable
assets to operations over the estimated useful lives of the related
assets. The straight-line method of depreciation and amortization
is followed for financial statement purposes. Leasehold
improvements are amortized over the shorter of the life of the
respective lease or the useful life of the improvements. Estimated
service lives range from 3 to 39 years. When such assets are sold
or otherwise disposed of, the cost and accumulated depreciation are
removed from the accounts, and any resulting gain or loss is
reflected in operations in the period of disposal. The cost of
normal maintenance and repairs is charged to expense as incurred.
Significant expenditures that increase the useful life of an asset
are capitalized and depreciated over the estimated useful life of
the asset.
Coffee
trees, land improvements and equipment specifically related to the
plantations are stated at cost, net of accumulated
depreciation. Depreciation of coffee trees and other
equipment is reported on a straight-line basis over the estimated
useful lives of the assets (25 years for coffee trees, between 5
and 15 years for equipment and land improvements,
respectively).
Property
and equipment are considered long-lived assets and are evaluated
for impairment whenever events or changes in circumstances indicate
their net book value may not be recoverable. Management has
determined that no impairment of its property and equipment
occurred as of December 31, 2016 or 2015.
Property
and equipment consist of the following (in thousands):
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
Building
|
$3,873
|
$2,930
|
|
Leasehold
improvements
|
2,532
|
2,302
|
|
Land
|
2,544
|
2,544
|
|
Land
improvements
|
602
|
602
|
|
Producing
coffee trees
|
553
|
553
|
|
Manufacturing
equipment
|
4,570
|
4,344
|
|
Furniture
and other equipment
|
1,580
|
1,417
|
|
Computer
software
|
1,236
|
1,100
|
|
Computer
equipment
|
699
|
663
|
|
Vehicles
|
103
|
103
|
|
Construction
in process
|
1,859
|
799
|
|
|
20,151
|
17,357
|
|
Accumulated
depreciation
|
(6,145)
|
(4,658)
|
|
Total
property and equipment
|
$14,006
|
$12,699
|
Depreciation
expense totaled approximately $1,518,000 and $1,242,000 for the
years ended December 31, 2016 and 2015, respectively.
Business Combinations
The
Company accounts for business combinations under the acquisition
method and allocates the total purchase price for acquired
businesses to the tangible and identified intangible assets
acquired and liabilities assumed, based on their estimated fair
values. When a business combination includes the exchange of the
Company’s common stock, the value of the common stock is
determined using the closing market price as of the date such
shares were tendered to the selling parties. The fair values
assigned to tangible and identified intangible assets acquired and
liabilities assumed are based on management or third-party
estimates and assumptions that utilize established valuation
techniques appropriate for the Company’s industry and each
acquired business. Goodwill is recorded as the excess, if any, of
the aggregate fair value of consideration exchanged for an acquired
business over the fair value (measured as of the acquisition date)
of total net tangible and identified intangible assets acquired. A
liability for contingent consideration, if applicable, is recorded
at fair value as of the acquisition date. In determining the fair
value of such contingent consideration, management estimates the
amount to be paid based on probable outcomes and expectations on
financial performance of the related acquired business. The fair
value of contingent consideration is reassessed quarterly, with any
change in the estimated value charged to operations in the period
of the change. Increases or decreases in the fair value of the
contingent consideration obligations can result from changes in
actual or estimated revenue streams, discount periods, discount
rates and probabilities that contingencies will be
met.
Intangible Assets
Intangible
assets are comprised of distributor organizations, trademarks and
tradenames, customer relationships and internally developed
software. The Company's acquired intangible assets,
which are subject to amortization over their estimated useful
lives, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an intangible
asset may not be recoverable. An impairment loss is recognized when
the carrying amount of an intangible asset exceeds its fair
value.
Intangible
assets consist of the following (in thousands):
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
||||||||||||||||||
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
||||||
|
Distributor organizations
|
|
$
|
12,930
|
|
|
$
|
7,162
|
|
|
$
|
5,768
|
|
|
$
|
11,173
|
|
|
$
|
6,086
|
|
|
$
|
5,087
|
|
|
Trademarks and tradenames
|
|
|
5,394
|
|
|
|
815
|
|
|
|
4,579
|
|
|
|
4,666
|
|
|
|
537
|
|
|
|
4,129
|
|
|
Customer relationships
|
|
|
7,846
|
|
|
|
3,642
|
|
|
|
4,204
|
|
|
|
6,787
|
|
|
|
2,751
|
|
|
|
4,036
|
|
|
Internally developed software
|
|
|
720
|
|
|
|
357
|
|
|
|
363
|
|
|
|
720
|
|
|
|
258
|
|
|
|
462
|
|
|
Intangible assets
|
|
$
|
26,890
|
|
|
$
|
11,976
|
|
|
$
|
14,914
|
|
|
$
|
23,346
|
|
|
$
|
9,632
|
|
|
$
|
13,714
|
|
Amortization
expense related to intangible assets was approximately $2,344,000
and $2,112,000 for the years ended December 31, 2016 and 2015,
respectively.
As
of December 31, 2016, future expected amortization expense related
to definite lived intangible assets for the next five years is as
follows (in thousands):
|
Years ending December
31,
|
|
|||
|
2017
|
|
$
|
2,471
|
|
|
2018
|
|
|
2,096
|
|
|
2019
|
|
|
1,502
|
|
|
2020
|
|
|
1,413
|
|
|
2021
|
|
|
1,336
|
|
As
of December 31, 2016, the weighted-average remaining amortization
period for intangibles assets was approximately 5.18
years.
Trade
names, which do not have legal, regulatory, contractual,
competitive, economic, or other factors that limit the useful lives
are considered indefinite lived assets and are not amortized but
are tested for impairment on an annual basis or whenever events or
changes in circumstances indicate that the carrying amount of these
assets may not be recoverable. Approximately $2,267,000 in
trademarks from business combinations have been identified as
having indefinite lives.
The Company has determined that no impairment occurred for its
definite and indefinite lived intangible assets for the years ended
December 31, 2016 and 2015.
Goodwill
Goodwill is recorded as the excess, if any, of the
aggregate fair value of consideration exchanged for an acquired
business over the fair value (measured as of the acquisition date)
of total net tangible and identified intangible assets acquired. In
accordance with Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification
(“ASC”) Topic 350, “Intangibles —
Goodwill and Other”, goodwill and other intangible assets with
indefinite lives are not amortized but are tested for impairment on
an annual basis or whenever events or changes in circumstances
indicate that the carrying amount of these assets may not be
recoverable. The Company conducts annual reviews for goodwill and
indefinite-lived intangible assets in the fourth quarter or
whenever events or changes in circumstances indicate that the
carrying amounts of the assets may not be fully
recoverable.
The
Company first assesses qualitative factors to determine whether it
is more likely than not (a likelihood of more than 50%) that
goodwill is impaired. After considering the totality of events and
circumstances, the Company determines whether it is more likely
than not that goodwill is not impaired. If impairment is
indicated, then the Company conducts the two-step impairment
testing process. The first step compares the Company’s fair
value to its net book value. If the fair value is less than the net
book value, the second step of the test compares the implied fair
value of the Company’s goodwill to its carrying amount. If
the carrying amount of goodwill exceeds its implied fair value, the
Company would recognize an impairment loss equal to that excess
amount. The testing is generally performed at the “reporting
unit” level. A reporting unit is the operating segment, or a
business one level below that operating segment (referred to as a
component) if discrete financial information is prepared and
regularly reviewed by management at the component level. The
Company has determined that its reporting units for goodwill
impairment testing are the Company’s reportable segments. As
such, the Company analyzed its goodwill balances separately for the
commercial coffee reporting unit and the direct selling reporting
unit. The goodwill balance as of December 31, 2016 and December 31,
2015 was $6,323,000.
The
Company has determined that no impairment of its goodwill occurred
for the years ended December 31, 2016 and 2015.
Goodwill
activity for the years ended December 31, 2016 and 2015 by
reportable segment consists of the following (in
thousands):
|
|
|
Direct selling
|
|
|
Commercial coffee
|
|
|
Total
|
|
|||
|
Balance at December 31, 2014
|
|
$
|
3,009
|
|
|
$
|
3,314
|
|
|
$
|
6,323
|
|
|
Goodwill recognized
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Goodwill impaired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Balance at December 31, 2015
|
|
$
|
3,009
|
|
|
$
|
3,314
|
|
|
$
|
6,323
|
|
|
Goodwill recognized
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Goodwill impaired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Balance at December 31, 2016
|
|
$
|
3,009
|
|
|
$
|
3,314
|
|
|
$
|
6,323
|
|
Revenue Recognition
The
Company recognizes revenue from product sales when the following
four criteria are met: persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the
selling price is fixed or determinable, and collectability is
reasonably assured. The Company ships the majority of its direct
selling segment products directly to the distributors via UPS or
USPS and receives substantially all payments for these sales in the
form of credit card transactions. The Company regularly monitors
its 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. The Company ships the majority of its coffee
segment products via common carrier and invoices its customer 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.
The
Company also charges fees to become a distributor, and earn a
position in the network genealogy, which are recognized as revenue
in the period received. Our distributors are required to pay a
one-time 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 and a genealogy
position with no down line distributors.
Sales
revenue and a reserve for estimated returns are recorded net of
sales tax when product is shipped.
Deferred Revenues and Costs
Deferred revenues relate primarily to the Heritage Makers product
line and represent the Company’s obligation for points
purchased by customers that have not yet been redeemed for product.
Cash received for points sold is recorded as deferred revenue.
Revenue is recognized when customers redeem the points and the
product is shipped. As of December 31, 2016 and December 31, 2015,
the balance in deferred revenues was approximately $1,870,000 and
$2,580,000 respectively, of which the portion attributable to
Heritage Makers was approximately $1,662,000 and $2,485,000,
respectively. The remaining balance of approximately
$208,000 and $95,000 as of December 31, 2016 and 2015, related
primarily to the Company’s 2017 and 2016 conventions whereby
attendees pre-enroll in the events and the Company does not
recognize this revenue until the conventions occur,
respectively.
Deferred
costs relate to Heritage Makers prepaid commissions that are
recognized in expense at the time the related revenue is
recognized. As of December 31, 2016 and 2015, the balance in
deferred costs was approximately $415,000 and $967,000
respectively, and was included in prepaid expenses and current
assets.
Product Return Policy
All
products, except food products and commercial coffee products are
subject to a full refund within the first 30 days of receipt by the
customer, subject to an advance return authorization procedure.
Returned product must be in unopened resalable condition. Product
returns as a percentage of our net sales have been approximately 1%
of our monthly net sales over the last two years. Commercial coffee
products are returnable only if defective.
Shipping and Handling
Shipping and handling costs associated with inbound freight and
freight to customers, including independent distributors, are
included in cost of sales. Shipping and handling fees charged to
customers are included in sales. Shipping expense was approximately
$9,927,000 and $10,394,000 for the years ended December 31, 2016
and 2015, respectively.
Distributor Compensation
In
the direct selling segment, the Company utilizes a network of
independent distributors, each of whom has signed an agreement with
the Company, enabling them to purchase products at wholesale
prices, market products to customers, enroll new distributors for
their down-line and earn compensation on product purchases made by
those down-line distributors and customers.
The
payments made and stock options issued under the compensation plans
are the only form of compensation paid to the distributors. Each
product has a point value, which may or may not correlate to the
wholesale selling price of a product. A distributor must qualify
each month to participate in the compensation plan by making a
specified amount of product purchases, achieving specified point
levels. Once qualified, the distributor will receive payments based
on a percentage of the point value of products sold by the
distributor’s down-line. The payment percentage varies
depending on the qualification level of the distributor and the
number of levels of down-line distributors. There are also
additional incentives paid upon achieving predefined activity and
or down-line point value levels. There can be multiple levels of
independent distributors earning incentives from the sales efforts
of a single distributor. Due to the multi-layer independent sales
approach, distributor incentives are a significant component of the
Company’s cost structure. The Company accrues all distributor
compensation expense in the month earned and pays the compensation
the following month.
Earnings Per Share
Basic
earnings (loss) per share is computed by dividing net income (loss)
attributable to common stockholders by the weighted-average number
of common shares outstanding during the period. Diluted earnings
per share is computed by dividing net income attributable to common
stockholders by the sum of the weighted-average number of common
shares outstanding during the period and the weighted-average
number of dilutive common share equivalents outstanding during the
period, using the treasury stock method. Dilutive common share
equivalents are comprised of in-the-money stock options, warrants
and convertible preferred stock, based on the average stock price
for each period using the treasury stock method. Since the Company
incurred a loss for the year ended December 31, 2016 and 2015,
therefore 105,647,443 and 99,625,809 common share equivalents
including potential convertible shares of common stock associated
with the Company's convertible notes, were not included in the
weighted-average calculations for each respective year since their
effect would have been anti-dilutive.
Foreign Currency Translation
The financial position and results of operations of the
Company’s foreign subsidiaries are measured using each
foreign subsidiary’s local currency as the functional
currency. Revenues and expenses of such subsidiaries have been
translated into U.S. dollars at average exchange rates prevailing
during the period. Assets and liabilities have been translated at
the rates of exchange on the balance sheet date. The resulting
translation gain and loss adjustments are recorded directly as a
separate component of stockholders’ equity, unless there is a
sale or complete liquidation of the underlying foreign
investments. Translation gains or losses resulting from
transactions in currencies other than the respective entities
functional currency are included in the determination of income and
are not considered significant to the Company for 2016 and
2015.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net gains and losses
affecting stockholders’ equity that, under generally accepted
accounting principles are excluded from net income (loss). For the
Company, the only items are the foreign currency translation and
net income (loss).
Income Taxes
The Company accounts for income taxes in
accordance with ASC Topic 740, "Income Taxes,"
under the asset and liability method
which includes the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that
have been included in the consolidated financial statements. Under
this approach, deferred taxes are recorded for the future tax
consequences expected to occur when the reported amounts of assets
and liabilities are recovered or paid. The provision for income
taxes represents income taxes paid or payable for the current year
plus the change in deferred taxes during the year. Deferred taxes
result from differences between the financial statement and tax
basis of assets and liabilities, and are adjusted for changes in
tax rates and tax laws when changes are enacted. The effects of
future changes in income tax laws or rates are not
anticipated.
The
Company is subject to income taxes in the United States and certain
foreign jurisdictions. The calculation of the Company’s tax
provision involves the application of complex tax laws and requires
significant judgment and estimates. The Company evaluates the
realizability of its deferred tax assets for each jurisdiction in
which it operates at each reporting date and establishes a
valuation allowance when it is more likely than not that all or a
portion of its deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income of the same character and in
the same jurisdiction. The Company considers all available positive
and negative evidence in making this assessment, including, but not
limited to, the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies. In
circumstances where there is sufficient negative evidence
indicating that deferred tax assets are not more likely than not
realizable, the Company will establish a valuation
allowance.
The Company applies ASC Topic 740
“Accounting
for Uncertainty in Income Taxes” recognized in its financial statements. ASC 740
requires that all tax positions be evaluated using a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to
be taken in a tax return. Differences between tax positions taken
in a tax return and amounts recognized in the financial statements
are recorded as adjustments to income taxes payable or receivable,
or adjustments to deferred taxes, or both. The Company believes
that its accruals for uncertain tax positions are adequate for all
open audit years based on its assessment of many factors including
past experience and interpretation of tax law. To the extent that
new information becomes available, which causes the Company to
change its judgment about the adequacy of its accruals for
uncertain tax positions, such changes will impact income tax
expense in the period such determination is made. The
Company’s policy is to include interest and penalties related
to unrecognized income tax benefits as a component of income tax
expense.
Stock Based Compensation
The Company accounts for stock based compensation
in accordance with ASC Topic 718, “Compensation – Stock
Compensation,” which
establishes accounting for equity instruments exchanged for
employee services. Under such provisions, stock based compensation
cost is measured at the grant date, based on the calculated fair
value of the award, and is recognized as an expense, under the
straight-line method, over the vesting period of the equity
grant.
The
Company accounts for equity instruments issued to non-employees in
accordance with authoritative guidance for equity based payments to
non-employees. Stock options issued to non-employees are accounted
for at their estimated fair value, determined using the
Black-Scholes option-pricing model. The fair value of options
granted to non-employees is re-measured as they vest, and the
resulting increase in value, if any, is recognized as expense
during the period the related services are rendered.
Other Income (Expense)
We
record interest income, interest expense, and change in derivative
liabilities, as well as other non-operating transactions, as other
income (expense) on our consolidated statements of
operations.
Recently Issued Accounting Pronouncements
In October 2016, the FASB issued Accounting
Standard Update ("ASU") 2016-17, Consolidation
(Topic 810): Interests Held through
Related Parties That Are under Common Control. This standard amends
the guidance issued with ASU 2015-02, Consolidation (Topic 810):
Amendments to the Consolidation Analysis in order to make it less
likely that a single decision maker would individually meet the
characteristics to be the primary beneficiary of a Variable
Interest Entity ("VIE"). When a decision maker or service provider
considers indirect interests held through related parties under
common control, they perform two steps. The second step was amended
with this ASU to say that the decision maker should consider
interests held by these related parties on a proportionate basis
when determining the primary beneficiary of the VIE rather than in
their entirety as was called for in the previous guidance. This ASU
will be effective for fiscal years beginning after December 15,
2016, and early adoption is not permitted. The Company is currently
evaluating the impact of the adoption of this ASU on our financial
position and results of operations.
In February 2016, the
FASB issued ASU 2016-02, Leases (Topic
842). The standard requires
lessees to recognize lease assets and lease liabilities on the
balance sheet and requires expanded disclosures about leasing
arrangements. We will adopt the standard no later than July 1,
2019. The Company is currently assessing the impact that the new
standard will have on our Consolidated Financial Statements, which
will consist primarily of a balance sheet gross up of our operating
leases. The Company does not
believe the adoption of the new standard will have a significant
impact on our consolidated financial
statements.
In April 2015, the FASB issued ASU No.
2015-03, Simplifying the Presentation
of Debt Issuance Costs. This
ASU more closely aligns the treatment of debt issuance costs with
debt discounts and premiums and requires debt issuance costs be
presented as a direct deduction from the carrying amount of the
related debt. The amendments in this ASU are effective for
financial statements issued for fiscal years beginning after
December 15, 2015 and interim periods within those fiscal years.
This guidance has been applied on a retrospective basis on the
Company’s consolidated financial statements as of December
31, 2015.
In August 2014, the FASB issued ASU No.
2014-15 Disclosure of Uncertainties
About an Entity’s Ability to Continue as a Going
Concern. The new standard
requires management to perform interim and annual assessments of an
entity’s ability to continue to meet its obligations as they
become due within one year after the date that the financial
statements are issued. ASU 2014-15 is effective for annual periods
ending after December 15, 2016, and interim periods thereafter,
with early adoption permitted. The Company evaluated the impact of
this new standard and concluded as of December 31, 2016 that the
adoption of this new standard did not have a significant impact on
our consolidated financial statements.
In May 2014, the FASB issued ASU No.
2014-09, Revenue from Contracts with
Customers, requiring an entity
to recognize the amount of revenue to which it expects to be
entitled for the transfer of promised goods or services to
customers. The updated standard will replace most existing revenue
recognition guidance in U.S. GAAP when it becomes effective and
permits the use of either the retrospective or cumulative effect
transition method. In August 2015, the FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers: Deferral of the Effective
Date, which deferred the effective date of the new revenue standard
for periods beginning after December 15, 2016 to December 15, 2017,
with early adoption permitted but not earlier than the original
effective date. Accordingly, the updated standard is effective for
us in the first quarter of fiscal 2018 and we do not plan to early
adopt. We have not yet selected a transition method and we are
currently evaluating the effect that the updated standard will have
on our consolidated financial statements and related
disclosures.
Note 2. Acquisitions and Business
Combinations
During
2016 and 2015, the Company entered into eight acquisitions, which
are detailed below. The acquisitions were conducted in an effort to
expand the Company’s distributor network, enhance and expand
its product portfolio, and diversify its product
mix. As such, the major purpose for all of the business
combinations was to increase revenue and
profitability. The acquisitions were structured as asset
purchases which resulted in the recognition of certain intangible
assets.
2016 Acquisitions
Legacy for Life, LLC
On
August 18, 2016, with an effective date of September 1, 2016 the
Company entered into an agreement to acquire certain assets of
Legacy for Life, LLC, an Oklahoma based direct sales company and
entered into an agreement to acquire the equity of two wholly owned
subsidiaries of Legacy for Life, LLC; Legacy for Life Taiwan and
Legacy for Life Limited (Hong Kong) collectively referred to as
(“Legacy for Life”).
Legacy for Life is a science-based direct
seller of i26, a product made from the IgY Max formula or
hyperimmune whole dried egg, which is the key ingredient in Legacy
for Life products. Additionally, the Company has entered into an
Ingredient Supply Agreement to market i26 worldwide. IgY Max
promotes healthy gut flora and healthy digestion and was created by
exposing a specially selected flock of chickens to natural elements
from the human world, whereby the chickens develop immunity to
these elements. In a highly patented process, these special eggs
are harvested as a whole food and are processed as a whole food
into i26 egg powder, an all-natural product. Nothing is added to
the egg nor does any chemical extraction take place.
As
a result of this acquisition, the Company’s distributors and
customers have access to the unique line of the Legacy for Life
products and the Legacy for Life distributors and customers have
gained access to products offered by the Company. The Company has
agreed to purchase certain inventories and assume certain
liabilities. The Company is obligated to make monthly payments
based on a percentage of the Legacy for Life distributor revenue
derived from sales of the Company’s products and a percentage
of royalty revenue derived from sales of the Legacy for Life
products until the earlier of the date that is fifteen (15) years
from the closing date or such time as the Company has paid to
Legacy for Life aggregate cash payments of Legacy for Life
distributor revenue and royalty revenue equal to a predetermined
maximum aggregate purchase price.
The
acquisition of Legacy for Life was accounted for under the
acquisition method of accounting. The assets acquired and
liabilities assumed by the Company were recognized at their
estimated fair values as of the acquisition date. The fair values
of the acquired assets have not been finalized pending further
information that may impact the valuation of certain assets or
liabilities. The acquisition related costs, such as legal
costs and other professional fees were minimal and expensed as
incurred.
The
contingent consideration’s estimated fair value at the date
of acquisition was $825,000 as determined by management using a
discounted cash flow methodology. In addition the Company paid
$221,000 for the net assets of the Taiwan and Hong Kong entities
and certain inventories from Legacy for Life.
The
preliminary purchase price allocation for the acquisition of Legacy
for Life (in thousands) is as follows:
|
Cash
paid for the equity in Legacy for Life Taiwan and Legacy for Life
Limited (Hong Kong)
|
$26
|
|
Cash
paid for inventory
|
195
|
|
Total
cash consideration
|
221
|
|
Trademarks
and trade name
|
185
|
|
Customer-related
intangible
|
250
|
|
Distributor
organization
|
390
|
|
Total
intangible assets acquired, non-cash
|
825
|
|
Total
purchase price
|
$1,046
|
The
preliminary fair value of intangible assets acquired was determined
through the use of a discounted cash flow methodology. The
trademarks and trade name, customer-related intangible and
distributor organization intangible are being amortized over their
estimated useful life of ten (10) years using the straight-line
method which is believed to approximate the time-line within which
the economic benefit of the underlying intangible asset will be
realized.
The
Company expects to finalize the valuation within one (1) year from
the acquisition date.
The
revenue impact from the Legacy for Life acquisition, included in
the consolidated statement of operations for the year ended
December 31, 2016 was approximately $507,000.
The
pro-forma effect assuming the business combination with Legacy for
Life discussed above had occurred at the beginning of the current
period is not presented as the information was not
available.
Nature’s Pearl Corporation
On
August 1, 2016, the Company entered into an agreement to acquire
certain assets of Nature’s Pearl Corporation,
(“Nature’s Pearl”) with an effective date of
September 1, 2016. Nature’s Pearl is a direct sales company
that produces nutritional supplements and skin and personal care
products using the muscadine grape grown in the southeastern region
of the United States that are deemed to be rich in antioxidants. As
a result of this acquisition, the Company’s distributors and
customers have access to the unique line of Nature’s Pearl
products and Nature’s Pearl distributors and customers have
gained access to products offered by the Company. The Company is
obligated to make monthly payments based on a percentage of
Nature’s Pearl distributor revenue derived from sales of the
Company’s products and a percentage of royalty revenue
derived from sales of Nature’s Pearl products until the
earlier of the date that is ten (10) years from the closing date or
such time as the Company has paid to Nature’s Pearl aggregate
cash payments of Nature’s Pearl distributor revenue and
royalty revenue equal to a predetermined maximum aggregate purchase
price. The Company paid approximately $200,000 for certain
inventories, which payment was applied against the maximum
aggregate purchase price.
The contingent consideration’s estimated fair value of the
acquisition was $1,475,000 and was determined by management using a
discounted cash flow methodology. The acquisition related costs,
such as legal costs and other professional fees were minimal and
expensed as incurred.
The assets acquired were recorded at estimated fair values and have
not been finalized pending further information that may impact the
valuation of certain assets or liabilities. The preliminary
purchase price allocation for Nature’s Pearl is as follows
(in thousands):
|
Distributor
organization
|
$825
|
|
Customer-related
intangible
|
400
|
|
Trademarks
and trade name
|
250
|
|
Total
purchase price
|
$1,475
|
The
preliminary fair value of intangible assets acquired was determined
through the use of a discounted cash flow methodology. The
trademarks and trade name, customer-related intangible and
distributor organization intangible are being amortized over their
estimated useful life of ten (10) years using the straight-line
method which is believed to approximate the time-line within which
the economic benefit of the underlying intangible asset will be
realized.
The
Company expects to finalize the valuation within one (1) year from
the acquisition date.
The
revenue impact from the Nature’s Pearl acquisition, included
in the consolidated statement of operations for the year ended
December 31, 2016 was approximately $1,488,000.
The
pro-forma effect assuming the business combination with
Nature’s Pearl discussed above had occurred at the beginning
of the current period is not presented as the information was not
available.
Renew Interest, LLC (SOZO Global, Inc.)
On July 29, 2016, the Company acquired certain assets of Renew
Interest, LLC (“Renew”) formerly owned by SOZO Global,
Inc. (“SOZO”), a direct sales company that produces
nutritional supplements, skin and personal care products, weight
loss products and coffee products. The SOZO brand of products
contains CoffeeBerry a fruit extract known for its high level of
antioxidant properties. As a result of this business combination,
the Company’s distributors and customers have access to the
unique line of the Renew products and Renew distributors and
customers have gained access to products offered by the
Company. The Company is obligated to make monthly payments
based on a percentage of Renew distributor revenue derived from
sales of the Company’s products and royalty payments until
the earlier of the date that is twelve (12) years from the closing
date or such time as the Company agreed to pay to Renew, aggregate
cash payments of Renew distributor revenue and royalty revenue
equal to a predetermined maximum aggregate purchase price. The
Company agreed to pay approximately $300,000 for certain
inventories and assumed liabilities, which payment was applied to
the maximum aggregate purchase price. The Company also received
inventories on a consignment basis.
The contingent consideration’s estimated fair value of
acquisition was $465,000 and was determined by management using a
discounted cash flow methodology. The acquisition related costs,
such as legal costs and other professional fees were minimal and
expensed as incurred.
The assets acquired were recorded at estimated fair values and have
not been finalized pending further information that may impact the
valuation of certain assets or liabilities. The preliminary
purchase price allocation for Renew is as follows (in
thousands):
|
Distributor
organization
|
$200
|
|
Customer-related
intangible
|
155
|
|
Trademarks
and trade name
|
110
|
|
Total
purchase price
|
$465
|
The
preliminary fair value of intangible assets acquired was determined
through the use of a discounted cash flow methodology. The
trademarks and trade name, customer-related intangible and
distributor organization intangible are being amortized over their
estimated useful life of ten (10) years using the straight-line
method which is believed to approximate the time-line within which
the economic benefit of the underlying intangible asset will be
realized.
The
Company expects to finalize the valuation within one (1) year from
the acquisition date.
The
revenue impact from the Renew acquisition, included in the
consolidated statement of operations for the year ended December
31, 2016 was approximately $432,000.
The
pro-forma effect assuming the business combination with Renew
discussed above had occurred at the beginning of the current period
is not presented as the information was not available.
South Hill Designs Inc.
In
January 2016, the Company acquired certain assets of South Hill
Designs Inc., (“South Hill”) a direct sales and
proprietary jewelry company that sells customized lockets and
charms. As a result of this business combination the
Company’s distributors have access to South Hill’s
customized products and the South Hill distributors and customers
have gained access to products offered by the
Company.
The
Company has agreed to pay South Hill a monthly royalty payment on
all gross sales revenue generated by the South Hill distributor
organization in accordance with this agreement, regardless of
products being sold and a monthly royalty payment on South
Hill product revenue for seven (7) years from the closing
date.
The
contingent consideration’s estimated fair value at the date
of acquisition was $2,650,000 as determined by management using a
discounted cash flow methodology. The acquisition related costs,
such as legal costs and other professional fees were minimal and
expensed as incurred.
During
the fourth quarter ended December 31, 2016 the purchase accounting
was finalized and the Company determined that the initial purchase
price should be reduced by $1,811,000 from $2,650,000 to $839,000.
The final purchase price allocation of the intangible assets
acquired for South Hill (in thousands) is as follows:
|
Distributor
organization
|
$396
|
|
Customer-related
intangible
|
285
|
|
Trademarks
and trade name
|
158
|
|
Total
purchase price
|
$839
|
The
fair value of intangible assets acquired was determined through the
use of a discounted cash flow methodology. The trademarks and trade
name, customer-related intangible and distributor organization
intangible are being amortized over their estimated useful life of
ten (10) years using the straight-line method which is believed to
approximate the time-line within which the economic benefit of the
underlying intangible asset will be realized.
The
revenue impact from the South Hill acquisition, included in the
consolidated statement of operations for the year ended December
31, 2016 was approximately $4,283,000.
The
pro-forma effect assuming the business combination with South Hill
discussed above had occurred at the beginning of the current period
is not presented as the information was not available.
2015 Acquisitions
Paws Group, LLC
On
July 1, 2015, the Company acquired certain assets of Paws Group,
LLC, (“PAWS”) a direct sales company for pet lovers
that offers an exclusive pet boutique carrying treats for dogs and
cats as well as grooming and bath products. The purchase
price consisted of a maximum aggregate purchase price of $150,000.
The Company paid approximately $61,000, for which the Company
received certain inventories, which payment was applied against the
maximum aggregate purchase price.
The
Company recorded a fair value of a distributor network intangible
asset of $125,000 as determined by management using a discounted
cash flow methodology. The intangible is being amortized over its
estimated useful life of ten (10) years using the straight-line
method which is believed to approximate the time-line within which
the economic benefit of the underlying intangible asset will be
realized. The acquisition related costs, such as legal costs and
other professional fees were minimal and expensed as
incurred.
The revenue impact from the PAWS acquisition, included in the
consolidated statement of operations for the years ended December
31, 2016 and 2015 was approximately $222,000 and $98,000,
respectively.
The
pro-forma effect assuming the business combination with PAWS
discussed above had occurred at the beginning of the year ended
2015 is not presented as the information was not
available.
Mialisia & Co., LLC
On
June 1, 2015, the Company acquired certain assets of Mialisia &
Co., LLC, (“Mialisia”) a direct sales jewelry company
that specializes in interchangeable jewelry. As a result of this
business combination, the Company’s distributors and
customers have access to Mialisia’s patent-pending
“VersaStyle” jewelry and Mialisia’s distributors
and customers have gained access to products offered by the
Company. The purchase price consisted of a maximum aggregate
purchase price of $1,900,000. The Company paid $118,988 for certain
inventories, which payment was applied against the maximum
aggregate purchase price.
The
Company has agreed to pay Mialisia a monthly payment equal to seven
(7%) of all gross sales revenue generated by the Mialisia
distributor organization in accordance with the asset purchase
agreement, regardless of products being sold and pay five (5%)
royalty on Mialisia product revenue until the earlier of the date
that is fifteen (15) years from the closing date or such time as
the Company has paid aggregate cash payment equal to $1,781,012
provided, however, that in no event will the maximum aggregate
purchase price be reduced below $1,650,000.
The
contingent consideration’s estimated fair value at the date
of acquisition was $700,000 as determined by management using a
discounted cash flow methodology. The acquisition related costs,
such as legal costs and other professional fees were minimal and
expensed as incurred.
During
the second quarter ended June 30, 2016 the purchase accounting was
finalized and the Company determined that the initial purchase
price should be reduced by $108,000 from $700,000 to $592,000. The
final purchase price allocation of the intangible assets acquired
for Mialisia (in thousands) is as follows:
|
Distributor
organization
|
$296
|
|
Customer-related
intangible
|
169
|
|
Trademarks
and trade name
|
127
|
|
Total
purchase price
|
$592
|
The
fair value of intangible assets acquired was determined through the
use of a discounted cash flow methodology. The trademarks and trade
name, customer-related intangible and distributor organization
intangible are being amortized over their estimated useful life of
ten (10) years using the straight-line method which is believed to
approximate the time-line within which the economic benefit of the
underlying intangible asset will be realized.
The revenue impact from the Mialisia acquisition, included in the
consolidated statement of operations for the years ended December
31, 2016 and 2015 was approximately $3,003,000 and $754,000,
respectively.
The
pro-forma effect assuming the business combination with Mialisia
discussed above had occurred at the beginning of the year ended
2015 is not presented as the information was not
available.
JD Premium LLC
On
March 4, 2015, the Company acquired certain assets of JD Premium,
LLC (“JD Premium”) a dietary supplement company. As a
result of this business combination, the Company’s
distributors and customers have access to JD Premium’s unique
line of products and JD Premium’s distributors and clients
gain access to products offered by the Company. The purchase
price consisted of a maximum aggregate purchase price of $500,000.
The Company paid $50,000 for the purchase of certain
inventories, which payment was applied against the maximum
aggregate purchase price.
The
Company has agreed to pay JD Premium a monthly payment equal to
seven (7%) of all gross sales revenue generated by the JD Premium
distributor organization in accordance with the asset purchase
agreement, regardless of products being sold and pay five (5%)
royalty on JD Premium product revenue until the earlier of the date
that is fifteen (15) years from the closing date or such time as
the Company has paid aggregate cash payment equal to $450,000. All
payments of JD Premium distributor revenue will be applied against
and reduce the maximum aggregate purchase price; however
if the aggregate gross sales revenue generated by the JD Premium
distributor organization, effective April 4, 2015 for a twenty-four
(24) months period does not equal or exceed $500,000 then the
maximum aggregate purchase price will be reduced by the difference
of the $500,000 and the average annual distributor revenue;
provided, however, that in no event will the maximum aggregate
purchase price be reduced below $300,000.
The
contingent consideration’s estimated fair value at the date
of acquisition was $195,000 as determined by management using a
discounted cash flow methodology. The acquisition related costs,
such as legal costs and other professional fees were minimal and
expensed as incurred.
During
the fourth quarter ended December 31, 2015 the purchase accounting
was finalized and the Company determined that the initial purchase
price should be reduced from $195,000 by approximately $75,000 to
$120,000. The final purchase price allocation for JD Premium is as
follows (in thousands):
|
Distributor organization
|
|
$
|
68
|
|
|
Customer-related intangible
|
|
|
52
|
|
|
Total purchase price
|
|
$
|
120
|
|
The
fair value of intangible assets acquired was determined through the
use of a discounted cash flow methodology. The customer-related
intangible and distributor organization intangible are being
amortized over their estimated useful life of ten (10) years using
the straight-line method which is believed to approximate the
time-line within which the economic benefit of the underlying
intangible asset will be realized.
The revenue impact from the JD Premium acquisition, included in the
consolidated statement of operations for the years ended December
31, 2016 and 2015 were immaterial.
The
pro-forma effect assuming the business combination with JD Premium
discussed above had occurred at the beginning of the year ended
2015 is not presented as the information was not
available.
Sta-Natural, LLC
On
February 23, 2015, the Company acquired certain assets and assumed
certain liabilities of Sta-Natural, LLC,
(“Sta-Natural”) a dietary supplement company and
provider of vitamins, minerals and supplements for families and
their pets. As a result of this business combination, the
Company’s distributors and customers have access to
Sta-Natural’s unique line of products and Sta-Natural’s
distributors and clients gain access to products offered by the
Company. The purchase price consisted of a maximum aggregate
purchase price of $500,000. The Company paid $25,000 for certain
inventories, which payment was applied against the maximum
aggregate purchase price.
The
Company has agreed to pay Sta-Natural a monthly payment equal to
eight (8%) of all gross sales revenue generated by the Sta-Natural
distributor organization in accordance with the asset purchase
agreement, regardless of products being sold and pay five (5%)
royalty on Sta-Natural product revenue until the earlier of the
date that is fifteen (15) years from the closing date or such time
as the Company has paid aggregate cash payment equal to $450,000.
All payments of Sta-Natural distributor revenue will be applied
against and reduce the maximum aggregate purchase
price; however if the aggregate gross sales revenue
generated by the Sta-Natural distributor organization, for a twelve
(12) months period following the closing date does not equal or
exceed $500,000 then the maximum aggregate purchase price will be
reduced by the difference of the $500,000 and the average
distributor revenue for a twelve (12) month period: provided,
however, that in no event will the maximum aggregate purchase price
be reduced below $300,000.
The
contingent consideration’s estimated fair value at the date
of acquisition was $285,000 as determined by management using a
discounted cash flow methodology. The acquisition related costs,
such as legal costs and other professional fees were minimal and
expensed as incurred.
The
final purchase price allocation for Sta-Natural is as follows (in
thousands):
|
Distributor organization
|
|
$
|
140
|
|
|
Customer-related intangible
|
|
|
110
|
|
|
Trademarks and trade name
|
|
|
60
|
|
|
Initial cash payment
|
|
|
(25
|
)
|
|
Total purchase price
|
|
$
|
285
|
|
The
fair value of intangible assets acquired was determined through the
use of a discounted cash flow methodology. The trademarks and trade
name, customer-related intangible and distributor organization
intangible are being amortized over their estimated useful life of
ten (10) years using the straight-line method which is believed to
approximate the time-line within which the economic benefit of the
underlying intangible asset will be realized.
The revenue impact from the Sta-Natural acquisition, included in
the consolidated statement of operations for the years ended
December 31, 2016 and 2015 was approximately $1,168,000 and
$691,000, respectively.
The
pro-forma effect assuming the business combination with Sta-Natural
discussed above had occurred at the beginning of the year ended
2015 is not presented as the information was not
available.
Note 3. Arrangements with Variable Interest Entities and
Related Party Transactions
The
Company consolidates all variable interest entities in which it
holds a variable interest and is the primary beneficiary of the
entity. Generally, a variable interest entity (“VIE”)
is a legal entity with one or more of the following
characteristics: (a) the total at risk equity investment is not
sufficient to permit the entity to finance its activities without
additional subordinated financial support from other parties; (b)
as a group the holders of the equity investment at risk lack any
one of the following characteristics: (i) the power, through voting
or similar rights, to direct the activities of the entity that most
significantly impact its economic performance, (ii) the obligation
to absorb the expected losses of the entity, or (iii) the right to
receive the expected residual returns of the entity; or (c) some
equity investors have voting rights that are not proportional to
their economic interests, and substantially all of the entity's
activities either involve, or are conducted on behalf of, an
investor that has disproportionately few voting rights. The primary
beneficiary of a VIE is required to consolidate the VIE and is the
entity that has (a) the power to direct the activities of the VIE
that most significantly impact the VIE's economic performance, and
(b) the obligation to absorb losses of the VIE or the right to
receive benefits from the VIE that could potentially be significant
to the VIE.
In
determining whether it is the primary beneficiary of a VIE, the
Company considers qualitative and quantitative factors, including,
but not limited to: which activities most significantly impact the
VIE's economic performance and which party has the power to direct
such activities; the amount and characteristics of Company's
interests and other involvements in the VIE; the obligation or
likelihood for the Company or other investors to provide financial
support to the VIE; and the similarity with and significance to the
business activities of Company and the other investors. Significant
judgments related to these determinations include estimates about
the current and future fair values and performance of these VIEs
and general market conditions.
FDI Realty, LLC
FDI
Realty is the owner and lessor of the building previously occupied
by the Company for its sales and marketing office in Windham, NH.
In December 2015 the Company relocated its operations from the
Windham office, to its corporate headquarters in Chula Vista,
California. A former officer of the Company is the single member of
FDI Realty. The Company is a co-guarantor of FDI Realty’s
mortgages on the building. The Company determined that the
fair value of the guarantees is not significant and therefore did
not record a related liability. The first mortgage is due on August
13, 2018 and the second mortgage is due on August 13, 2028. The
Company’s maximum exposure to loss as a result of its
involvement with the unconsolidated VIE is approximately $1,806,000
and $1,900,000 as of December 31, 2016 and 2015, respectively. The
Company may be subject to additional losses to the extent of any
financial support that it voluntarily provides in the
future.
At December 31, 2016 and 2015, the Company held a variable interest
in FDI Realty, for which the Company is not deemed to be the
primary beneficiary. The Company has concluded, based on its
qualitative consideration of the terminated lease agreement, and
the role of the single member of FDI Realty, that the single member
is the primary beneficiary of FDI Realty. In making these
determinations, the Company considered that the single member
conducts and manages the business of FDI Realty, is authorized to
borrow funds on behalf of FDI Realty, is the sole person authorized
and responsible for conducting the business of FDI Realty, and is
obligated to fund the obligations of FDI Realty. As a result of
this determination, the financial position and results of
operations of FDI Realty have not been included in the accompanying
consolidated financial statements of the
Company.
Related Party Transactions
Richard Renton
Richard Renton is a member of the Board of Directors and owns and
operates with his wife Roxanna Renton Northwest Nutraceuticals,
Inc., a supplier of certain inventory items sold by the Company.
The Company made purchases of approximately $126,000 and $93,000
from Northwest Nutraceuticals Inc., for the years ended December
31, 2016 and 2015, respectively. In addition, Mr. Renton and his
wife are also distributors of the Company and the Renton’s
were paid distributor commissions for the years ended December 31,
2016 and 2015 approximately $457,000 and $422,000
respectively.
Hernandez, Hernandez, Export Y Company
The
Company’s coffee segment CLR is associated with Hernandez,
Hernandez, Export Y Company (“H&H”), a Nicaragua
company, through sourcing arrangements to procure Nicaraguan green
coffee and in March 2014 as part of the Siles Plantation
Family Group “Siles” acquisition, CLR engaged the
owners of H&H as employees to manage Siles.
As an inducement to managing the
operations of Siles, CLR and H&H entered into an Operating and
Profit Sharing Agreement (“Agreement”). In
accordance with the Agreement, H&H shares equally (50%) in all
profits and losses generated by Siles, and profits from any
subsequent sale of the plantation, after profits are first
distributed to CLR equal to the amount of CLR’s cash
contributions for the acquisitions, then after profits are
distributed to H&H in an amount equal to their cash
contributions, and after certain other conditions are met. During
the years ended December 31, 2016 and 2015 CLR recorded expenses
allocated to the profit sharing Agreement of $698,000 and $528,000,
respectively. As
of December 31, 2016 and 2015 the balance of contingent acquisition
debt payable to H&H after the reduction of $698,000 and
$528,000 from the allocation of 50% losses recognized in 2016 and
2015 is $83,000 and $894,000, respectively.
CLR
sources green coffee from H&H and made purchases of
approximately $8,810,000 and $10,499,000 for the years ended
December 31, 2016 and 2015, respectively. H&H Coffee Group
Export, a Florida Company which is affiliated with H&H is a
customer of CLR. During the year ended December 31, 2016 CLR sold
$2,637,000 in green coffee to H&H Coffee Group Export. There
were no related sales of green coffee to H&H Coffee Group
Export during 2015.
Carl Grover
Mr.
Carl Grover is the beneficial owner of in excess of five
percent (5%) of our outstanding common shares, including his
ownership as the sole beneficial owner of 44,866,952 shares of our
common stock. Mr. Grover owns a September 2014 Note in the
principal amount of $4,000,000 convertible into 11,428,571 shares
of common stock convertible at a conversion price of $0.35 per
share, and a September 2014 Warrant exercisable for 15,652,174
shares of common stock at an exercise price of $0.23 per share. Mr.
Grover also owns a November 2015 Note in the principal amount of
$7,000,000 convertible into 20,000,000 shares of common stock
convertible at a conversion price of $0.35 per share, and a
November 2015 Warrant exercisable for 9,333,333 shares of common
stock at an exercise price of $0.45 per share. He also owns
5,151,240 shares of common stock.
2400 Boswell LLC
On
March 15, 2013, the Company acquired 2400 Boswell LLC (“2400
Boswell”) for approximately $4.6 million. 2400 Boswell is the
owner and lessor of the building occupied by the Company for its
corporate office and warehouse in Chula Vista, California. The
purchase was from an immediate family member of our Chief Executive
Officer and consisted of approximately $248,000 in cash, $334,000
of debt forgiveness and accrued interest, and a promissory note of
approximately $393,000, payable in equal payments over 5 years and
bears interest at 5.0%. Additionally, the Company
assumed a long-term mortgage of $3,625,000, payable over 25 years
and has an initial interest rate of 5.75%. The interest rate is the
prime rate plus 2.5%. The lender will adjust the interest rate on
the first calendar day of each change period. As of December 31,
2016 the balance on the long-term mortgage is approximately
$3,363,000 and the balance on the promissory note is approximately
$108,000. The Company and its Chief Executive Officer are
both co-guarantors of the mortgage.
Note 4. Notes Payable and Other Debt
In
November 2015, the Company completed a private placement
and entered into Note Purchase Agreements with three (3) accredited
investors pursuant to which it sold senior secured convertible
notes in the aggregate principal amount of $7,187,500, that are
convertible into shares of Common Stock. The Notes are due in
October 2018 if the option to convert has not been exercised (see
Note 5, below.)
In
January 2015, the Company completed a private placement
and entered into Note Purchase Agreements with three (3) accredited
investors pursuant to which it sold units consisting of one (1)
year senior secured notes in the aggregate principal amount of
$5,250,000. One holder of a January 2015 Note in the principal
amount of $5,000,000 was prepaid on October 26, 2015 through a cash
payment from us to the investor of $1,000,000, and the remaining
$4,000,000 owed was applied to the investor’s purchase of a
$4,000,000 November 2015 Note in the November 2015 Offering and a
November 2015 Warrant exercisable to purchase 5,333,333 shares of
Common Stock. The remaining balance of the January 2015 Notes
as of December 31, 2015 was $250,000 which amount was paid in
January 2016 (see Note 5, below.)
During
the third quarter of the year ended December 31, 2014, the
Company completed a private placement and entered into Note
Purchase Agreements with seven (7) accredited investors pursuant to
which we sold units consisting of five (5) year senior secured
convertible Notes in the aggregate principal amount of $4,750,000,
that are convertible into shares of our common stock. The Notes are
due in September 2019 if the option to convert has not been
exercised (see Note 5, below.)
In
March 2013, the Company acquired 2400 Boswell for approximately
$4.6 million. 2400 Boswell is the owner and lessor of the building
occupied by the Company for its corporate office and warehouse in
Chula Vista, California. The purchase was from an immediate family
member of our Chief Executive Officer and consisted of
approximately $248,000 in cash, $334,000 of debt forgiveness and
accrued interest, and a promissory note of approximately $393,000,
payable in equal payments over 5 years and bears interest at
5.0%. Additionally, the Company assumed a long-term
mortgage of $3,625,000, payable over 25 years and has an initial
interest rate of 5.75%. The interest rate is the prime rate plus
2.5%. The lender will adjust the interest rate on the first
calendar day of each change period. As of December 31, 2016 the
balance on the long-term mortgage is approximately $3,363,000 and
the balance on the promissory note is approximately $108,000.
The Company and its Chief Executive Officer are both co-guarantors
of the mortgage.
In
March 2007, the Company entered into an agreement to purchase
certain assets of M2C Global, Inc., a Nevada corporation, for
$4,500,000. The agreement required payments totaling
$500,000 in three installments during 2007, followed by monthly
payments in the amount of 10% of the sales related to the acquired
assets until the entire note balance is paid. The
Company has imputed interest at the rate of 7% per
annum. As of December 31, 2016 and 2015, the carrying
value of the liability was approximately $1,156,000 and $1,204,000,
respectively. Imputed interest recorded on the note was
approximately $29,000 for the year ended December 31, 2015. The
interest associated with the note for the year ended December 31,
2016 was minimal.
The
Company has two other notes payable in the total amount of $23,000
as of December 31, 2016 which expires in 2018 and
2020.
The
following summarizes the maturities of notes payable (in
thousands):
|
Years
ending December 31,
|
|
|
2017
|
$220
|
|
2018
|
7,349
|
|
2019
|
4,891
|
|
2020
|
143
|
|
2021
|
108
|
|
Thereafter
|
3,877
|
|
Total
|
$16,588
|
Capital Lease
The
Company leases certain manufacturing and operating equipment under
non-cancelable capital leases. The total outstanding balance under
the capital leases as of December 31, 2016 excluding
interest was approximately $2,390,000, of which $821,000 will
be paid in 2017 and the remaining balance of $1,569,000 will be
paid through 2021.
The
following summarizes the maturities of capital leases (in
thousands):
|
Years ending
December 31,
|
|
|
2017
|
$984
|
|
2018
|
972
|
|
2019
|
604
|
|
2020
|
90
|
|
2021
|
28
|
|
Total
|
2,678
|
|
Amount representing
interest
|
(288)
|
|
Present value of
minimum lease payments
|
2,390
|
|
Less current
portion
|
(821)
|
|
Long term
portion
|
$1,569
|
Depreciation
expense related to the capitalized lease obligations was
approximately $103,000 and $27,000 for the years ended December 31,
2016 and 2015, respectively.
Factoring Agreement
The
Company has a factoring agreement (“Factoring
Agreement”) with Crestmark Bank (“Crestmark”)
related to the Company’s accounts receivable resulting from
sales of certain products within its commercial coffee segment.
Effective May 1, 2016, the Company entered into a third amendment
to the factoring agreement (“Agreement”). Under the
terms of the Agreement, all new receivables assigned to Crestmark
shall be “Client Risk Receivables” and no further
credit approvals will be provided by Crestmark and there will be no
new credit-approved receivables. The changes to the Agreement
include expanding the factoring facility to include borrowings to
be advanced against acceptable eligible inventory up to 50% of
landed cost of finished goods inventory and meeting certain
criteria, not to exceed the lesser of $1,000,000 or 85% of the
value of the receivables already advanced with a maximum overall
borrowing of $3,000,000. Interest accrues on the outstanding
balance and a factoring commission is charged for each invoice
factored which is calculated as the greater of $5.00 or 0.75% to
0.875% of the gross invoice amount and is recorded as interest
expense. In addition the Company and the Company’s CEO Mr.
Wallach have entered into a Guaranty and Security Agreement with
Crestmark Bank if in the event that CLR were to default. This
Agreement continues in full force and is effective until February
1, 2019.
The
Company accounts for the sale of receivables under the Factoring
Agreement as secured borrowings with a pledge of the subject
inventories and receivables as well as all bank deposits as
collateral, in accordance with the authoritative guidance for
accounting for transfers and servicing of financial assets and
extinguishments of liabilities. The caption “Accounts
receivable, due from factoring company” on the accompanying
consolidated balance sheets in the amount of approximately
$1,078,000 and $556,000 as of December 31, 2016 and December
31, 2015, respectively, reflects the related collateralized
accounts.
The
Company's outstanding liability related to the Factoring Agreement
was approximately $1,290,000 and $457,000 as of December 31, 2016
and December 31, 2015, respectively, and is included in other
current liabilities on the consolidated balance sheets. The minimum
factoring commission payable to the bank is $90,000 during each
consecutive 12-month period. Fees and interest paid pursuant to
this agreement were approximately $170,000 and $155,000 for the
years ended December 31, 2016 and 2015, respectively, which were
recorded as interest expense.
Contingent Acquisition Debt
The
Company has contingent acquisition debt associated with its
business combinations. The Company accounts for business
combinations under the acquisition method and allocates the total
purchase price for acquired businesses to the tangible and
identified intangible assets acquired and liabilities assumed,
based on their estimated fair values as of the acquisition date. A
liability for contingent consideration, if applicable, is recorded
at fair value as of the acquisition date and, evaluated each period
for changes in the fair value and adjusted as appropriate (see Note
7 below.) The Company’s contingent acquisition debt as of
December 31, 2016 is $8,001,000 and is primarily attributable to
debt associated with the Company’s direct selling segment
which is $7,806,000 and $195,000 is debt associated with the
Company’s coffee segment.
Line of Credit
On
October 10, 2014, the Company entered into a revolving line of
credit agreement (“Line of Credit”), with Wells Fargo
Bank National Association (“Bank”), the Company’s
principal banking partner. The Line of Credit provided the Company
with a $2.5 million revolving credit line. The outstanding
principal balance of the Line of Credit bear interest at a
fluctuating rate per annum determined by the Bank to be two and
three-quarter percent (2.75%) above Daily One Month LIBOR as in
effect from time to time. The bank charged an unused commitment fee
equal to five tenths percent (.5%) per annum on the daily unused
amount of the Line of Credit and was payable quarterly. The Company
did not draw against this credit facility. The agreement expired in
October 2015 and was not renewed.
Note 5. Debt
January 2015 Private Placement
In
January 2015, the Company entered into Note Purchase Agreements
(the “Note” or “Notes”) related to its
private placement offering (“January 2015 Private
Placement”) with three (3) accredited investors pursuant to
which the Company sold units consisting of one (1) year senior
secured notes in the aggregate principal amount of $5,250,000. One
holder of a January 2015 Note in the principal amount of $5,000,000
was prepaid on October 26, 2015 through a cash payment from us to
the investor of $1,000,000 and the remaining $4,000,000 owed was
applied to the investor’s purchase of a $4,000,000 November
2015 Note in the November 2015 Private Placement and a November
2015 Warrant exercisable to purchase 5,333,333 shares of Common
Stock. The Notes bore interest at a rate of eight percent (8%) per
annum and interest was paid quarterly in 2015. The remaining
balance of the January 2015 Notes as of December 31, 2015 was
$250,000 and was paid in January 2016.
The
Company recorded a non-cash extinguishment loss on debt of
$1,198,000 for the year ended December 31, 2015 as a result of the
repayment of $5,000,000 in Notes Payable to one of the investors
from the January 2015 Private Placement through issuance of a new
November 2015 Note Payable. This loss represents the difference
between the reacquisition value of the new debt to the holder of
the note and the carrying amount of the holder’s extinguished
debt. Issuance costs related to the Notes and the common stock were
approximately $170,000 and $587,000 in cash and non-cash costs,
respectively, which were recorded as deferred financing costs and
were amortized over the term of the Notes. As of December 31, 2015
the deferred financing costs is fully amortized and was recorded as
interest expense.
Convertible Notes Payable
Our
total convertible notes payable, net of debt discount outstanding
consisted of the amount set forth in the following table (in
thousands):
|
|
December 31,
2016
|
December 31,
2015
|
|
8%
Convertible Notes due July and August 2019 (July 2014 Private
Placement) (1)
|
$2,296
|
$1,346
|
|
8%
Convertible Notes due October and November 2018 (November 2015
Private Placement) (2)
|
6,999
|
6,896
|
|
Net
debt issuance costs (3)
|
(968)
|
(1,456)
|
|
Total
convertible notes payable, net of debt discount (4)
|
$8,327
|
$6,786
|
|
(1)
|
Principal amount of $4,750,000 are net of unamortized debt
discounts of $2,454,000 as of December 31, 2016 and $3,404,000
as of December 31, 2015.
|
|
(2)
|
Principal amount of approximately $7,188,000 are net of unamortized
debt discounts of $189,000 as of December 31, 2016 and
$292,000 as of December 31, 2015.
|
|
(3)
|
As of January 1, 2016, we adopted ASU 2015-03 with retrospective
application. This resulted in a $1,456,000 reclassification from
prepaid expenses and other current assets to convertible notes
payable, net of debt discount, for unamortized debt issuance
costs.
|
|
(4)
|
Principal amounts are net of unamortized discounts and issuance
costs of $3,611,000 as of December 31, 2016 and $5,152,000 as of
December 31, 2015.
|
July 2014 Private Placement
Between
July 31, 2014 and September 10, 2014 the Company entered into
Note Purchase Agreements (the “Note” or
“Notes”) related to its private placement offering
(“2014 Private Placement”) with seven accredited
investors pursuant to which the Company raised aggregate gross
proceeds of $4,750,000 and sold units consisting of five (5) year
senior secured convertible Notes in the aggregate principal amount
of $4,750,000, that are convertible into 13,571,429 shares of our
common stock, at a conversion price of $0.35 per share, and
warrants to purchase 18,586,956 shares of common stock at an
exercise price of $0.23 per share. The Notes bear interest at a
rate of eight percent (8%) per annum and interest is paid quarterly
in arrears with all principal and unpaid interest due between July
and September 2019. As of December 31, 2016 and December 31, 2015
the principal amount of $4,750,000 remains
outstanding.
The
Company has the right to prepay the Notes at any time after the one
year anniversary date of the issuance of the Notes at a rate equal
to 110% of the then outstanding principal balance and any unpaid
accrued interest. The notes are secured by Company pledged assets
and rank senior to all debt of the Company other than certain
senior debt that has been previously identified as senior to the
convertible notes debt. Additionally,
Stephan Wallach, the Company’s Chief Executive Officer, has
also personally guaranteed the repayment of the Notes, subject to
the terms of a Guaranty Agreement executed by him with the
investors. In addition, Mr. Wallach has agreed not to
sell, transfer or pledge 30 million shares of the Common Stock that
he owns so long as his personal guaranty is in effect.
Additionally,
upon issuance of the Convertible Notes, the Company recorded the
discount for the beneficial conversion feature of $1,053,000.
The debt discount associated with the beneficial conversion feature
is amortized to interest expense over the life of the
Notes.
Paid
in cash issuance costs related to the July 2014 Private Placement
were approximately $490,000 and were recorded as deferred financing
costs and are included with convertible notes payable, net of debt
discounts on the consolidated balance sheets and are being
amortized over the term of the Convertible Notes. As of
December 31, 2016 and December 31, 2015 the remaining balance in
deferred financing costs is approximately $253,000 and $351,000,
respectively. The quarterly amortization of the deferred financing
costs is approximately $25,000 and is recorded as interest
expense.
November 2015 Private Placement
Between
October 13, 2015 and November 25, 2015 the Company entered into
Note Purchase Agreements (the “Note” or
“Notes”) related to its private placement offering
(“November 2015 Private Placement”) with three (3)
accredited investors pursuant to which the Company raised cash
proceeds of $3,187,500 in the offering and converted $4,000,000 of
debt from the January 2015 Private Placement to this offering in
consideration of the sale of aggregate units consisting of three
(3) year senior secured convertible Notes in the aggregate
principal amount of $7,187,500, convertible into 20,535,714 shares
of common stock, par value $0.001 per share, at a conversion price
of $0.35 per share, subject to adjustment as provided therein; and
five (5) year Warrants exercisable to purchase 9,583,333 shares of
the Company’s common stock at a price per share of $0.45. The
Notes bear interest at a rate of eight percent (8%) per
annum and interest is paid quarterly in arrears with all
principal and unpaid interest due at maturity on October 12, 2018.
As of December 31, 2016 and December 31, 2015 the principal amount
of $7,187,500 remains outstanding.
The
Company has the right to prepay the Notes at any time after the one
year anniversary date of the issuance of the Notes at a rate equal
to 110% of the then outstanding principal balance and any unpaid
accrued interest. The notes are secured by Company pledged assets
and rank senior to all debt of the Company other than certain
senior debt that has been previously identified as senior to the
convertible notes debt.
The amounts owed under this Note are
secured by a Deed of Trust as of October 13, 2015 executed by the
Company’s affiliate 2400 Boswell LLC, a California limited
liability company, and encumbering the Company’s headquarters
at 2400 Boswell Rd., Chula Vista, CA 91914 (the “Deed of
Trust.”). Additionally,
Stephan Wallach, the Company’s Chief Executive Officer, has
also personally guaranteed the repayment of the Notes, subject to
the terms of a Guaranty Agreement executed by him with the
investors. In addition, Mr. Wallach has agreed not to
sell, transfer or pledge 30 million shares of the Common Stock that
he owns so long as his personal guaranty is in effect.
The
Company recorded the discount for the beneficial conversion feature
of $15,000. The beneficial conversion feature was recorded to
equity and the debt discount associated with the beneficial
conversion feature will be amortized to interest expense over the
life of the Notes.
Paid
in cash issuance costs related to the November 2015 Private
Placement were approximately $786,000 and were recorded as deferred
financing costs and are included with convertible notes payable,
net of debt discounts on the consolidated balance sheets and are
being amortized over the term of the Convertible Notes. As of
December 31, 2016 and December 31, 2015 the remaining balance in
deferred financing costs is approximately $480,000 and $742,000,
respectively. The quarterly amortization of the deferred financing
costs is approximately $66,000 and is recorded as interest
expense.
Registration Rights Agreements
The
Company entered into a registration rights agreements
(“Registration Rights Agreement”) with the investors in
the November 2015 and July 2014 Private Placements. Under the
terms of the Registration Rights Agreement, the Company agreed
to file a registration statement covering the resale of the common
stock underlying the units and the common stock that is issuable on
exercise of the warrants within 90 days from the final closing date
of the Private Placements (the “Filing
Deadline”).
The
Company has agreed to use reasonable efforts to maintain the
effectiveness of the registration statement through the one year
anniversary of the date the registration statement is declared
effective by the Securities and Exchange Commission (the
“SEC”), or until Rule 144 of the 1933 Act is available
to investors in the Private Placements with respect to all of their
shares, whichever is earlier. If the Company does not meet the
Filing Deadline or Effectiveness Deadline, as defined in the
Registration Rights Agreement, the Company will be liable for
monetary penalties equal to one percent (1.0%) of each
investor’s investment at the end of every 30 day period
following such Filing Deadline or Effectiveness Deadline failure
until such failure is cured.
The payment
amount shall be prorated for partial 30 day periods. The maximum
aggregate amount of payments to be made by the Company as the
result of such shall be an amount equal to ten (10%) of each
investor’s investment amount. Notwithstanding the foregoing,
no payments shall be owed with respect to any period during which
all of the investor’s registrable securities may be sold by
such investor under Rule 144 or pursuant to another exemption from
registration.
July 2014 Private
Placement: The Company filed a
registration statement on October 3, 2014 and an amended statement
on October 17, 2014 and it was declared effective by the SEC on
November 4, 2014.
November 2015 Private
Placement: The Company filed a
registration statement on December 29, 2015 and an amended
registration statement on February 9, 2016 that was declared
effective by the SEC on February 12, 2016.
Note 6. Derivative Liability
In October and November of 2015, the Company
issued 9,583,333 five-year warrants in connection with Convertible
Notes associated with our November 2015 Private Placement. The
exercise price of the warrants is protected against down-round
financing throughout the term of the warrant. Pursuant to ASC Topic
815, “Derivatives and
Hedging” the fair value
of the warrants of approximately $1,491,000 was recorded as a
derivative liability on the issuance dates. The
estimated fair values of the warrants were computed at issuance
using a Monte Carlo option pricing models, with the following
assumptions: stock price volatility 70%, risk-free rate 1.66%,
annual dividend yield 0% and expected life 5.0
years.
In
July and August of 2014, the Company issued 21,802,793 five-year
warrants in connection with Convertible Notes associated with our
July 2014 Private Placement. The exercise price of the warrants is
protected against down-round financing throughout the term of the
warrant. Pursuant to ASC Topic 815, the fair value of the warrants
of approximately $3,697,000 was recorded as a derivative liability
on the issuance dates. The estimated fair values of the warrants
were computed at issuance using a Monte Carlo option pricing
models, with the following assumptions: stock price volatility 90%,
risk-free rates 1.58%-1.79%, annual dividend yield 0% and expected
life 5.0 years.
In
December 2015, the Company modified
the terms of certain warrants that were issued to the placement
agent as a result of warrants issued from the July Private
Placement that were initially classified as derivative liabilities.
The Company entered into an agreement with the placement agent to
remove the down-round pricing protection provision contained within
the placement agent issued warrants. As a result of this change in
the warrants, the Company considered the guidance of Topic
ASC 815, “Derivatives and
Hedging” (formerly EITF 07-5 Determining Whether an Instrument (or Embedded
Feature) is Indexed to an Entity's Own Stock)) to determine
the appropriate accounting treatment of the warrants and the
balance sheet classification of the warrants as either equity or
liability. The Company determined that the warrants were indexed to
the Company’s stock and the equity classification was
appropriate and no longer qualified as derivative liabilities. This
determination resulted in the reclassification of 3,215,837 warrants from a
liability instrument to equity instruments by removing the
derivative liability and a reclassification to additional paid
in capital. The Company revalued the warrants as of December 31,
2015 and reduced the derivate liability by approximately $526,000.
The warrants were revalued using the Black-Scholes valuation method
using a risk-free rate of 1.5%, stock price of $0.30, exercise
prices ranging from $0.23 to $0.35, expected life of 3.6 to 3.7
years and stock price volatility of 70.0%.
Warrants
classified as derivative liabilities are recorded at their
estimated fair value (see Note 7, below) at the issuance date and
are revalued at each subsequent reporting date. We will continue to
revalue the derivative liability on each subsequent balance sheet
date until the securities to which the derivative liabilities
relate are exercised or expire.
The
Company revalued the warrants as of the end of each reporting
period, and the estimated fair value of the outstanding warrant
liabilities was approximately $3,345,000 and $4,716,000 as of
December 31, 2016 and December 31, 2015,
respectively.
Increases
or decreases in fair value of the derivative liability are included
as a component of total other expense in the accompanying
consolidated statements of operations for the respective
period. The changes to the derivative liability for
warrants resulted in a decrease of $1,371,000 for the year ended
December 31, 2016 and an increase of $39,000 for the year ended
December 31, 2015.
Various
factors are considered in the pricing models we use to value the
warrants, including our current stock price, the remaining life of
the warrants, the volatility of our stock price, and the risk free
interest rate. Future changes in these factors may have a
significant impact on the computed fair value of the warrant
liability. As such, we expect future changes in the fair value of
the warrants to continue and may vary significantly from year to
year. The warrant liability and revaluations have not had a
cash impact on our working capital, liquidity or business
operations.
The
estimated fair value of the warrants were computed as
of December 31, 2016 and as of December 31, 2015 using
Black-Scholes and Monte Carlo option pricing models, using the
following assumptions:
|
|
December 31,
2016
|
December 31,
2015
|
|
Stock price volatility
|
60%-65%
|
70%
|
|
Risk-free interest rates
|
1.34%-1.70%
|
1.76%
|
|
Annual dividend yield
|
0%
|
0%
|
|
Expected life
|
2.6-3.9 years
|
3.6-4.9 years
|
In
addition, Management assessed the probabilities of future
financing assumptions in the valuation models.
Note 7. Fair Value of Financial
Instruments
Fair value measurements are performed in
accordance with the guidance provided by ASC Topic 820,
“Fair Value
Measurements and Disclosures.” ASC Topic 820 defines fair value as the price that
would be received from selling an asset, or paid to transfer a
liability in an orderly transaction between market participants at
the measurement date. Where available, fair value is based on
observable market prices or parameters or derived from such prices
or parameters. Where observable prices or parameters are not
available, valuation models are applied.
ASC
Topic 820 establishes a fair value hierarchy that requires an
entity to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. Assets and
liabilities recorded at fair value in the financial statements are
categorized based upon the hierarchy of levels of judgment
associated with the inputs used to measure their fair value.
Hierarchical levels directly related to the amount of subjectivity
associated with the inputs to fair valuation of these assets and
liabilities, are as follows:
Level
1 – Quoted prices in active markets for identical assets or
liabilities that an entity has the ability to access.
Level
2 – Observable inputs other than quoted prices included in
Level 1, such as quoted prices for similar assets and liabilities
in active markets; quoted prices for identical or similar assets
and liabilities in markets that are not active; or other inputs
that are observable or can be corroborated by observable market
data.
Level
3 – Unobservable inputs that are supportable by little or no
market activity and that are significant to the fair value of the
asset or liability.
The
carrying amounts of the Company’s financial instruments,
including cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities, capital lease obligations and
deferred revenue approximate their fair values based on their
short-term nature. The carrying amount of the Company’s long
term notes payable approximates its fair value based on interest
rates available to the Company for similar debt instruments and
similar remaining maturities.
The
estimated fair value of the contingent consideration related to the
Company's business combinations is recorded using significant
unobservable measures and other fair value inputs and is therefore
classified as a Level 3 financial instrument.
In
connection with the 2015 and 2014 Private Placements, we issued
warrants to purchase shares of our common stock which are accounted
for as derivative liabilities (see Note 6 above.) The estimated
fair value of the warrants is recorded using significant
unobservable measures and other fair value inputs and is therefore
classified as a Level 3 financial instrument.
The
following table details the fair value measurement within the three
levels of the value hierarchy of the Company’s financial
instruments, which includes the Level 3 liabilities (in
thousands):
|
|
Fair Value at December 31, 2016
|
|||
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
Contingent
acquisition debt, current portion
|
$628
|
$-
|
$-
|
$628
|
|
Contingent
acquisition debt, less current portion
|
7,373
|
-
|
-
|
7,373
|
|
Warrant
derivative liability
|
3,345
|
-
|
-
|
3,345
|
|
Total
liabilities
|
$11,346
|
$-
|
$-
|
$11,346
|
|
|
Fair Value at December 31, 2015
|
|||
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
Contingent
acquisition debt, current portion
|
$264
|
$-
|
$-
|
$264
|
|
Contingent
acquisition debt, less current portion
|
7,174
|
-
|
-
|
7,174
|
|
Warrant
derivative liability
|
4,716
|
-
|
-
|
4,716
|
|
Total
liabilities
|
$12,154
|
$-
|
$-
|
$12,154
|
The
following table reflects the activity for the Company’s
warrant derivative liability associated with our 2015 and 2014
Private Placements measured at fair value using Level 3 inputs (in
thousands):
|
|
|
Warrant Derivative Liability
|
|
|
|
Balance at December 31, 2014
|
|
$
|
3,712
|
|
|
Issuance
|
|
|
1,491
|
|
|
Adjustments to estimated fair
value
|
|
|
39
|
|
|
Warrant liability reclassified to
equity
|
|
|
(526
|
)
|
|
Balance at December 31, 2015
|
|
|
4,716
|
|
|
Issuance
|
|
|
-
|
|
|
Adjustments to estimated fair
value
|
|
|
(1,371
|
)
|
|
Balance at December 31, 2016
|
|
$
|
3,345
|
|
The
following table reflects the activity for the Company’s
contingent acquisition liabilities measured at fair value using
Level 3 inputs (in thousands):
|
|
|
Contingent Consideration
|
|
|
|
Balance at December 31, 2014
|
|
$
|
10,472
|
|
|
Level
3 liabilities acquired
|
|
|
1,353
|
|
|
Level
3 liabilities settled
|
|
|
(3,338
|
)
|
|
Adjustments
to liabilities included in earnings
|
|
|
(446
|
)
|
|
Expenses
allocated to profit sharing agreement
|
|
|
(528
|
)
|
|
Adjustment
to purchase price allocation
|
|
|
(75
|
)
|
|
Balance at December 31, 2015
|
|
|
7,438
|
|
|
Level
3 liabilities acquired
|
|
|
3,604
|
|
|
Level
3 liabilities settled
|
|
|
(773
|
)
|
|
Adjustments
to liabilities included in earnings
|
|
|
(1,462
|
)
|
|
Expenses
allocated to profit sharing agreement
|
|
|
(698
|
)
|
|
Adjustment to purchase price
allocation
|
|
|
(108
|
)
|
|
Balance at December 31, 2016
|
|
$
|
8,001
|
|
The
fair value of the contingent acquisition liabilities are evaluated
each reporting period using projected revenues, discount rates, and
projected timing of revenues. Projected contingent payment amounts
are discounted back to the current period using a discount rate.
Projected revenues are based on the Company’s most recent
internal operational budgets and long-range strategic plans.
Increases in projected revenues will result in higher fair value
measurements. Increases in discount rates and the time to payment
will result in lower fair value measurements. Increases (decreases)
in any of those inputs in isolation may result in a significantly
lower (higher) fair value measurement. During the years ended
December 31, 2016 and 2015, the net adjustment to the fair value of
the contingent acquisition debt was a decrease of $1,462,000 and a
decrease of $446,000, respectively.
The
weighted-average of the discount rates used was 18.2% and 17.6% as
of December 31, 2016 and 2015, respectively. The projected year of
payment ranges from 2017 to 2031.
Note 8. Stockholders’ Equity
The
Company’s Articles of Incorporation, as amended, authorize
the issuance of two classes of stock to be designated “Common
Stock” and “Preferred Stock”.
Convertible Preferred Stock
The
Company had 161,135 shares of Series A Convertible Preferred Stock
("Series A Preferred") outstanding as of December 31, 2016 and
December 31, 2015, and accrued dividends of approximately $112,000
and $98,000, respectively. The holders of the Series A Preferred
Stock are entitled to receive a cumulative dividend at a rate of
8.0% per year, payable annually either in cash or shares of the
Company's Common Stock at the Company's election. Shares
of Common Stock paid as accrued dividends are valued at $0.50 per
share. Each share of Series A Preferred is convertible
into two shares of the Company's Common Stock. The holders of
Series A Preferred are entitled to receive payments upon
liquidation, dissolution or winding up of the Company before any
amount is paid to the holders of Common Stock. The holders of
Series A Preferred shall have no voting rights, except as required
by law.
Common Stock
The
Company had 392,698,557 common shares outstanding as of December
31, 2016. The holders of Common Stock are entitled to one vote per
share on matters brought before the shareholders.
Warrant Modification Agreements
In
December 2015, the Company modified
the terms of certain warrants that were issued to the placement
agent as a result of warrants issued from the July Private
Placement that were initially classified as derivative liabilities.
The Company entered into an agreement with the placement agent to
remove the down-round pricing protection provision contained within
the placement agent issued warrants. As a result of this change in
the warrants, the Company considered the guidance of Topic
ASC 815, “Derivatives and
Hedging” (formerly EITF 07-5 Determining Whether an Instrument (or Embedded
Feature) is Indexed to an Entity's Own Stock)) to determine
the appropriate accounting treatment of the warrants and the
balance sheet classification of the warrants as either equity or
liability. The Company determined that the warrants were indexed to
the Company’s stock and that the equity classification was
appropriate and the warrants no longer qualified as derivative
liabilities. This determination resulted in the reclassification of 3,215,837 warrants from a
liability instrument to equity instruments by removing the
derivative liability and a reclassification to additional paid
in capital. The Company revalued the warrants as of December 31,
2015 and reduced the derivate liability by approximately $526,000.
The warrants were revalued using the Black-Scholes valuation method
using a risk-free rate of 1.5%, stock price of $0.30, exercise
prices ranging from $0.23 to $0.35, expected life of 3.6 to 3.7
years and stock price volatility of 70.0%.
In
July 2015, the Company entered into agreements which extended the
life of 2,418,750 warrants classified as equity instruments by two
years after certain conditions were met. The Company recorded a
warrant modification expense, as a result of the extension of the
expiration dates of approximately $253,000, which is included in
general and administrative expense in the Company’s
consolidated statements of operations. The expense was calculated
using the Black-Scholes valuation method and using a risk-free rate
of 0.67%, stock price of $0.31, exercise prices ranging from $0.30
to $0.40, expected life of 2.0 years and stock price volatility of
67.8%.
The
warrants are exercisable into the Company’s common
stock.
There
were no warrant modifications during 2016.
Repurchase of Common Stock
On
December 11, 2012, the Company authorized a share repurchase
program to repurchase up to 15 million of the Company's issued and
outstanding common shares from time to time on the open market or
via private transactions through block trades. Under
this program, for the year ended December 31, 2016, the Company
repurchased a total of 125,708 shares at a weighted-average cost of
$0.28. A total of 3,931,880 shares have been repurchased
to-date at a weighted-average cost of $0.27. The remaining number
of shares authorized for repurchase under the plan as of December
31, 2016 is 11,068,120.
Warrants to Purchase Preferred Stock and Common Stock
As
of December 31, 2016, warrants to purchase 37,988,030 shares
of the Company's common stock at prices ranging from
$0.10 to $0.50 were outstanding. All warrants are exercisable as of
December 31, 2016 and expire at various dates through November 2020
and have a weighted average remaining term of approximately 2.75
years and are included in the table below as of December 31,
2016.
During
the fourth quarter of fiscal year ended December 31, 2015, the
Company issued warrants through a Private Placement, to purchase
10,541,666 and 2,053,571 shares of its common stock, exercisable at
$0.45 and $0.35 per share, respectively, and expire in October 2020
and October 2018, respectively. (See Note 5, above.)
During
the third quarter of fiscal year ended December 31, 2014, the
Company issued warrants through a Private Placement, to purchase
20,445,650 and 1,357,143 shares of its common stock, exercisable at
$0.23 and $0.35 per share, respectively and expire in August 2019.
(See Note 5, above.)
The
following table summarizes warrant activity for the following
periods:
|
Balance
at December 31, 2014
|
35,221,630
|
|
Granted
|
12,595,237
|
|
Expired
/ cancelled
|
(5,335,821)
|
|
Exercised
|
(806,250)
|
|
Balance
at December 31, 2015
|
41,674,796
|
|
Granted
|
-
|
|
Expired
/ cancelled
|
(3,645,516)
|
|
Exercised
|
(41,250)
|
|
Balance
at December 31, 2016
|
37,988,030
|
Advisory agreements
PCG
Advisory Group. On September 1, 2015, the Company entered
into an agreement with PCG Advisory Group (“PCG”),
pursuant to which PCG agreed to provide investor relations services
for six (6) months in exchange for fees paid in cash of $6,000 per
month and 100,000 shares of restricted common stock to be issued in
accordance with the agreement upon successfully meeting certain
criteria in accordance with the agreement. In connection
with this agreement, the Company accrued for the estimated per
share value on the agreement date at $0.32 per share, the price of
Company’s common stock at September 1, 2015 for a total of
$32,000 due to PCG. The fair values of the shares was recorded as
prepaid advisory fees and were included in prepaid expenses and
other current assets on the Company’s consolidated balance
sheets and were amortized on a pro-rata basis over the term of the
contract. On June 28, 2016 the Company issued PCG 100,000
restricted shares of our common stock in accordance with the
performance of the agreement as previously accrued. These shares
were valued at $0.30 per share, based on the price per share of the
Company’s common stock on June 28, 2016. During the year ended December 31, 2016 and 2015
the Company recorded expense of approximately $9,000 and $21,000
respectively, in connection with amortization of the stock
issuance.
On March 1, 2016, the Company signed a renewal
contract with PCG, pursuant to which PCG agreed to provide investor
relations services for six (6) months in exchange for fees paid in
cash of $6,000 per month and 100,000 shares of restricted common
stock to be issued in accordance with the agreement upon
successfully meeting certain criteria in accordance with the
agreement. In connection with this agreement, the Company has
accrued for the estimated per share value on the agreement date at
$0.30 per share, the price of Company’s common stock at March
1, 2016 for a total of $30,000 due to PCG. The fair values of the
shares was recorded as prepaid advisory fees and are included in
prepaid expenses and other current assets on the Company’s
consolidated balance sheets and will be amortized on a pro-rata
basis over the term of the contract. During the year ended
December 31, 2016, the Company recorded expense of
approximately $30,000 in connection with amortization of the stock
issuance. There were no amortization expenses for the
year ended December 31,
2015.
On September 1, 2016, the Company signed a renewal
contract with PCG, pursuant to which PCG agreed to provide investor
relations services for six (6) months in exchange for fees paid in
cash of $6,000 per month and 100,000 shares of restricted common
stock to be issued in accordance with the agreement upon
successfully meeting certain criteria in accordance with the
agreement. In connection with this agreement, the Company has
accrued for the estimated per share value on the agreement date at
$0.29 per share, the price of Company’s common stock at
September 1, 2016 for a total of $29,000 due to PCG. The fair
values of the shares was recorded as prepaid advisory fees and are
included in prepaid expenses and other current assets on the
Company’s consolidated balance sheets and will be amortized
on a pro-rata basis over the term of the contract. During the
year ended December 31, 2016, the Company recorded
expense of approximately $19,000 in connection with amortization of
the stock issuance. There were no amortization expenses for
the year ended December 31,
2015. As of December 31, 2016,
the total remaining balance of the prepaid investor relation
services is approximately $10,000.
Shares Issued in Private Placement
On
January 29, 2015, we completed our January 2015 Private Placement
pursuant to which we entered into Notes Payable Agreements (see
Note 5, above) and issued 2,450,000 shares of our common stock. The
shares of common stock issued under the January 2015 Private
Placement were offered and issued without registration under the
Securities Act of 1933, as amended, (the “1933 Act”).
The securities may not be sold, transferred or assigned in the
absence of an effective registration statement for the securities
under the 1933 Act, or an opinion of counsel, in form, substance
and scope customary for opinions of counsel in comparable
transaction, that registration in required under the 1933 Act or
unless sold pursuant to Rule 144 under the 1933 Act.
Stock Options
On
May 16, 2012, the Company established the 2012 Stock Option Plan
(“Plan”) authorizing the granting of options for up to
40,000,000 shares of Common Stock. The purpose of the Plan is to
promote the long-term growth and profitability of the Company by
(i) providing key people and consultants with incentives to improve
stockholder value and to contribute to the growth and financial
success of the Company and (ii) enabling the Company to attract,
retain and reward the best available persons for positions of
substantial responsibility. The Plan permits the granting of stock
options, including non-qualified stock options and incentive stock
options qualifying under Section 422 of the Code, in any
combination (collectively, “Options”). At December 31,
2016, the Company had 6,300,825 shares of Common Stock available
for issuance under the Plan.
A
summary of the Plan Options for the year ended December 31, 2016 is
presented in the following table:
|
|
Number of
Shares
|
Weighted
Average
Exercise Price
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
Outstanding
December 31, 2014
|
28,918,500
|
$0.21
|
$786
|
|
Issued
|
1,124,250
|
0.31
|
|
|
Canceled/expired
|
(6,151,475)
|
0.22
|
|
|
Exercised
|
(369,675)
|
0.21
|
-
|
|
Outstanding
December 31, 2015
|
23,521,600
|
0.22
|
2,044
|
|
Issued
|
12,792,250
|
0.27
|
|
|
Canceled
/ expired
|
(2,981,350)
|
0.24
|
|
|
Exercised
|
(102,500)
|
0.21
|
-
|
|
Outstanding
December 31, 2016
|
33,230,000
|
$0.24
|
$1,346
|
|
Exercisable
December 31, 2016
|
18,830,000
|
$0.23
|
$993
|
The
weighted-average fair value per share of the granted options for
the years ended December 31, 2016 and 2015 was approximately
$0.15.
The
following table sets forth the exercise price range, number of
shares, weighted-average exercise price and remaining contractual
lives at December 31, 2016:
|
Weighted
|
|
Weighted
|
Weighted
|
|
|
Average
|
|
Average
|
Average
|
|
|
Exercise Price
|
Options
|
Exercise Price
|
Remaining Life
|
|
|
Outstanding:
|
|
|
|
|
|
$
|
$0.16 - 0.21
|
6,852,500
|
$0.19
|
7.02
|
|
$
|
$0.21 - 0.23
|
11,245,000
|
$0.22
|
5.28
|
|
$
|
$0.23 - 0.35
|
14,917,750
|
$0.27
|
7.81
|
|
$
|
$0.35 - 0.40
|
214,750
|
$0.38
|
1.44
|
|
Exercisable:
|
|
|
|
|
|
$
|
$0.16 - 0.21
|
3,452,250
|
$0.19
|
6.48
|
|
$
|
$0.21 - 0.23
|
11,245,000
|
$0.22
|
5.28
|
|
$
|
$0.23 - 0.35
|
3,917,750
|
$0.27
|
1.68
|
|
$
|
$0.35 - 0.40
|
214,750
|
$0.38
|
1.44
|
Total
stock based compensation expense included in the consolidated
statements of operations was charged as follows in
thousands:
|
|
Years ended December 31,
|
|
|
|
2016
|
2015
|
|
Cost
of revenues
|
$10
|
$17
|
|
Distributor
compensation
|
215
|
158
|
|
Sales
and marketing
|
10
|
28
|
|
General
and administrative
|
160
|
252
|
|
|
$395
|
$455
|
As
of December 31, 2016, there was approximately $2,084,000 of total
unrecognized compensation expense related to unvested share-based
compensation arrangements granted under the Plan. The expense is
expected to be recognized over a weighted-average period of 4.42
years.
The
Company uses the Black-Scholes option-pricing model
(“Black-Scholes model”) to estimate the fair value of
stock option grants. 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. The following were the factors used in
the Black Scholes model to calculate the compensation
cost:
|
|
Years ended December 31,
|
|
|
|
2016
|
2015
|
|
Dividend
yield
|
-
|
-
|
|
Stock
price volatility
|
57%- 90%
|
66% - 77%
|
|
Risk-free
interest rate
|
0.71% - 2.25%
|
0.56%- 1.06%
|
| Expected life of options |
2.6 - 6.5 years
|
1.5 - 5.0 years
|
Approval of the Amendment of the Company’s 2012 Stock Option
Plan
On February 23, 2017, the Company’s board of
directors received the approval
of our stockholders, to amend the 2012 Stock Option Plan
(“Plan”) to increase the number of shares of common
stock available for grant and to expand the types of awards
available for grant under the Plan.
The
amendment of the Plan increases the number of shares of the
Company’s common stock that may be delivered pursuant to
awards granted during the life of the plan from 40,000,000 to
80,000,000 shares authorized. The Plan currently provides only for
the grant of options; however the Plan amendments will allow for
the grant of: (i) incentive stock options; (ii) nonqualified stock
options; (iii) stock appreciation rights; (iv) restricted stock;
and (v) other stock-based and cash-based awards to eligible
individuals. The terms of the awards will be set forth in an award
agreement, consistent with the terms of the Plan. No stock option
is exercisable later than ten years after the date it is
granted.
Note 9. Commitments and Contingencies
Credit Risk
The
Company maintains cash balances at various financial institutions
primarily located in California. Accounts at the U.S. institutions
are secured, up to certain limits, by the Federal Deposit Insurance
Corporation. At times, balances may exceed federally insured
limits. The Company has not experienced any losses in such
accounts. Management believes that the Company is not exposed to
any significant credit risk with respect to its cash and cash
equivalent balances.
Litigation
We are, from time to time, the subject of claims and suits arising
out of matters occurring during the operation of our business. We
are not presently party to any legal proceedings that, if
determined adversely to us, would individually or taken together
have a material adverse effect on our business, operating results,
financial condition or cash flows. Regardless of the outcome,
litigation can have an adverse impact on us because of defense and
settlement costs, diversion of management resources and other
factors.
Leases
The
Company leases its domestic and certain foreign facilities and
other equipment under non-cancelable operating lease agreements,
which expire at various dates through 2023. In addition to the
minimum future lease commitments presented below, the leases
generally require that the Company pay property taxes, insurance,
maintenance and repair costs. Such expenses are not included in the
operating lease amounts.
At
December 31, 2016, future minimum lease commitments are as
follows (in thousands):
|
2017
|
$1,138
|
|
2018
|
930
|
|
2019
|
634
|
|
2020
|
557
|
|
2021
|
571
|
|
Thereafter
|
748
|
|
Total
|
$4,578
|
Rent
expense was $1,558,000 and $1,043,000 for the years ended December
31, 2016 and 2015, respectively.
In
connection with the Company's 2011 acquisition of FDI, it assumed
mortgage guarantee obligations made by FDI on the building
previously housing our New Hampshire office. The balance
of the mortgages is approximately $1,806,000 as of December 31,
2016 (see Note 3, above).
The
Company purchases its inventory from multiple third-party suppliers
at competitive prices. The Company made purchases from three
vendors, which individually comprised more than 10% of total
purchases and in aggregate approximated 54% and 61% of total
purchases for the years ended December 31, 2016 and 2015,
respectively.
The
Company has purchase obligations related to minimum future purchase
commitments for green coffee to be used in the Company’s
commercial coffee segment for roasting. Each individual
contract requires the Company to purchase and take delivery of
certain quantities at agreed upon prices and delivery
dates. The contracts as of December 31, 2016, have
minimum future purchase commitments of approximately $1,164,000,
which are to be delivered in 2017. The contracts
contain provisions whereby any delays in taking delivery of the
purchased product will result in additional charges related to the
extended warehousing of the coffee product. The fees can
average approximately $0.01 per pound for every month of delay,
to-date the Company has not incurred such
fees.
Note 10. Income Taxes
The
income tax provision contains the following components (in
thousands):
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
Current
|
|
|
|
Federal
|
$3
|
$66
|
|
State
|
(18)
|
(161)
|
|
Foreign
|
150
|
76
|
|
Total
current
|
135
|
(19)
|
|
Deferred
|
|
|
|
Federal
|
$(304)
|
$1,307
|
|
State
|
(21)
|
96
|
|
Foreign
|
-
|
-
|
|
Total
deferred
|
(325)
|
1,403
|
|
Net
income tax (benefit) expense
|
$(190)
|
$1,384
|
Income
(loss) before income taxes relating to non-U.S. operations were
$590,000 and $(62,000) in the years ended December 31, 2016
and 2015, respectively.
The
provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income
tax rate to pretax income (loss) as a result of the following
differences:
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
Federal
statutory rate
|
$(206)
|
$(113)
|
|
|
|
|
|
Adjustments
for tax effects of:
|
|
|
|
Foreign
rate differential
|
(35)
|
26
|
|
State
taxes, net
|
(112)
|
(241)
|
|
Other
nondeductible items
|
(50)
|
1,162
|
|
Change
in foreign entity tax status
|
(77)
|
-
|
|
Rate
change
|
6
|
91
|
|
Deferred
tax asset adjustment
|
(201)
|
101
|
|
Change
in valuation allowance
|
183
|
161
|
|
Foreign
tax credit
|
275
|
-
|
|
Undistributed
foreign earnings
|
17
|
197
|
|
Other
|
10
|
-
|
|
|
$(190)
|
$1,384
|
Significant
components of the Company's deferred tax assets and liabilities are
as follows (in thousands):
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
Deferred
tax assets:
|
|
|
|
Amortizable
assets
|
$1,117
|
$1,146
|
|
Inventory
|
726
|
608
|
|
Accruals
and reserves
|
222
|
174
|
|
Stock
options
|
285
|
217
|
|
Net
operating loss carry-forward
|
3,554
|
2,387
|
|
Credit
carry-forward
|
309
|
581
|
|
Total
deferred tax asset
|
6,213
|
5,113
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
Prepaids
|
(383)
|
(71)
|
|
Other
|
(608)
|
(521)
|
|
Depreciable
assets
|
(464)
|
(270)
|
|
Total
deferred tax liability
|
(1,455)
|
(862)
|
|
Net
deferred tax asset
|
4,758
|
4,250
|
|
Less
valuation allowance
|
(1,901)
|
(1,718)
|
|
Net
deferred tax liabilities
|
$2,857
|
$2,532
|
The
Company has determined through consideration of all positive and
negative evidence that the US federal deferred tax assets are more
likely than not to be realized. The Company does not
have a valuation allowance in the US Federal tax
jurisdiction. A valuation allowance remains on certain
state and foreign tax attributes that are likely to expire before
realization. The valuation allowance increased approximately
$183,000 for the year ended December 31, 2016 and increased
approximately $161,000 for the year ended December 31,
2015.
At
December 31, 2016, the Company had approximately $4,611,000 in
federal net operating loss carryforwards, which begin to expire in
2028, and approximately $24,761,000 in net operating loss
carryforwards from various states. The Company had
approximately $1,697,000 in net operating losses in foreign
jurisdictions.
Pursuant
to Internal Revenue Code ("IRC") Section 382, use of net operating
loss and credit carryforwards may be limited if the Company
experienced a cumulative change in ownership of greater than 50% in
a moving three-year period. Ownership changes could
impact the Company's ability to utilize the net operating loss and
credit carryforwards remaining at an ownership change
date. The Company has not completed a Section 382
study.
The
Company has analyzed the impact of repatriating earnings from its
foreign subsidiaries and has determined that the impact is
immaterial. The Company does not assert indefinite reinvestment of
earnings from its foreign subsidiaries. Therefore, a deferred tax
liability has been recorded. As of December 31, 2016 the deferred
tax liability net of tax deemed paid is approximately
$310,000.
The
Company has accounted for uncertain tax position related to states.
The Company accounts for interest expense and penalties related to
income tax issues as income tax expense. Accordingly, interest
expense and penalties associated with an uncertain tax position are
included in the income tax provision. The total amount of accrued
interest and penalties as of December 31, 2016 are approximately
$1,000. Income tax expense as of December 31, 2016, included an
increase in state income tax expense of approximately $4,000
related to uncertain tax positions.
Note 11. Segment and Geographical
Information
The
Company offers a wide variety of products to support a healthy
lifestyle including; nutritional supplements, sports and energy
drinks, health and wellness, weight loss, gourmet coffee, skincare
and cosmetics, lifestyle services, digital products including scrap
books and memory books, packaged foods, pharmacy discount cards,
and clothing and jewelry lines. The Company’s business is
classified by management into two reportable segments: direct
selling and commercial coffee.
The
Company’s segments reflect the manner in which the business
is managed and how the Company allocates resources and assesses
performance. The Company’s chief operating decision maker is
the Chief Executive Officer. The Company’s chief operating
decision maker evaluates segment performance primarily based on
revenue and segment operating income. The principal measures and
factors the Company considered in determining the number of
reportable segments were revenue, gross margin percentage, sales
channel, customer type and competitive risks. In addition, each
reporting segment has similar products and customers, similar
methods of marketing and distribution and a similar regulatory
environment.
The
accounting policies of the segments are consistent with those
described in the summary of significant accounting policies.
Segment revenue excludes intercompany revenue eliminated in the
consolidation. The following tables present certain financial
information for each segment (in thousands):
|
|
Years ended
|
|
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
Revenues
|
|
|
|
Direct
selling
|
$145,418
|
$138,927
|
|
Commercial
coffee
|
17,249
|
17,670
|
|
Total
revenues
|
$162,667
|
$156,597
|
|
Gross
profit
|
|
|
|
Direct
selling
|
$97,219
|
$93,613
|
|
Commercial
coffee
|
918
|
(644)
|
|
Total
gross profit
|
$98,137
|
$92,969
|
|
Operating
income (loss)
|
|
|
|
Direct
selling
|
$4,564
|
$8,594
|
|
Commercial
coffee
|
(2,049)
|
(3,188)
|
|
Total
operating income
|
$2,515
|
$5,406
|
|
Net
income (loss)
|
|
|
|
Direct
selling
|
$1,894
|
$3,144
|
|
Commercial
coffee
|
(2,292)
|
(4,850)
|
|
Total
net loss
|
$(398)
|
$(1,706)
|
|
Capital
expenditures
|
|
|
|
Direct
selling
|
$1,922
|
$1,396
|
|
Commercial
coffee
|
903
|
2,223
|
|
Total
capital expenditures
|
$2,825
|
$3,619
|
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
Total
assets
|
|
|
|
Direct
selling
|
$40,127
|
$36,907
|
|
Commercial
coffee
|
25,881
|
24,422
|
|
Total
assets
|
$66,008
|
$61,329
|
Total
tangible assets, net located outside the United States are
approximately $5.4 million as of December 31, 2016. For the year
ended December 31, 2015, total assets, net located outside the
United States were approximately $5.2 million.
The
Company conducts its operations primarily in the United States. For
the year ended December 31, 2016 approximately 9% of the
Company’s sales were derived from sales outside the United
States. As compared to approximately 7% for the year ended December
31, 2015. The following table displays revenues attributable to the
geographic location of the customer (in thousands):
|
|
Years ended
|
|
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
Revenues
|
|
|
|
United
States
|
$147,548
|
$145,259
|
|
International
|
15,119
|
11,338
|
|
Total
revenues
|
$162,667
|
$156,597
|
Note 12. Subsequent Events
None.
Item 9. Changes in
and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
Item 9A. Controls
and Procedures
Evaluation of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms, and
that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that any
controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired
control objectives.
As
required by Rule 13a-15(b) under the Exchange Act, our management
conducted an evaluation, under the supervision and with the
participation of our Chief Executive Officer and our Chief
Financial Officer, of the effectiveness of the design and operation
of our disclosure controls and procedures as of the end of the
period covered by this Annual Report. Based on the foregoing
evaluation, our principal executive officer and principal financial
officer concluded that as of the end of the period covered by this
report our disclosure controls and procedures were effective to
ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act, is recorded,
processed, summarized and reported, within the time periods
specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to the our management,
including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required
disclosure.
Management’s Report on Internal Control Over Financial
Reporting
Our management is
responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Exchange Act Rules
13a-15(f) and 15d-15(f). With the participation of our Chief
Executive Officer and Chief Financial Officer, management conducted
an evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2016 based on the
framework and criteria established by the Committee of
Sponsoring Organizations of the Treadway Commission
(“COSO”) in Internal Control-Integrated
Framework (2013) . Based on its evaluation
under this framework, our management concluded that our internal
control over financial reporting was effective as of December 31,
2016.
Our
management, including our Chief Executive Officer and Chief
Financial Officer, does not expect that our disclosure controls and
procedures and our internal control processes will prevent all
error and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of
error or fraud, if any, within our company have been detected.
These inherent limitations include the realities that judgments in
decision-making can be faulty, and that the breakdowns can occur
because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion
of two or more people, or by management override of the control.
The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions. Over time,
controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud
may occur and may not be detected. However, these inherent
limitations are known features of the financial reporting process.
Therefore, it is possible to design into the process safeguards to
reduce, though not eliminate, this risk.
Changes in Our Controls
There
were no changes in our internal controls over financial reporting
during our most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect our
internal controls over financial reporting.
This Annual Report
on Form 10-K does not include an attestation report of the
Company’s registered public accounting firm regarding
internal control over financial
reporting. Management’s report was not subject to
attestation by the Company’s registered public accounting
firm pursuant to rules of the SEC that permit the Company to
provide only management’s report in this Annual Report on
Form 10-K.
Item 9B. Other
Information
None.
PART III
Item 10. Directors, Executive
Officers and Corporate Governance
Pursuant
to our bylaws, the number of directors is fixed and may be
increased or decreased from time to time by resolution of our Board
of Directors, or the Board. The Board has fixed the number of
directors at five members.
Information Regarding the Board of Directors
Information
with respect to our current directors is shown below.
|
Name
|
|
Age
|
|
Director Since
|
|
Position
|
|
|
Stephan Wallach
|
|
|
50
|
|
2011*
|
|
Chairman and Chief Executive Officer
|
|
David Briskie
|
|
|
56
|
|
2011
|
|
President, Chief Financial Officer and Director
|
|
Michelle Wallach
|
|
|
46
|
|
2011*
|
|
Chief Operating Officer and Director
|
|
Richard Renton
|
|
|
61
|
|
2012
|
|
Director
|
|
William Thompson
|
|
|
56
|
|
2013
|
|
Director
|
* Since 1996, Stephen Wallach and
Michelle Wallach have been directors of AL Global, Corporation the
private company that merged with and into Javalution Coffee
Company, our predecessors in 2011.
Stephan Wallach, Chief Executive Officer and
Chairman of the Board
Mr.
Stephan Wallach was appointed to the position of Chief Executive
Officer on July 11, 2011 pursuant to the terms of the merger
agreement between Youngevity® and Javalution. He previously
served as President and Chief Executive Officer of AL Global
Corporation. He has served as a director of our Company since
inception and was appointed Chairman of the Board on January 9,
2012. In 1996, Mr. Wallach and the Wallach family together launched
our Youngevity® division and served as its co-founder and
Chief Executive Officer from inception until the merger with
Javalution. Mr. Wallach’s extensive knowledge
about our business operations and our products makes him an
exceptional board member.
David Briskie, President, Chief Financial
Officer and Director
Mr.
David Briskie was appointed to the position of President on October
30, 2015 and Chief Financial Officer on May 15, 2012. Prior to
that, Mr. Briskie served as President of Commercial Development, a
position he was appointed to on July 11, 2011 pursuant to the terms
of the merger agreement between Youngevity® and Javalution.
From February 2007 until the merger he served as the Chief
Executive Officer and director of Javalution and since September
2007 has served as the Managing Director of CLR Roasters. Prior to
joining Javalution in 2007, Mr. Briskie had an 18-year career with
Drew Pearson Marketing (“DPM”), a consumer product
company marketing headwear and fashion accessories. He began his
career at DPM in 1989 as Executive Vice President of Finance and
held numerous positions in the company, including vice president of
marketing, chief financial officer, chief operating officer and
president. Mr. Briskie graduated magna cum laude from
Fordham University with a major in marketing and finance. Mr.
Briskie’s experience in financial matters, his overall
business understanding, as well as his familiarity and knowledge
regarding public companies make him an exceptional board
member.
Michelle G. Wallach, Chief Operating Officer and
Director
Ms.
Michelle Wallach was appointed to the position of Chief Operating
Officer on July 11, 2011 pursuant to the terms of the merger
agreement between Youngevity® and Javalution. She
previously served as Corporate Secretary and Manager of AL Global
Corporation. She has a background in network marketing, including
more than 10 years in distributor management. Her career in network
marketing began in 1991 in Portland, Oregon, where she developed a
nutritional health product distributorship. In 1996, Ms. Wallach
and the Wallach family together launched our Youngevity®
division and served as its co-founder and Chief Operations Officer
from inception until the merger with Javalution. Ms. Wallach has an
active role in promotion, convention and event planning, domestic
and international training, and product development. Ms.
Wallach’s prior experience with network marketing and her
extensive knowledge about our business operations and our products
make her an exceptional board member.
Richard Renton, Director
Mr.
Richard Renton was appointed to our Board of Directors on January
9, 2012, and currently serves on the Youngevity Medical and
Athletic Advisory Boards. For the past five years, Mr. Renton owned
his own business providing nutritional products to companies like
ours. The Company purchases certain products from Mr.
Renton’s company Northwest Nutraceuticals,
Inc. Mr. Renton graduated from Portland State University
with quad majors in Sports Medicine, Health, Physical Education,
and Chemistry. He has served as an Associate Professor at PSU in
Health and First Aid, and was the Assistant Athletic Trainer for
PSU, the Portland Timbers Soccer Team, and the Portland Storm
Football team. Mr. Renton is a board certified Athletic Trainer
with the National Athletic Trainers Association. Mr. Renton’s
understanding of nutritional products makes him an exceptional
board member.
William Thompson, Director
Mr.
William Thompson was appointed to our Board of Directors on June
10, 2013 and currently serves as the Chief Financial Officer of
Broadcast Company of the Americas, which operates three radio
stations in San Diego, California. He served as Corporate
Controller for the Company from 2011 to March 2013 and for Breach
Security, a developer of web application firewalls, from 2007 to
2010. Prior to 2007, Mr. Thompson was Divisional Controller
for Mediaspan Group and Chief Financial Officer of Triathlon
Broadcasting Company. Mr. Thompson’s achievements in
financial matters and his overall business understanding make him
an exceptional board member.
Family Relationships
Other
than Stephan Wallach and Michelle Wallach, who are husband and
wife, none of our officers or directors has a family relationship
with any other officer or director.
INFORMATION REGARDING THE COMMITTEES OF THE BOARD OF
DIRECTORS
Committees of the Board of Directors
The
Board of Directors has a standing Audit Committee, Compensation
Committee, and Investment Committee. The following table shows the
directors who are currently members or Chairman of each of these
committees.
|
Board Members
|
|
Audit
Committee
|
|
|
Compensation
Committee
|
|
|
Investment
Committee
|
|
|
Stephan
Wallach
|
|
-
|
|
|
Chairman
|
|
|
Member
|
|
|
David
Briskie
|
|
-
|
|
|
Member
|
|
|
Chairman
|
|
|
Michelle
Wallach
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Richard
Renton
|
|
-
|
|
|
-
|
|
|
-
|
|
|
William
Thompson
|
|
Member
|
|
|
-
|
|
|
-
|
|
Board Committees
Compensation
Committee. The Compensation
Committee of the Board of Directors currently consists of Stephan
Wallach (Chair) and David Briskie. The functions of the
Compensation Committee include the approval of the compensation
offered to our executive officers and recommending to the full
Board of Directors the compensation to be offered to our directors,
including our Chairman. None of the members of the Compensation
Committee are independent under the listing standards of The NASDAQ
Stock Market. In addition, the members of the Compensation
Committee qualify as “non-employee directors” for
purposes of Rule 16b-3 under the Exchange Act and as “outside
directors” for purposes of Section 162(m) of the
Internal Revenue Code of 1986, as amended. The Compensation
Committee is governed by a written charter approved by the Board of
Directors, a copy of which is available on our website at
www.ygyi.com.
Audit
Committee. The Audit Committee
of the Board of Directors currently consists of William Thompson.
The functions of the Audit Committee include the retention of our
independent registered public accounting firm, reviewing and
approving the planned scope, proposed fee arrangements and results
of the Company’s annual audit, reviewing the adequacy of the
Company’s accounting and financial controls and reviewing the
independence of the Company’s independent registered public
accounting firm. The Board has determined that William Thompson is
an “independent director” under the listing standards
of The NASDAQ Stock Market. The Board of Directors has also
determined that William Thompson is an “audit committee
financial expert” within the applicable definition of the
SEC. The Audit Committee is governed by a written charter approved
by the Board of Directors, a copy of which is available on our
website at www.ygyi.com.
Investment
Committee. The Investment
Committee of the Board of Directors currently consists of David
Briskie (Chair) and Stephan Wallach as a member. This Committee
determines, approves, and reports to the Board of Directors on all
elements of acquisitions and investments for the
Company.
We
do not currently have a separate nominating committee and instead
our full board of directors performs the functions of a nominating
committee. Due to our size we believe that this is an appropriate
structure.
Board Leadership Structure
We
currently have the same person serving as our Chairman of the Board
and Chief Executive Officer and we do not have a formal policy on
whether the same person should (or should not) serve as both the
Chief Executive Officer and Chairman of the Board. Mr.
Briskie currently serves as our President. Due to the
size of our company, we believe that this structure is
appropriate. Mr. Wallach has served as the Chairman of
the Board and Chief Executive Officer since AL Global Corporation,
the private company that he owned, merged into our predecessor in
2011 and he served as the Chairman of the Board and Chief Executive
Officer of AL Global Corporation, since inception. In
serving as Chairman of the Board, Mr. Wallach serves as a
significant resource for other members of management and the Board
of Directors.
We
do not have a separate lead director. We believe the combination of
Mr. Wallach as our Chairman of the Board and Chief Executive
Officer has been an effective structure for our company. Our
current structure is operating effectively to foster productive,
timely and efficient communication among the independent directors
and management. We do have active participation in our
committees by our independent directors. Each committee performs an
active role in overseeing our management and there are complete and
open lines of communication with the management and independent
directors.
Oversight of Risk Management
The
Board of Directors has an active role, as a whole and also at the
committee level, in overseeing management of our
risks. The Board of Directors regularly reviews
information regarding our strategy, finances and operations, as
well as the risks associated with each.
Overview
Corporate Governance Guidelines
We
are committed to maintaining the highest standards of business
conduct and corporate governance, which we believe are fundamental
to the overall success of our business, serving our stockholders
well and maintaining our integrity in the marketplace. Our
Corporate Governance Guidelines and Code of Business Conduct and
Ethics, together with our Certificate of Incorporation, Bylaws and
the charters of our Board Committees, form the basis for our
corporate governance framework. As discussed above, our Board of
Directors has established three standing committees to assist it in
fulfilling its responsibilities to the Company and its
stockholders: the Audit Committee, the Compensation Committee and
the Investment Committee. The Board of Directors performs the
functions typically assigned to a Nominating and Corporate
Governance Committee.
Our Corporate Governance Guidelines are designed
to ensure effective corporate governance of our company. Our
Corporate Governance Guidelines cover topics including, but not
limited to, director qualification criteria, director
responsibilities, director compensation, director orientation and
continuing education, communications from stockholders to the
Board, succession planning and the annual evaluations of the Board
and its Committees. Our Corporate Governance Guidelines are
reviewed regularly by the Board and revised when appropriate. The
full text of our Corporate Governance Guidelines can be found in
the “Corporate Governance” section of our website
accessible at www.ygyi.com.
A printed copy may also be obtained by any stockholder upon request
to our Corporate Secretary.
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and
Ethics that applies to all of our employees, officers and
directors. This Code constitutes a “code of ethics” as
defined by the rules of the SEC. This Code also contains
“whistle blower” procedures adopted by our Audit
Committee regarding the receipt, retention and treatment of
complaints related to accounting, internal accounting controls or
auditing matters and procedures for confidential anonymous employee
complaints related to questionable accounting or auditing matters.
Copies of the code may be obtained free of charge from our
website, www.ygyi.com.
Any amendments to, or waivers from, a provision of our code of
ethics that applies to any of our executive officers will be posted
on our website in accordance with the rules of the
SEC.
Director Independence
Our
common stock is not quoted or listed on any national exchange or
interdealer quotation system with a requirement that a majority of
our Board of Directors is independent and therefore we are not
subject to any director independence requirements. However,
for purposes of determining independence we use the definition
applied by The NASDAQ Stock Market, our Board of Directors has
determined that William Thompson is our only independent director
in accordance with such definition.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section 16 of the Exchange Act and the related rules of the
Securities and Exchange Commission require our directors and
executive officers and beneficial owners of more than 10% of our
common stock to file reports, within specified time periods,
indicating their holdings of and transactions in our common stock
and derivative securities. Based solely on a review of such reports
provided to us and written representations from such persons
regarding the necessity to file such reports, we are not aware of
any failures to file reports or report transactions in a timely
manner during our fiscal year ended December 31, 2016 other than
late filings of (i) a Form 3, a Form 4 which reported six late
transactions and a Form 4 which reported an option issuance, (ii) a
Form 4 for Mr. Briskie which reported an option issuance, and
(iii)a Form 4 for Mr. Thompson which reported an option
issuance.
Our
Board regularly assesses the appropriate size of our Board, and
whether any vacancies on our Board are expected due to retirement
or otherwise. In the event that vacancies are anticipated, or
otherwise arise, the Board will consider various potential
candidates who may come to the attention of the Board through
current Board members, professional search firms, stockholders or
other persons. Each candidate brought to the attention of the
Board, regardless of who recommended such candidate, is considered
on the basis of the criteria set forth in our corporate governance
guidelines. As stated above, our Board will consider candidates
proposed for nomination by our significant stockholders.
Stockholders may propose candidates by submitting the names and
supporting information to: Board of Directors in care of the
Corporate Secretary, Youngevity International, Inc. 2400 Boswell,
Chula Vista, California 91914. Supporting information should
include (a) the name and address of the candidate and the proposing
stockholder, (b) a comprehensive biography of the candidate and an
explanation of why the candidate is qualified to serve as a
director taking into account the criteria identified in our
corporate governance guidelines, (c) proof of ownership, the class
and number of shares, and the length of time that the shares of our
voting securities have been beneficially owned by each of the
candidate and the proposing stockholder, and (d) a letter signed by
the candidate stating his or her willingness to serve, if
elected.
Item 11. Executive
Compensation
Summary Compensation Table
The
following table sets forth a summary of cash and non-cash
compensation awarded, earned or paid for services rendered to us
during the years ended December 31, 2016 and 2015 by our
“named executive officers,” consisting of (i) each
individual serving as principal executive officer during the year
ended December 31, 2016, and (ii) our Chief Financial
Officer/Chief Operating Officer, our other executive
officer.
|
|
Year
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Option
Awards(2)
($)
|
|
|
Total
($)
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Stephan Wallach (1)
|
2016
|
|
|
282,500
|
|
|
|
179,730
|
|
|
|
-
|
|
|
|
462,230
|
|
|
Chief Executive Officer
|
2015
|
|
|
271,519
|
|
|
|
89,000
|
|
|
|
-
|
|
|
|
360,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Briskie (1) (2)
|
2016
|
|
|
282,500
|
|
|
|
179,730
|
|
|
|
748,500
|
|
|
|
1,210,730
|
|
|
President and Chief Financial Officer
|
2015
|
|
|
271,519
|
|
|
|
89,000
|
|
|
|
-
|
|
|
|
360,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michelle Wallach (1)
|
2016
|
|
|
192,660
|
|
|
|
179,730
|
|
|
|
-
|
|
|
|
372,390
|
|
|
Chief Operating Officer
|
2015
|
|
|
200,070
|
|
|
|
57,500
|
|
|
|
-
|
|
|
|
257,570
|
|
|
(1)
|
Mr. Stephan Wallach, Mr. David Briskie, and Ms. Michelle Wallach
have direct and or indirect (beneficially) distributor positions in
our Company that pay income based on the performance of those
distributor positions in addition to their base salaries, and the
people and or companies supporting those positions based upon the
contractual agreements that each and every distributor enter into
upon engaging in the network marketing business. The contractual
terms of these positions are the same as those of all the other
individuals that become distributors in our Company. There are no
special circumstances for these officers/directors. Mr. Stephan
Wallach and Ms. Michelle Wallach received or beneficially received
$357,002 and $312,410 in 2016 and 2015, respectively related to
their distributor positions, which are not included above. Mr.
Briskie beneficially received $23,889 and $28,010 in 2016 and 2015,
respectively, related to his spouse’s distributor position,
which is not included above.
|
|
(2)
|
We use a Black-Scholes option-pricing model (Black-Scholes model)
to estimate the fair value of the stock option grant. The amounts
do not represent the actual amounts paid to or released by any of
the Named Executive Officers during the respective periods. For a
discussion of the assumptions used in computing this valuation, see
Note 8 of the Notes to Consolidated Financial Statements in our
Annual Report on Form 10-K for the fiscal year ended December 31,
2016.
|
Outstanding Equity Awards at Fiscal Year-End
The
table below reflects all outstanding equity awards made to each of
the named executive officers that are outstanding as of December
31, 2016. We currently grant stock-based awards pursuant
to our 2012 Stock Option Plan.
|
Name
|
|
Grant Date
|
|
Number of Securities
Underlying
Unexercised Options
Exercisable
|
|
Number of Securities
Underlying
Unexercised Options
Unexercisable
|
|
Option
Exercise
Price ($)
|
|
Option
Expiration
Date
|
|
Stephan Wallach
|
|
5/31/2012
|
|
2,500,000
|
|
-
|
|
0.22
|
|
5/31/2022
|
|
David Briskie
|
|
5/31/2012
|
|
5,000,000
|
|
-
|
|
0.22
|
|
5/31/2022
|
|
|
|
10/31/2013
|
|
600,000
|
|
400,000
|
|
0.18
|
|
10/31/2023
|
|
|
|
10/30/2014
|
|
800,000
|
|
1,200,000
|
|
0.19
|
|
10/30/2024
|
|
|
|
12/27/2016
|
|
-
|
|
5,000,000
|
|
0.27
|
|
12/27/2026
|
|
Michelle Wallach
|
|
5/31/2012
|
|
2,500,000
|
|
-
|
|
0.22
|
|
5/31/2022
|
The
fair value of each option grant is estimated at the date of grant
using the Black-Scholes option pricing model. Expected volatility
is calculated based on the historical volatility of the
Company’s stock. The risk free interest rate is based on the
U.S. Treasury yield for a term equal to the expected life of the
options at the time of grant.
Employment Agreements
Our
executive officers work as at-will employees.
Code Section 162(m) Provisions
Section 162(m)
of the U.S. Internal Revenue Code, or the Code, generally disallows
a tax deduction to public companies for compensation in excess of
$1 million paid to the Chief Executive Officer or any of the four
most highly compensated officers. Performance-based compensation
arrangements may qualify for an exemption from the deduction limit
if they satisfy various requirements under Section 162(m).
Although we consider the impact of this rule when developing and
implementing our executive compensation programs, we believe it is
important to preserve flexibility in designing compensation
programs. Accordingly, we have not adopted a policy that all
compensation must qualify as deductible under Section 162(m)
of the Code. While our stock options are intended to qualify as
“performance-based compensation” (as defined by the
Code), amounts paid under our other compensation programs may not
qualify as such.
2016 Director Compensation
The
following table sets forth information for the fiscal year ended
December 31, 2016 regarding the compensation of our directors
who at December 31, 2016 were not also named executive
officers.
|
Name
|
Fees Earned or
Paid in Cash ($)
|
Option
Awards ($)(1)
|
Other
Compensation ($)
|
Total ($)
|
|
Richard
Renton
|
-
|
2,786
|
-
|
2,786
|
|
William
Thompson
|
-
|
2,786
|
-
|
2,786
|
(1)
The amounts in the “Option Awards” column reflect the
dollar amounts recognized as compensation expense for the financial
statement reporting purposes for stock options for the fiscal year
ended December 31, 2016 in accordance with FASB ASC Topic 718. The
fair value of the options was determined using the Black-Scholes
model. For a discussion of the assumptions used in computing this
valuation, see Note 8 of the Notes to Consolidated Financial
Statements in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2016.
As
of December 31, 2016 the following table sets forth the number of
aggregate outstanding option awards held by each of our directors
who were not also named executive officers:
|
Name
|
Aggregate
Number of
Option Awards
|
|
Richard
Renton
|
250,000
|
|
William
Thompson
|
250,000
|
We
have granted to non-employee members of the Board of Directors upon
appointment, stock options to purchase shares of our common stock
at an exercise price equal to the fair market value of the common
stock on the date of grant, and additional stock options each year
thereafter for their service. We also reimburse the non-employee
directors for travel and other out-of-pocket expenses incurred in
attending board of director and committee meetings. During 2016, we granted each non-employee director
an option to purchase 100,000 shares of our common stock, of which
20% vests on a pro rata
basis over five years starting on December 27,
2017.
Item 12. Security
Ownership of Certain Beneficial Owners and Management
The
following table provides information regarding the beneficial
ownership of our common stock as of March 17, 2017, (the
“Evaluation Date”) by: (i) each of our current
directors, (ii) each of our named executive officers, and
(iii) all such directors and executive officers as a group. We
know of no other person or group of affiliated persons who
beneficially own more than five percent of our common stock. The
table is based upon information supplied by our officers, directors
and principal stockholders and a review of Schedules 13D and 13G,
if any, filed with the SEC. Unless otherwise indicated in the
footnotes to the table and subject to community property laws where
applicable, we believe that each of the stockholders named in the
table has sole voting and investment power with respect to the
shares indicated as beneficially owned.
Applicable
percentages are based on 392,704,557 shares outstanding as of the
Evaluation Date, adjusted as required by rules promulgated by the
SEC. These rules generally attribute beneficial ownership of
securities to persons who possess sole or shared voting power or
investment power with respect to those securities. In addition, the
rules include shares of our common stock issuable pursuant to the
exercise of stock options or warrants that are either immediately
exercisable or exercisable within 60 days of the Evaluation Date.
These shares are deemed to be outstanding and beneficially owned by
the person holding those options for the purpose of computing the
percentage ownership of that person, but they are not treated as
outstanding for the purpose of computing the percentage ownership
of any other person.
|
Name of Beneficial Owner
|
Number of Shares Beneficially Owned
|
|
Percentage
Ownership
|
|
|
Executive Officers & Directors (1)
|
|
|
|
|
|
Stephan Wallach, Chairman and Chief Executive
Officer
|
282,556,250
|
(2)
|
71.5
|
%
|
|
David Briskie, President, Chief Financial Officer and
Director
|
16,809,155
|
(3)
|
4.2
|
%
|
|
Michelle Wallach, Chief Operating Officer and
Director
|
282,500,000
|
(2)
|
71.5
|
%
|
|
Richard Renton, Director
|
434,600
|
(4)
|
*
|
|
|
William Thompson, Director
|
100,000
|
(5)
|
*
|
|
|
All
Executive Officers & Directors, as a group (5
persons)
|
302,400,005
|
|
77.0
|
%
|
|
|
|
|
|
|
|
Stockholders owning 5% or more
|
|
|
|
|
|
Carl
Grover
|
44,866,952
|
(6)
|
9.99
|
%
|
*less than 1%
|
(1)
|
Unless otherwise set forth below, the mailing address of Executive
Officers, Directors and 5% or greater holders is c/o the Company,
2400 Boswell Road, Chula Vista, California 91914.
|
|
(2)
|
Mr. Stephan Wallach, our Chief Executive Officer, owns 280,000,000
shares of common stock through joint ownership with his wife,
Michelle Wallach, with whom he shares voting and dispositive
control. Mr. Wallach also owns 56,250 shares and options to
purchase 2,500,000 shares of common stock which are exercisable
within 60 days of the Evaluation Date and are included in the
number of shares beneficially owned by him and Ms. Wallach also
owns options to purchase 2,500,000 shares of common stock which are
exercisable within 60 days of the Evaluation Date and are included
in the number of shares beneficially owned by her.
|
|
(3)
|
Mr. David Briskie, our President and Chief Financial Officer, owns
3,408,588 shares of common stock, and beneficially owns 2,000,567
shares of common stock owned by Brisk Investments, LP, 5,000,000
shares of common stock owned by Brisk Management,
LLC. Mr. Briskie also owns options to purchase 6,400,000
shares of common stocks that are exercisable within 60 days of the
Evaluation Date and are included in the number of shares
beneficially owned by him.
|
|
(4)
|
Mr. Renton is a director of the Company, owns 34,850 shares of
common stock and 187,500 shares of common stock through joint
ownership with his wife, Roxanna Renton, with whom he shares voting
and dispositive control. Mr. Renton also owns 149,750
options to purchase common stock which are exercisable within 60
days of the Evaluation Date, 62,500 shares purchasable upon the
excise of outstanding warrants and are included in the number of
shares beneficially owned by him.
|
|
(5)
|
Mr. Thompson is a director of the Company, owns 100,000 options to
purchase common stock which are exercisable within 60 days of the
Evaluation Date and are included in the number of shares
beneficially owned by him.
|
|
(6)
|
Mr. Grover is the sole beneficial owner of 44,866,952 shares of
common stock. Mr. Grover owns a September 2014 Note in the
principal amount of $4,000,000 convertible into 11,428,571 shares
of Common Stock and a September 2014 Warrant exercisable for
15,652,174 shares of Common Stock. Mr. Grover also owns a November
2015 Note in the principal amount of $7,000,000 convertible into
20,000,000 shares of Common Stock and a November 2015 Warrant
exercisable for 9,333,333 shares of Common Stock. He also owns
5,151,240 shares of common stock. Mr. Grover has a contractual
agreement with us that limits his exercise of warrants and
conversion of notes such that his beneficial ownership of our
equity securities to no more than 9.99% of the voting power of the
Company at any one time and therefore his beneficial ownership does
not include the shares of Common Stock issuable upon conversion of
notes or exercise or warrants owned by Mr. Grover if such
conversion or exercise would cause his beneficial ownership to
exceed 9.99% of our outstanding shares of Common Stock. Mr.
Grover’s address is 1010 S. Ocean Blvd., Apt 1017, Pompano
Beach, FL 33062.
|
Item 13. Certain Relationships and
Related Transactions
FDI Realty, LLC
In
December 2015 we relocated our marketing operations from Windham,
New Hampshire, to our corporate headquarters in Chula Vista,
California. The Windham building is owned by FDI Realty and Mr.
William Andreoli, our Former President is the single member of FDI
Realty. The building consists of 12,750 square feet of office
rental space. We are currently a co-guarantor of FDI Realty’s
mortgages on the building.
2400 Boswell, LLC
2400
Boswell, LLC (“2400 Boswell”) is the owner and lessor
of the building occupied by us for our corporate office and
warehouse in Chula Vista, CA. As of December 31, 2012, an
immediate family member of a greater than 5% shareholder of the
Company was the single member of 2400 Boswell and the Company was a
co-guarantor of the 2400 Boswell mortgage on the leased building.
During 2013 we acquired 2400 Boswell LLC for $248,000 in cash,
$334,000 of debt forgiveness and accrued interest, and a promissory
note of approximately $393,000, payable in equal payments over 5
years and bears interest at 5.00%. Additionally, we
assumed a long-term mortgage of $3,625,000, payable over 25 years
at an interest rate of 5.75%.
Richard Renton
Richard Renton is a member of the Board of Directors and owns and
operates with his wife Roxanna Renton Northwest Nutraceuticals,
Inc., a supplier of certain inventory items sold by the Company.
The Company made purchases of approximately $126,000 and $93,000
from Northwest Nutraceuticals Inc., for the years ended December
31, 2016 and 2015, respectively. In addition, Mr. Renton and his
wife are also distributors of the Company and the Renton’s
were paid distributor commissions for the years ended December 31,
2016 and 2015 approximately $457,000 and $422,000
respectively.
Hernandez, Hernandez, Export Y Company
Our
Company’s coffee segment CLR is associated with Hernandez,
Hernandez, Export Y Company (“H&H”), a Nicaragua
company, through sourcing arrangements to procure Nicaraguan green
coffee and in March 2014 as part of the Siles Plantation
Family Group “Siles” acquisition, CLR engaged H&H
as employees to manage Siles.
As an inducement to managing the
operations Siles, CLR and H&H entered into an Operating and
Profit Sharing Agreement (“Agreement”). In
accordance with the Agreement, H&H shares equally (50%) in all
profits and losses generated by Siles, and profits from any
subsequent sale of the plantation, after profits are first
distributed to CLR equal to the amount of CLR’s cash
contributions for the acquisitions, then after profits are
distributed to H&H in an amount equal to their cash
contributions, and after certain other conditions are met. During
the years ended December 31, 2016 and 2015CLR recorded expenses
allocated to the profit sharing Agreement of $698,000 and $528,000,
respectively. As
of December 31, 2016 and 2015 the balance of contingent acquisition
debt payable to H&H after the reduction of $698,000 and
$528,000 from the allocation of 50% losses recognized in 2016 and
2015 is $83,000 and $894,000, respectively.
CLR
sources green coffee from H&H and made purchases of
approximately $8,810,000 and $10,499,000 for the years ended
December 31, 2016 and 2015, respectively. H&H Coffee Group
Export, a Florida Company which is affiliated with H&H is a
customer of CLR. During the year ended December 31, 2016 CLR sold
$2,637,000 in green coffee to H&H Coffee Group Export. There
were no related sales of green coffee to H&H Coffee Group
Export during 2015.
Carl Grover
Mr.
Carl Grover the beneficial owner of in excess of five percent
(5%) of our outstanding common shares is the sole beneficial owner
of 44,866,952 shares of our common stock. Mr. Grover owns a
September 2014 Note in the principal amount of $4,000,000
convertible into 11,428,571 shares of common stock convertible
at $0.35 per share, and a September 2014 Warrant exercisable for
15,652,174 shares of common stock at an exercise price of $0.23 per
share. Mr. Grover also owns a November 2015 Note in the principal
amount of $7,000,000 convertible into 20,000,000 shares of common
stock convertible at $0.35 per share, and a November 2015 Warrant
exercisable for 9,333,333 shares of common stock at an exercise
price of $0.45 per share. He also owns 5,151,240 shares of common
stock. See Item 12 above.
Compensation of Our Current Directors and Executive
Officers
For
information with respect to the compensation offered to our current
directors and executive officers, please see the descriptions under
the heading “Executive Compensation” of this annual
report.
Related Party Transaction Policy and Procedures
Pursuant
to our Related Party Transaction and Procedures, our executive
officers, directors, and principal stockholders, including their
immediate family members and affiliates, are prohibited from
entering into a related party transaction with us without the prior
consent of our Audit Committee or our independent directors. Any
request for us to enter into a transaction with an executive
officer, director, principal stockholder, or any of such
persons’ immediate family members or affiliates, must first
be presented to our Audit Committee for review, consideration and
approval. In approving or rejecting the proposed agreement, our
Audit Committee will consider the relevant facts and circumstances
available and deemed relevant, including, but not limited, to the
risks, costs and benefits to us, the terms of the transaction, the
availability of other sources for comparable services or products,
and, if applicable, the impact on a director’s independence.
Our Audit Committee approves only those agreements that, in light
of known circumstances, are in, or are not inconsistent with, our
best interests, as our Audit Committee determines in the good faith
exercise of its discretion.
Item 14. Principal
Accounting Fees and Services
Independent Registered Public Accounting Firm’s Fee
Summary
The
following table provides information regarding the fees billed to
us by Mayer Hoffman McCann P.C. for the years ended December 31,
2016 and 2015. Mayer Hoffman McCann P.C. leases substantially all
of its personnel, who work under the control of Mayer Hoffman
McCann P.C. shareholders, from wholly-owned subsidiaries of CBIZ,
Inc., including CBIZ MHM, LLC, in an alternative practice
structure. All fees described below were approved by the Board or
the Audit Committee:
|
|
December 31,
2016
|
December 31,
2015
|
|
Audit Fees and Expenses (1)
|
$264,000
|
$300,000
|
|
Audit Related Fees (2)
|
17,000
|
8,000
|
|
All
Other Fees
|
-
|
-
|
|
|
$281,000
|
$308,000
|
|
(1)
|
Audit
fees and expenses were for professional services rendered for the
audit and reviews of the consolidated financial statements of the
Company, professional services rendered for issuance of consents
and assistance with review of documents filed with the
SEC.
|
|
(2)
|
The
audit related fees were for professional services rendered for
additional filing for registration statements and forms with the
SEC.
|
Pre-Approval Policies and Procedures
Consistent
with SEC policies regarding auditor independence, the Audit
Committee has responsibility for appointing, setting compensation
and overseeing the work of the independent registered public
accounting firm. In recognition of this responsibility, the Audit
Committee has established a policy to pre-approve all audit and
permissible non-audit services provided by the independent
registered public accounting firm.
Prior
to the engagement of the independent registered public accounting
firm for the next year’s audit, management will submit a list
of services and related fees expected to be rendered during that
year for audit services, audit-related services, tax services and
other fees to the Audit Committee for approval.
PART IV
Item 15. Exhibits, Financial Statement
Schedules
|
(a)(1)
|
The Consolidated Financial Statements of Youngevity International,
Inc. and Report of Independent Registered Public Accounting Firm
are included in Item 8 of this Annual Report.
|
|||
|
(2)
|
Schedules
are omitted because they are not applicable or the required
information is shown in the financial statements or notes
thereto.
|
|
||
|
(3)
|
The
following exhibits are filed as part of this Annual Report pursuant
to Item 601 of Regulation S-K:
|
|
|
|
|
|
|
||
|
Exhibit No.
|
|
Title of Document
|
|
|
3.1
|
|
Certificate of Incorporation Dated July 15, 2011(1)
|
|
|
3.2
|
|
Bylaws(1)
|
|
|
4.1
|
|
Specimen Common Stock certificate (1)
|
|
|
4.2
|
|
Warrant for Common Stock issued to David Briskie(1)
|
|
|
4.3
|
|
Stock Option issued to Stephan Wallach(1)
|
|
|
4.4
|
|
Stock Option issued to Michelle Wallach(1)
|
|
|
4.5
|
|
Stock Option issued to David Briskie(1)
|
|
|
4.6
|
|
Stock Option issued to William Andreoli(1)
|
|
|
4.7
|
|
Stock Option issued to Richard Renton(1)
|
|
|
4.8
|
|
Stock Option issued to John Rochon(1)
|
|
|
4.9
|
|
Form of Purchase Note Agreement(3)
|
|
|
4.10
|
|
Form of Secured Convertible Notes(3)
|
|
|
4.11
|
|
Form of Series A Warrants(3)
|
|
|
4.12
|
|
Form of Registration Rights Agreement(3)
|
|
|
4.13
|
|
Form of Note Purchase Agreement(4)
|
|
|
4.14
|
|
Form of Secured Note(4)
|
|
|
4.15
|
|
Form of Purchase Note Agreement(6)
|
|
|
4.16
|
|
Form of Secured Note(6)
|
|
|
4.17
|
|
Form of Warrant(6)
|
|
|
10.1
|
|
Purchase Agreement with M2C Global, Inc. dated March 9,
2007(1)
|
|
|
10.2
|
|
First Amendment to Purchase Agreement with M2C Global, Inc. dated
September 7, 2008(1)
|
|
|
10.3
|
|
Asset Purchase Agreement with MLM Holdings, Inc.
dated June 10, 2010(1)
|
|
|
10.4
|
|
Agreement of Purchase and Sale with Price Plus, Inc. dated
September 21, 2010(1)
|
|
|
10.5
|
|
Amended and Restated Agreement and Plan of Reorganization
Javalution Coffee Company, YGY Merge, Inc. dated July 11,
2011(1)
|
|
|
10.6
|
|
Asset Purchase Agreement with R-Garden Inc. dated July 1,
2011(1)
|
|
|
10.7
|
|
Re-Purchase Agreement with R-Garden dated September 12,
2012(1)
|
|
|
10.8
|
|
Agreement and Plan of Reorganization with Javalution dated July 18,
2011(1)
|
|
|
10.9
|
|
Asset Purchase Agreement with Adaptogenix, LLC dated August 22,
2011(1)
|
|
|
10.10
|
|
Amended Asset Purchase Agreement with Adaptogenix, LLC dated
January 27, 2012(1)
|
|
|
10.11
|
|
Asset Purchase Agreement with Prosperity Group, Inc. dated October
10, 2011(1)
|
|
|
10.12
|
|
Amended and Restated Equity Purchase Agreement with Financial
Destination, Inc., FDI Management Co, Inc., FDI Realty, LLC, and
MoneyTRAX, LLC dated October 25, 2011(1)
|
|
|
10.13
|
|
Exclusive License/Marketing Agreement with GLIE, LLC dba True2Life
dated March 20, 2012(1)
|
|
|
10.14
|
|
Bill of Sale with Livinity, Inc. dated July 10,
2012(1)
|
|
|
10.15
|
|
Consulting Agreement with Livinity, Inc. dated July 10,
2012(1)
|
|
|
10.16
|
|
Employment Agreement with William Andreoli dated October 25,
2011(1)
|
|
|
10.17
|
|
Promissory Note with 2400 Boswell LLC dated July 15,
2012(1)
|
|
|
10.18
|
|
Promissory Note with William Andreoli dated July 1,
2012(1)
|
|
|
10.19
|
|
2012 Stock Option Plan(1)
|
|
|
10.20
|
|
Form of Stock Option(1)
|
|
10.21
|
|
Lease with 2400 Boswell LLC dated May 1, 2001(1)
|
|
10.22
|
|
Lease with FDI Realty LLC dated July 29, 2008(1)
|
|
10.23
|
|
First Amendment to Lease with FDI Realty LLC dated October 25,
2011(1)
|
|
10.24
|
|
Lease with Perc Enterprises dated February 6, 2008(1)
|
|
10.25
|
|
Lease with Perc Enterprises dated September 25,
2012(1)
|
|
10.26
|
|
Factoring Agreement with Crestmark Bank dated February 12,
2010(1)
|
|
10.27
|
|
First Amendment to Factoring Agreement with Crestmark Bank dated
April 6, 2011(1)
|
|
10.28
|
|
Second Amendment to Factoring Agreement with Crestmark Bank dated
February 1, 2013(1)
|
|
10.29
|
|
Lease with Perc Enterprises dated March 19, 2013(1)
|
|
10.30
|
|
Purchase Agreement with Ma Lan Wallach dated March 15,
2013(1)
|
|
10.31
|
|
Promissory Note with Plaza Bank dated March 14,
2013(1)
|
|
10.32
|
|
Form of Security Agreement(3)
|
|
10.33
|
|
Guaranty Agreement made by Stephan Wallach(3)
|
|
10.34
|
|
Form of Security Agreement(4)
|
|
10.35
|
|
Guaranty Agreement made by Stephan Wallach(4)
|
|
10.36
|
|
Credit Agreement with Wells Fargo Bank, National Association dated
October 10, 2014(5)
|
| 10.37 |
|
Amended and Restated 2012 Stock Incentive Plan (7) |
| 10.38 |
|
Form of Stock
Option* |
| 10.39 |
|
Third Amendment with
Crestmark Bank dated May 1, 2016* |
|
21.1
|
|
Subsidiaries of Youngevity International, Inc. *
|
|
23.1
|
|
Consent of Independent Registered Public Accounting Firm
*
|
|
31.1
|
|
Certification of Stephan Wallach, Chief Executive Officer, pursuant
to Rule 13a-14(a)/15d-14(a) *
|
|
31.2
|
|
Certification of David Briskie, Chief Financial Officer pursuant to
Rule 13a-14(a)/15d-14(a) *
|
|
32.1
|
|
Certification of Stephan Wallach, Chief Executive Officer pursuant
to Section 1350 of the Sarbanes-Oxley Act of 2002 *
|
|
32.2
|
|
Certification David Briskie, Chief Financial Officer pursuant to
Section 1350 of the Sarbanes-Oxley Act of 2002 *
|
|
101.INS
|
|
XBRL Instance Document **
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document **
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
**
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document
**
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document **
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
**
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
101.INS
|
|
XBRL Instance Document
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
*
|
Filed herewith
|
|
(1)
|
Incorporated by reference to the Company’s Form 10-12G, File
No. 000-54900, filed with the Securities
and Exchange Commission on February 12,
2013
|
|
(2)
|
Incorporated by reference to the Company’s Form 10-K, File
No. 000-54900, filed with the Securities and Exchange Commission on
March 27, 2014
|
|
(3)
|
Incorporated by reference to the Company’s 8-K, File No.
000-54900, filed with the Securities and Exchange Commission on
August 5, 2014
|
|
(4)
|
Incorporated by reference to the Company’s 8-K, File No.
000-54900, filed with the Securities and Exchange Commission on
January 7, 2015
|
|
(5)
|
Incorporated by reference to the Company’s Form 10-K, File
No. 000-54900, filed with the Securities and Exchange Commission on
March 30, 2015
|
|
(6)
|
Incorporated by reference to the Company’s 8-K, File No.
000-54900, filed with the Securities and Exchange Commission on
October 16, 2015
|
|
(7)
|
Previously filed with the Company’s Current Report on
Schedule 14C File No. 000-54900, filed with the Securities and
Exchange Commission on March 21, 2017
|
Item 16. Form 10-K
Summary
Not applicable
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
|
YOUNGEVITY INTERNATIONAL, INC.
|
|
|
|
|
|
March 30, 2017
|
By:
|
/s/ Stephan Wallach
|
|
|
|
Stephan Wallach,
|
|
|
|
Chief Executive Officer
|
|
|
|
(Principal Executive Officer)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
registrant in the capacities and on the dates
indicated.
|
Signature
|
Title
|
Date
|
|
|
|
|
|
|
|
|
|
/s/ Stephan Wallach
|
Chief
Executive Officer and Director (Principal Executive
Officer)
|
March 30, 2017
|
|
Stephan Wallach
|
|
|
|
|
|
|
|
/s/ David Briskie
|
Chief
Financial Officer and Director (Principal Financial and Accounting
Officer)
|
March 30, 2017
|
|
David Briskie
|
|
|
|
/s/ Michelle Wallach
|
Chief
Operating Officer and Director
|
March 30, 2017
|
|
Michelle Wallach
|
|
|
|
/s/ William Thompson
|
Director
|
March 30, 2017
|
|
William Thompson
|
|
|
|
/s/ Richard Renton
|
Director
|
March 30, 2017
|
|
Richard Renton
|
|
|
-90-